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1 Disaster losses and Economic Consequences: Toward Comprehensive Risk Finance Strategy www. unisdr. org 1 Disaster losses and Economic Consequences: Toward Comprehensive Risk Finance Strategy www. unisdr. org The First Arab Regional Conference for Disaster Risk Reduction; Aqaba, Jordan www. unisdr. org 20, March, 2013 Kazuko Ishigaki, Risk Knowledge Economist United Nations Office for Disaster Risk Reduction Geneva, Switzerland

2 Contents Need for Comprehensive Risk Finance Strategy 2. Risk Management Tools for Private 2 Contents Need for Comprehensive Risk Finance Strategy 2. Risk Management Tools for Private Sector and Government 3. To Prepare for Probable Maximum Disaster 4. Process of evidence-based decision making 5. www. unisdr. org 1. Conclusion

3 The Need for Comprehensive Risk Financing Strategy www. unisdr. org Background 1 Increase/intensification 3 The Need for Comprehensive Risk Financing Strategy www. unisdr. org Background 1 Increase/intensification of disaster interruption or slow down to economic growth e. g. Pakistan GDP growth estimate e. g. Simulation of economic growth and cyclone exposure

4 The Need for Comprehensive Risk Financing Strategy Background 2. Economic growth increase of 4 The Need for Comprehensive Risk Financing Strategy Background 2. Economic growth increase of economic loss in the event of disaster www. unisdr. org e. g. Annual Average Losses from cyclonic wind by risk class

5 The Need for Comprehensive Risk Financing Strategy www. unisdr. org Background 3. Constrained 5 The Need for Comprehensive Risk Financing Strategy www. unisdr. org Background 3. Constrained public finance Source: IMF (2012)

6 The Need for Comprehensive Risk Financing Strategy www. unisdr. org Background 4. Constrained 6 The Need for Comprehensive Risk Financing Strategy www. unisdr. org Background 4. Constrained public investment - Investment vs consumption 5. Increasing importance of private investment - Public/Private investment share OECD 16%: 84% Developing countries 30 -40% : 60 -70%

7 The Need for Comprehensive Risk Financing Strategy Challenges and Options A: To decrease 7 The Need for Comprehensive Risk Financing Strategy Challenges and Options A: To decrease economic loss in the event of disaster Invest in disaster risk reduction and preparedness B: To finance the response/recovery/reconstruction after disaster Transfer risk and/or pool money www. unisdr. org Both require ex-ante financing under tight budget constraint Need for Comprehensive Risk Financing Strategy Q 1 How much money should be allocated to comprehensive risk financing? (size of total pie) Q 2 What is the most efficient and effective allocation of money between option A (risk reduction) and B (risk transfer and risk retention)? (how to divide the pie)

8 Risk Management Tools for Business and Household Risk reduction Risk avoidance Business Risk 8 Risk Management Tools for Business and Household Risk reduction Risk avoidance Business Risk mitigation No business in hazard prone area Risk finance Risk transfer -Diversifying business location -Buying insurance - Issuing cat -Improving resiliency bonds of offices etc -Crafting BCP Risk retaining -Setting allowance for contingency -Establishing captive companies www. unisdr. org Household No housing in hazard prone area Improving resiliency of housings Buying insurance Dedicated savings in the event of disaster Insurance companies Selecting risks which can be insured Providing buyers with DRR incentive (e. g. premium setting linked to risk level) -Buying reinsurance Setting deductible and liability limit -Issuing cat bonds

9 Government Policy for Comprehensive Risk Finance (1) To affect private corporations and households 9 Government Policy for Comprehensive Risk Finance (1) To affect private corporations and households Precondition Individual methods -Risk assessment -Hazard mapping -Information sharing and education Risk reduction Risk finance Risk avoidance Risk mitigation Risk transfer Risk retaining -Land use planning -Infrastructure investment in DRR -Providing incentive for insurance -Helping relocation -Critical infrastructure protection -Providing incentive for reserve establishment www. unisdr. org -Establishing early warning system -Helping evacuation planning Responsibility - Providing incentive for Issuing bonds -Establishing building code -Helping BCP Sectoral ministries/DM agency Sectoral ministries/ DM agency

10 Government Policy for Comprehensive Risk Finance (2) To assure business continuity of government 10 Government Policy for Comprehensive Risk Finance (2) To assure business continuity of government Precondition Individual methods -Risk assessment -Hazard mapping -Information sharing and education Risk reduction Risk finance Risk mitigation Risk transfer Risk retaining -No government offices, important public asset and facility in hazard prone area www. unisdr. org Risk avoidance -Critical Infrastructure protection -Buying insurance -Establishing reserve - Issuing bonds -Contingency credit contract -Response plan -Government BCP Responsibility Sectoral ministries/DM agency Ministry of Finance/DM agency

11 To prepare for probable maximum disaster $ (loss) Intensive Risk PML Uncertainty: We 11 To prepare for probable maximum disaster $ (loss) Intensive Risk PML Uncertainty: We do not know when the disaster occurs… AAL Extensive Risk www. unisdr. org Year Along With adequate annual investment for DRR to cover AAL, it is necessary to financially prepare for probable maximum disaster

