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Catastrophe risk management : using alternative risk financing and insurance pooling mechanisms

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  • Pollner, John D

Abstract

Residual stochastic risks from catastrophic natural events can be addressed through insurance pooling and risk transfer mechanisms that provide thebasis for financial protection and instill strong incentives for reducing vulnerability. To reduce the economic stress after disasters, the author shows, World Bank instruments could be used to support initiaitves to help correct market imperfections in catastrophe insurance. He takes a step-by-step approach to showing how both risk pooling structures and alternative catastrophe coverage mechanisms (long-maturity risk financing facilities, weather-indexed contracts, and capital market instruments) can achieve better risk protection and financing terms--enough to allow the expansion of insurance coverage of public assets and private property. The author examines the insurable assets (private and public) in eight countries in the easternmost part of the Caribbean and, by quantifying the portion of the premium and risk used to fund catastrophe losses, shows that through pooling and the use of credit-type instruments for catastrophe coverage, governments and uninsured property owners or enterprises (with insurable assets) could expect to improve their terms of coverage. Neither local insurers nor reinsurers would suffer in profitability. The risk management options the author examines could lead to real benefits for all participants (buyers and sellers) in insurance markets. But four factors are essential for ensuring the integrity of any participatory insurance scheme for providing risk management in disaster-prone areas such as the Caribbean: 1) stronger regulatory requirements and supervision in the insurance sector; 2) Broad-based, pooled catastrophe funding structures with efficient risk transfer tools; 3) Public insurance policies linked to programs for loss reduction in uninsured sectors; and 4) Stronger risk assessment and enforcement of such structural measures as zoning and compliance with building codes.

Suggested Citation

  • Pollner, John D, 2001. "Catastrophe risk management : using alternative risk financing and insurance pooling mechanisms," Policy Research Working Paper Series 2560, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2560
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    References listed on IDEAS

    as
    1. John D. Pollner, 1999. "Using Capital Markets to Develop Private Catastrophe Insurance," World Bank Publications - Reports 11453, The World Bank Group.
    2. Froot, Kenneth A. & O'Connell, Paul G.J., 2008. "On the pricing of intermediated risks: Theory and application to catastrophe reinsurance," Journal of Banking & Finance, Elsevier, vol. 32(1), pages 69-85, January.
    3. Kenneth A. Froot, 1997. "The Limited Financing of Catastrophe Risk: An Overview," NBER Working Papers 6025, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Alessio Ciullo & Eric Strobl & Simona Meiler & Olivia Martius & David N. Bresch, 2022. "Increasing countries financial resilience through global catastrophe risk pooling," Papers 2206.13895, arXiv.org.
    2. Alessio Ciullo & Eric Strobl & Simona Meiler & Olivia Martius & David N. Bresch, 2023. "Increasing countries’ financial resilience through global catastrophe risk pooling," Nature Communications, Nature, vol. 14(1), pages 1-9, December.
    3. Schenker-Wicki, Andrea & Inauen, Matthias & Olivares, Maria, 2010. "Unmastered risks: From crisis to catastrophe: An economic and management insight," Journal of Business Research, Elsevier, vol. 63(4), pages 337-346, April.
    4. John Pollner, 2012. "Financial and Fiscal Instruments for Catastrophe Risk Management : Addressing Losses from Flood Hazards in Central Europe," World Bank Publications - Books, The World Bank Group, number 9381.

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    Keywords

    Insurance&Risk Mitigation; Banks&Banking Reform; Non Bank Financial Institutions; Insurance Law; Health Economics&Finance;
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