Disaster risk financing: reducing the burden on public budgets
The rising impact of natural catastrophes is driving up the cost of disaster relief and reconstruction for the public sector. New forms of private-public partnership can make societies more resilient by absorbing the financial impact of large catastrophes.
Such partnerships allow governments, semi-governmental agencies aid organisations and NGOs to manage disaster expenses more efficiently by funding them before - instead of after - a catastrophe occurs.
Private sector insurers have developed innovative financial risk transfer products to mitigate the impact of disaster events. These provide models for public sector entities to leverage their available funds through the use of capital market instruments - allowing governments to smooth and protect their budgets at lower opportunity costs and ensuring more adequate funds for relief activities.
One recent example for this approach is the GlobeCat securitisation structured by Swiss Re. Launched in December 2007, this solution uses financial instruments with an innovative trigger mechanism to transfer Central American earthquake risks to the capital markets.
GlobeCat provides a payout based on the size of population exposed to a specified earthquake. The transaction offers a new model for governments and relief organisations to access pre-event financing in order to fund the growing impact of natural disasters in developing countries.