Stefan Hochrainer

Sovereign financial disaster risk management: The case of Mexico

Abstract In 2006, Mexico became the first transition country to transfer part of its public-sector natural catastrophe risk to the international reinsurance and capital markets. The Mexican case is of considerable interest to highly exposed transition and developing countries, many of which are considering similar transactions. Risk financing instruments can assure governments of sufficient post-disaster capital to provide emergency response, disaster relief to the affected population and repair public infrastructure. The costs of financial instruments, however, can greatly exceed expected losses, and for this reason it is important to closely examine their benefits and alternatives. This paper analyzes the Mexican case from the perspective of the risk cedent (the Ministry of Finance and Public Credit), which was informed by analyses provided by the International Institute for Applied Systems Analysis (IIASA). The rationale for a government to insure its contingent liabilities is presented along with the fiscal, legal and institutional context of the Mexican transaction. Using publicly available data, the paper scrutinizes the choice the authorities faced between two different risk-transfer instruments: reinsurance and a catastrophe bond. Making use of IIASAs catastrophe simulation model (CATSIM), this financial risk management decision is analyzed within the context of a public investment decision.

Assessing the Macroeconomic Impacts of Natural Disasters: Are There Any?

There is an ongoing debate on whether disasters cause significant macroeconomic impacts and are truly a potential impediment to economic development. This paper aims to assess whether and by what mechanisms disasters have the potential to cause significant GDP impacts. The analysis first studies the counterfactual versus the observed gross domestic product. Second, the analysis assesses disaster impacts as a function of hazard, exposure of assets, and, importantly, vulnerability. In a medium-term analysis (up to 5 years after the disaster event), comparing counterfactual with observed gross domestic product, the authors find that natural disasters on average can lead to negative consequences. Although the negative effects may be small, they can become more pronounced depending mainly on the size of the shock. Furthermore, the authors test a large number of vulnerability predictors and find that greater aid and inflows of remittances reduce adverse macroeconomic consequences, and that direct losses appear most critical.

Micro‐insurance against drought risk in a changing climate: Assessing demand and supply considerations

Purpose – Novel micro‐insurance schemes are emerging to help the poor better deal with droughts and other disasters. Climate change is projected to increase the intensity and frequency of disasters and is already adding stress to actual and potential clients of these schemes. As well, insurers and reinsurers are increasingly getting worried about increasing claim burdens and the robustness of their pricing given changing risks. The purpose of this paper is to review and suggest ways to methodologically tackle the challenges regarding the assessment of drought risk and the viability of index‐based insurance arrangements in the light of changing risks and climate change.Design/methodology/approach – Based on novel modeling approaches, the authors take supply as well as demand side perspectives by combining risk analysis with regional climate projections and linking this to household livelihood modeling and insurance pricing. Two important examples in Malawi and India are discussed, where such schemes have b...

The Value of Global Earth Observations

Humankind has never been so populous, technically equipped, and economically and culturally integrated as it is today. In the twenty-first century, societies are confronted with a multitude of challenges in their efforts to manage the Earth system.