Increasing countries’ financial resilience through global catastrophe risk pooling
The present study addresses the issues of risk diversification of currently existing pools, and therefore their members’ financial resilience, being limited because these pools were not designed with the primary goal of maximizing risk diversification and they pool risk only within regional borders. It introduces a method that forms pools by maximizing risk diversification and apply it to assess the benefits of global pooling compared to regional pooling. The Sendai Framework and the Paris Agreement advocate for more resilient financial instruments like sovereign catastrophe risk pools.
The study finds out that global pooling always provides a higher risk diversification, it better distributes countries’ risk shares in the pool’s risk and it increases the number of countries profiting from risk pooling. Optimal global pooling could provide a diversification increase to existing pools of up to 65 %.