Solving Commitment Problems in Disaster Risk Finance

27 Pages Posted: 19 Jul 2016

See all articles by Daniel Clarke

Daniel Clarke

Disaster Risk Financing and Insurance Program, World Bank,

Liam Wren-Lewis

Paris School of Economics (PSE)

Date Written: June 21, 2016

Abstract

Those at risk from natural disasters are typically under-protected, possibly because they expect benefactors such as governments and donors to come to their aid. Yet when relief comes, it is often insufficient, delayed or misallocated. Benefactors may wish to commit to provide an efficient amount of fast well-targeted relief, and leave the rest up to recipients, but such commitments are difficult. This article analyses how transferring risk to third-parties such as private insurers may help resolve these commitment problems. Using a simple model of disaster risk finance is used to identify three distinct commitment problems and then show how various properties of risk transfer schemes can help to resolve these problems. The paper illustrates how these commitment problems play out using examples from around the world, and demonstrates where risk transfer schemes seem to have helped in practice. Overall, the findings show that the benefits of such schemes depend on the relative severity of the different commitment problems.

Keywords: Hazard Risk Management, Regional Urban Development, Urban Economic Development, Economics and Institutions, National Urban Development Policies & Strategies, Adaptation to Climate Change, Disaster Management, Urban Communities, Public Sector Economics, Inequality, City to City Alliances, Public Sector Management and Reform, Public Finance Decentralization and Poverty Reduction, Social Risk Management, Urban Economics, Non Governmental Organizations

Suggested Citation

Clarke, Daniel and Wren-Lewis, Liam, Solving Commitment Problems in Disaster Risk Finance (June 21, 2016). World Bank Policy Research Working Paper No. 7720. Available at SSRN: https://ssrn.com/abstract=2811369

Daniel Clarke (Contact Author)

Disaster Risk Financing and Insurance Program, World Bank, ( email )

Washington, DC 20433
United States

Liam Wren-Lewis

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

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