By J. David Cummins
Disaster danger Financing in constructing international locations presents a close research of the imperfections and inefficiencies that bog down the emergence of aggressive disaster possibility markets in constructing nations. The publication demonstrates how donors and overseas monetary associations may also help governments in heart- and low-income international locations in selling potent and cheap disaster probability financing strategies. The authors set out guiding rules on how and while the governments, with the aid of donors and overseas monetary associations, should still interfere in disaster coverage markets. additionally they determine key actions to be undertaken via donors and associations that will permit center- and low-income nations to advance aggressive and cost effective disaster chance financing options at either the macro (government) and micro (household) degrees. those rules and actions are anticipated to notify solid perform and confirm fascinating ends up in disaster coverage tasks. disaster probability Financing in constructing international locations bargains priceless suggestion and directions to coverage makers and assurance practitioners keen on the improvement of disaster assurance courses in constructing international locations.
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Additional resources for Catastrophe Risk Financing in Developing Countries: Principles for Public Intervention
CHAPTER 2 Market Imperfections and Catastrophe Insurance his chapter examines why the public sector, with the help of donors and IFIs, should intervene in the catastrophe insurance markets, and how public intervention could contribute to the emergence of affordable, effective, and sustainable catastrophe insurance solutions in developing countries. The chapter begins by examining the basic features of insurance markets, with an emphasis on the key players and the information flows that are required for the market to succeed.
Donors can assist in the creation of catastrophe insurance pools that can offer policies issued in primary insurance markets, provide liquidity to governments following catastrophes, and facilitate the transfer of risk to global reinsurance and capital markets. Pools can be either single-country risk aggregators, such as the Turkish Catastrophe Insurance Pool in Turkey, or multiple-country regional organizations, such as the Caribbean Catastrophe Risk Insurance Facility in the Caribbean. By performing a risk-aggregation function, catastrophe insurance pools can enable lowand middle-income countries to reduce transaction costs, achieve diversification, and access risk transfer on more favorable terms than would be available to countries acting alone.
Although purchasing reinsurance is essential for most insurers, especially those with large catastrophe exposure, reinsurance tends to be expensive—the ratio of the price to the expected loss under the reinsurance policy tends to be significantly larger than 1 and has historically ranged as high as multiples of 6 times the expected loss for very infrequent events. Better capitalized insurers are able to conserve on the use of costly reinsurance, reducing the price of coverage to buyers. For a well-diversified property insurance portfolio, the net cost of reinsurance can be up to 10 percent of the premium income in non-catastrophe years.