12 To prepare for probable maximum disaster Which sector covers which layer of risk? 12 To prepare for probable maximum disaster Which sector covers which layer of risk? Frequency First loss Excess loss Private Government Extensive Risk USA (FHCF) Japan Layer A Intensive Risk Layer B Layer C www. unisdr. org Economic loss First loss NZ (EQC) Turkey (TCIP) USA (NFIP) Excess loss Government (the public) Private

13 Process of evidence-based decision making STEP 1 : Produce risk (annual average loss 13 Process of evidence-based decision making STEP 1 : Produce risk (annual average loss & probable maximum loss) estimate. Risk STEP 2: Choose the return period to cover : political decision STEP 3: Define the expected level of DRR: political decision STEP 4: Measure the impact of policy tools on DRR (avoided economic loss) Reduced Disaster Risk www. unisdr. org Policy How much impact on reducing loss? Public Investment Subsidy Tax Regulation

14 STEP 4 : how to measure the impact of policy on DRR? Cost 14 STEP 4 : how to measure the impact of policy on DRR? Cost Benefit Analysis Disaster Impact Analysis • Past disaster loss data • Vulnerability data • Construction standard Principle www. unisdr. org Preconditions • If the present value of benefit is equal to or more than 1, invest. • The higher C/B ratio, the more preferable the project is. Methodological problems (examples) • How to assign monetary value • Same as CBA to saved life? • How to assign monetary value to avoided loss? Institutional Problems (examples) • Who does the analysis? • Administrative burden • Before the project implementation, analyze and measure the disaster impact of the project and/or project impact on disaster. • If the negative impact is measured, include the mitigation cost in the total project cost. • Same as the CBA • Enforcement

15 Process of evidence-based decision making STEP 5: Check the gap between the expected 15 Process of evidence-based decision making STEP 5: Check the gap between the expected level of DRR and current level of DRR Ideal Reality www. unisdr. org Policy AAL Investment Regulation etc Transfer Retain DRR Investment ? ? ? Regulation etc Transfer Retain STEP 6: Decide how to do with the gap: implement more DRR or transfer risk? : political decision

16 STEP 5 (related): Main Challenges in DRR Investment Tracking: Lessons from the recent 16 STEP 5 (related): Main Challenges in DRR Investment Tracking: Lessons from the recent studies (Main methodological challenges) • How to count “embedded” DRR investment? (e. g. water management) How to separate DRR from reconstruction investment? (e. g. subsidy for housing relocation after disaster) • How to measure private sector investment, for example, PPP? • www. unisdr. org • How to measure local government investment? (for example, many project are co-financed by national and local governments) • How to make the tracking comparable across countries and along time? (e. g. common or comparable definition of DRR, counting method) • It requires additional administrative burden on government

17 STEP 5 (related): Main Challenges in DRR Investment Tracking: Lessons from the recent 17 STEP 5 (related): Main Challenges in DRR Investment Tracking: Lessons from the recent studies • • DRR budget of DM Agency: easy to identify Main DRR tools embedded in sectoral budgets • DRR Infrastructure investment www. unisdr. org - 100% for DRR (not embedded) e. g. coastal levees - x % for DRR (embedded but separable) sub-category of budget item e. g. emergency train stop equipment for train - multiple purpose including DRR (completely embedded) e. g. multi purpose dam, meteorological monitoring

STEP 5 (related): Critical infrastructure: US and UK definition US Agriculture and Food UK STEP 5 (related): Critical infrastructure: US and UK definition US Agriculture and Food UK Food Defense industrial base Energy (oil, gas, electricity) Healthcare and public health Health National monuments and icons Banking and finance Financial services Water Chemical Commercial facilities Critical manufacturing Dams www. unisdr. org Emergency services (police, fire, ambulance, coastguard) Nuclear reactors, materials and waste IT communications Communications (telecom, post, broadcast) Postal and shipping Transportation system Transportation (highways, rail, ports, aviation) Government facilities including schools Government 18

19 Conclusion: Toward comprehensive risk finance strategy Constructing information and knowledge base is essentially 19 Conclusion: Toward comprehensive risk finance strategy Constructing information and knowledge base is essentially important. • Not only hazard risk information but also disaster loss and vulnerability information is necessary as a fundamental base for sound policy making • Ensure that information leads to implementation: measuring the impact of policy on DRR would bridge the risk information, vulnerability information and government coping capacity information, and facilitate the DRR investment implementation. (2) www. unisdr. org (1) Better governance building is necessary. • In addition to traditional DM agency, MOF and Planning Authority should be key stakeholders. • Sectoral ministries, especially Ministry which has responsibility for infrastructure building, are also important stakeholders.

20 Conclusion: Toward comprehensive risk finance strategy DRR mitigates disaster loss and negative economic 20 Conclusion: Toward comprehensive risk finance strategy DRR mitigates disaster loss and negative economic consequences www. unisdr. org e. g. Pakistan GDP growth estimate

21 Thank you www. unisdr. org Contact: Kazuko Ishigaki United Nations Office for Disaster 21 Thank you www. unisdr. org Contact: Kazuko Ishigaki United Nations Office for Disaster Risk Reduction Tel: +41 22 917 3460 [email protected] org