Promoting Disaster Risk Financing in Asia and the Pacific - Policy Brief No. 2017-1 (January)

Key points

• The economies in Asia and the Pacific are exposed to disaster risks, which can cause fatalities as well as economic losses. One strategy to mitigate the economic losses and strengthen financial resilience to disasters is developing disaster risk financing.

• There are two policy options in implementing disaster risk financing: public sector and private sector disaster risk financing tools. Each option has challenges that need to be addressed for them to be effectively implemented.

• Two possible strategies could be pursued for overcoming the implementation challenges of disaster risk financing: the establishment of institutional arrangements for a combined public– private response to disaster risk financing and the development of a state-sponsored disaster insurance scheme.

Wawan Juswanto, Senior Economist, ADBI

Suryo A. Nugroho, Associate, ADBI

Many of the economies in Asia and the Pacific are vulnerable to the impacts of natural disasters, which have caused fatalities as well as economic losses to the impacted economies (Figure 1). Since 2008, there have been several major natural disasters that occurred throughout the region. The 2008 Sichuan earthquake in the People’s Republic of China (PRC) caused approximately 84,000 fatalities and also $85 billion in damages. In 2011, a powerful and devastating earthquake, with a magnitude of 9.0, struck the eastern part of Japan and caused $210 billion in overall losses as well as 15,880 fatalities (Munich Re 2015). Furthermore, in 2015, two major natural disasters occurred in the Asia and Pacific region: the first one was severe Tropical Cyclone Pam that struck Vanuatu in March, which caused approximately 16 fatalities and a total economic loss estimated at $449.4 million (Government of Vanuatu 2015).

The second was the magnitude 7.6 earthquake that hit Nepal in April, causing 8,790 casualties as well as $7 billion in economic losses (National Planning Commission, Government of Nepal 2015).

Due to the significant economic losses that were suffered by many countries in Asia and the Pacific caused by the impact of disasters in the past, as well as the increasing risk exposure to disasters in the future, the governments in the region need to possess a good understanding of assessing the economic impact of disasters, since it will be crucial for ensuring the availability of resources for disaster response, recovery, and reconstruction, which can ultimately prevent financial distress (Mahul and Signer 2014). With respect to financial management of disaster risks, the governments have a key role in developing and designing schemes that will enable post-disaster assistance, disaster insurance, and the provision of financial guarantees. Furthermore, the governments should ensure that the finance sector in their respective countries provides coverage against the risk of disaster, and they also have the responsibility to manage the contingent liabilities of disaster within the fiscal framework. The governments’ role becomes critical where the disaster risk of their respective countries is significantly high and the insurance market is not available or does not have the capability to cover such risks, which leaves the country with potentially enormous economic losses (OECD 2015).