WITH THE 2007 Atlantic hurricane season approaching in June, those living around the Caribbean basin will be watching the weather forecasts closely. It is hoped that the atmospheric calm of last year will be repeated, but the large losses from hurricanes in 2004 (Charley and Ivan, among others) and in 2005 (Katrina and Wilma) are still fresh in people’s minds. Moreover, scientific studies suggest an upward trend in the frequency and intensity of hurricanes (Webster and others, 2005).
Natural disasters (such as catastrophic hurricanes) can have far-reaching negative effects on macroeconomic conditions in affected countries, including on their public finances (Rasmussen, 2006). And nowhere is this more the case than in developing and smaller countries. Developing countries are often unable to marshal the substantial resources needed in the aftermath of a major disaster. Smaller countries (such as the island states in the Caribbean and the South Pacific) are typically unable to achieve the geographic redistribution of risk available to larger countries, which can subsidize the costs associated with catastrophic events by using revenues from unaffected regions. In these countries, therefore, the costs associated with natural disasters can quickly overwhelm the public sector’s ability to respond effectively.
Catastrophe insurance markets, however, increasingly offer opportunities for the transfer of such risks. Thus far, developing countries have only tepidly begun to tap these opportunities, although more frequent and intensive use of insurance markets may be desirable. This article discusses available insurance modalities and a few recent initiatives in developing and emerging market countries, along with some key challenges for the insurance community, donors, and international financial institutions.
Brukoff, Patricia, and David Hofman, 2006, “Insuring Public Finances Against Natural Disasters—A Survey of Options and Recent Initiatives,” IMF Working Paper No. 06/199 (Washington: International Monetary Fund).
Chacko, George, Peter Hecht, Vincent Dessain, and Anders Sjöman, 2004, “Catastrophe Bonds at Swiss Re” (unpublished; Cambridge, Massachusetts: Harvard Business School).
Freeman, Paul, Michael Keen, and Muthukumara Mani, 2003, “Dealing with Increased Risk of Disasters: Challenges and Options,” IMF Working Paper No. 03/197 (Washington: International Monetary Fund).
Intergovernmental Panel on Climate Change (IPCC), 2007, Climate Change 2007: The Physical Science Basis (Cambridge, Massachusetts: Cambridge University Press for IPCC).
Rasmussen, Tobias, 2006, “Natural Disasters and Their Macroeconomic Implications,” in The Caribbean—From Vulnerability to Sustained Growth, ed. by Ratna Sahay and others (Washington: International Monetary Fund).
Webster, P.J., G.J. Holland, J.A. Curry, and H.R. Chang, 2005, “Changes in Tropical Cyclone Number, Duration, and Intensity in a Warming Environment,” Science, Vol. 309 (September), pp. 1844–46.