Government Insurance Against Natural Disasters: An Application to the ECCU

December 4, 2020

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Alejandro D Guerson. Government Insurance Against Natural Disasters: An Application to the ECCU, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper estimates insurance requirements against natural disasters (NDs) in the Eastern Caribbean Currency Union (ECCU) using an insurance layering framework. The layers include a government saving fund, as well as market instruments. Each layer is calibrated to cover estimated fiscal cost of NDs according to intensity and expected damage. The results indicate that ECCU countries could target saving fund stocks for relativelly smaller and more frequent events in the range of 6-12 percent of GDP, enough to cover 95 percent of NDs’ fiscal costs. To ensure financially-sustainable saving funds with a low probability of depletion, this requires annual budget savings in the range os 0.5 to 1.9 percent of GDP per year. Additional coverage could be obtained with market instruments for large and less frequent events, albeit at a significant cost.The results are based on a Monte-Carlo experiment that simulates natural disaster shocks and their impact on output and government finances.

Subject: Environment, Financial institutions, Insurance, Monetary policy, Natural disasters, Public debt, Standing facilities, Stocks

Keywords: Annual budget, Caribbean, CCRIF payout, Cost composition, Debt sustainability, Debt sustainability., ECCU, ECCU country, Financing flow, Fiscal cycles, Insurance, Insurance cost, Monte Carlo experiment, Natural disasters, Payout amount, Rate of return, SF stock, Standing facilities, Stocks, WP

Publication Details

Pages:

25
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/266
Stock No:

WPIEA2020266
ISBN:

9781513563329
ISSN:

1018-5941

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