Government Insurance Against Natural Disasters: An Application to the ECCU

Government Insurance Against Natural Disasters: An Application to the ECCU
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Volume/Issue: Volume 2020 Issue 266
Publication date: December 2020
ISBN: 9781513563329
$18.00
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Topics covered in this book

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Money and Monetary Policy , Public Finance , Natural Disasters , ECCU , fiscal cycles , Monte Carlo experiment , debt sustainability , , WP , SF stock , ECCU country , CCRIF payout , financing flow , annual budget , cost composition , insurance cost , Natural disasters , debt sustainability , payout amount , rate of return , Insurance , Standing facilities , Stocks , Caribbean

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.