Coping with disasters: advancing disaster risk financing strategies in the Caribbean

By Xijie Lu, Mary Boyer, Kerri Cox, and Rashmin Gunasekera

In a few weeks, hurricane season in the Caribbean will begin again. In our travels to Belize, the British Virgin Islands, Jamaica, Saint Lucia and St. Vincent and the Grenadines over the past two months, we’ve heard variations of this same refrain. People in these islands are talking about what they will do differently this season, from conducting community-wide drainage cleanups to stockpiling cash in the event of island-wide power outages; whilst at the national level, ministries are also discussing the best ways to reduce the impact of disasters going forward.

These dialogues and adjustments at the individual, community and national levels are a necessity, as over the last 40 years, disasters in the Caribbean have almost tripled. During the 2017 hurricane season, Hurricanes Maria and Irma caused unprecedented damage across several islands in the Caribbean, prompting payouts from the Caribbean Catastrophe Risk Insurance Facility of over USD 50 million to member countries that year. Although last year was a particularly horrible season for the region, every year, at least one country in the region is hit by a strong hurricane, and ever-present threats exist like flooding, earthquakes and droughts. Although Caribbean countries have made great progress in reducing poverty and inequality over the years, disasters like these threaten to drive vulnerable populations back into poverty.

So, how can these countries cope with these disasters? One solution involves incorporating disaster risk management principles into development planning by: identifying the countries’ disaster risk; working to reduce this risk; actively preparing for disasters; implementing disaster risk financing mechanisms; and reconstructing in resilient ways.

Over the past three years, our Disaster Risk Management team in the World Bank’s Latin American and Caribbean region worked with four countries to improve one of these key areas – Disaster Risk Financing.

Well-designed disaster risk financing strategies are developed before a disaster strikes, integrated into core public finance systems, and combine risk retention and transfer instruments in the context of an effective legal framework. Utilizing funding received from the Global Facility for Disaster Reduction and Recovery (GFDRR), our team collaborated with the Ministries of Finance in Belize, Grenada, Jamaica and Saint Lucia to design cost-effective, tailored strategies that would help each country improve their fiscal resilience to disasters. This process entailed:

• Quantifying countries’ contingent liabilities to estimate the fiscal risk of natural disasters;
• Reviewing their existing systems for public financial management of disasters as well as their legal frameworks for addressing shocks;
• And evaluating the domestic non-life insurance market in each country to determine their capacity to build strong financial sectors for public and private risk transfer.

Conducting these steps collaboratively with the governments helped them to gain a much better understanding of their exposed assets and fiscal risk. For instance, in Jamaica, we estimated that the government would need to cover losses of approximately USD 121 million annually, the equivalent of 0.85% of their 2015 GDP, to address the impacts of hurricanes and floods. With a tangible risk level handy, the governments are then better equipped to assess whether existing financial protection instruments are adequate.

At the end of the process, we identified existing disaster risk financing gaps and corresponding tailored solutions for each of the four countries. These solutions were identified by the Ministries of Finance as key priority areas for improvement in the short, medium and long-term, which include:

• Creating an inventory of public assets and streamlining damage and loss data collection
• Approving a disaster risk financing strategy and streamlining reporting of post-disaster expenditures
• Establishing a contingency reserves fund, engaging external development partners in establishing contingent financing arrangements, and developing a disaster risk insurance program for key public assets, in partnership with the private insurance industry
• Promoting government and the private sector partnership to implement flexible Social Protection systems; improve the availability and affordability of private and residential catastrophe insurance; and enhance the availability of agricultural insurance.

We further developed reports for each country that detailed these recommendations for strengthening their disaster risk management strategies.

During the launch of these reports at the 2018 Understanding Risk Forum held in Mexico City, Sameh Wahba, Director of the World Bank’s Social, Urban, Rural, and Resilience Global Practice, noted, “This is the first report series published after the 2017 Atlantic hurricane season that highlights specific recommendations to strengthen disaster risk finance strategies in the Caribbean. However, for these strategies to be beneficial, countries need to foster a data-rich environment and ensure that enabling legal and policy frameworks exist.”

Indeed, the effectiveness of each country’s disaster risk financing strategy will be based on the extent to which these recommendations are implemented and how well they work together with the other components. Our team will provide support to these countries in implementing the strategies and, at the request of Governments, will also work to expand this technical assistance program to other countries in within the Caribbean region.