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Analysis
When disaster strikes

When disaster strikes

Innovative funding for natural catastrophes

by Kat Usita in London

Fri 6 Oct 2017

Estimates of the collective damage caused by Hurricanes Harvey, Irma and Maria are staggering. Together, Harvey and Irma could cost the US government $200bn. Maria’s costs could add up to $45bn-$95bn for Puerto Rico, the US territory that has been in recession for over a decade and filed for a form of municipal bankruptcy five months ago. The tally does not include estimates of the devastation to other Caribbean countries and territories.

Governments have to be first responders to natural disasters. Since local officials are usually among the affected and have limited access to resources, central governments bear most of immediate costs. These include manpower and logistics for rescue and retrieval operations. Transportation, communication and energy infrastructure need to be restored. Survivors must be brought to temporary shelters and provided food, clothing and other necessities. Foreign aid and private donations typically supplement public funds.

A catastrophic storm can make obsolete even the most responsible fiscal planning. Immediate relief in Puerto Rico has shown some shortcomings, particularly when compared to Texas and Florida. The federal government must improve its response before Puerto Ricans lose hope and large groups begin to migrate to the US mainland, leaving the island without the human capital to rebuild devastated communities.

Increasingly commonplace disasters like these and the warming of the world’s oceans may point to the consequences of climate change. While most coverage has focused on the Caribbean, floods in South Asia and a landslide in Sierra Leone triggered by torrential rains were even more deadly, with death tolls in the thousands. Governments, international organisations and private insurers must adjust their calculations to show a more strategic response in how they absorb the financial burden of natural disasters.

Innovations in disaster risk-financing aim to meet the problems of fund disbursement. The Caribbean Catastrophe Risk Insurance Facility facilitates risk sharing among hurricane-prone countries in the region. The CCRIF model uses parametric triggers: the severity of a disaster initiates the pay-out, rather than a claim for damages, which in such circumstances would be difficult to process. This means that within two weeks of Hurricane Irma, affected countries covered by the CCRIF should have received pay-outs. These funds can make a tremendous difference to a country’s ability to manage the critical first few weeks after a disaster and compensates for any liquidity obstacles with public money and aid. In the long term, replacing damaged infrastructure will be costly, especially since building standards will have to be raised to improve resiliency.

The permanent and irreversible cost of natural disasters is lives lost: in the actual onset of disaster, in failed rescue attempts, and in under-resourced evacuation centres. The human cost should end there. After that point, responsive financing must step in to help survivors recover and rebuild.

Kat Usita is Researcher at OMFIF.

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