Natural Disaster Insurance for Sovereigns: Issues, Challenges and Optimality

Aliona Cebotari and Karim Youssef

No 2020/003, IMF Working Papers from International Monetary Fund

Abstract: Natural disasters are a source of economic risks in many countries, especially in smaller and lower-income states, and ex-ante preparedness is needed to manage the risks. The paper discusses sovereign experience with disaster insurance as a key instrument to mitigate the risks; proposes ways to judge the adequacy of insurance; and considers ways to enhance its use by vulnerable countries. The paper especially aims to inform policy decisions on disaster insurance. Through simulations of natural disasters and various insurance options, we find that sovereign decisions on optimal risk transfer involve balancing trade-offs between growth and debt, based on government risk preferences and country risk exposure. The choice of optimal insurance for smaller countries turns out to be more constrained by cost considerations due to their higher exposure, likely resulting in underinsurance; donor grants could help them achieve a more optimal protection. We also find that optimal insurance packages are those that are least costly relative to expected payouts (i.e. have the lowest insurance multiple), which are also the packages that insure less severe (more frequent) disasters.

Keywords: WP; insurance coverage; insurance premium; insurance package; utility function; catastrophe risk insurance program; agency GSIS; options country; Insurance; Natural disasters; Insurance companies; Options; Disaster aid; Caribbean; natural disaster insurance; debt growth tradeoffs; optimal insurance for sovereigns (search for similar items in EconPapers)
Pages: 34
Date: 2020-01-17
New Economics Papers: this item is included in nep-ias
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