Earthquake Risk and Earthquake Catastrophe Insurance for the People's Republic of China

The year 2008 witnessed the renewed interests in earthquake risk management and insurance in the People's Republic of China (PRC), after the Wenchuan earthquake hit the country in May. Located along the southeastern edge of the Euro-Asian Plate, the PRC has a relatively high seismicity, which is manifested by the frequent occurrence of large and disastrous earthquakes. Buildings and infrastructure in the earthquake-prone regions of the PRC have relatively low earthquake resistance levels. Hence, disastrous earthquakes result not only in large numbers of injuries and fatalities but also in huge economic losses from property damages. While the PRC began testing earthquake insurance programs in the late 1980s, the overall penetration rate remains very low. The low penetration rate not only creates disruptions for the government after a major earthquake but also, in some cases, delays the reconstruction efforts. Moreover, as a result of the low penetration of earthquake insurance in the PRC, the government serves as the predominant bearer of financial risk from earthquake catastrophes. This paper discusses historical earthquakes and earthquake risk in the PRC and the recent developments of PRC's earthquake risk reduction efforts. The general principles of earthquake programs are explained and the critical issues of formulating earthquake programs in the PRC are discussed, including lessons from earthquake insurance in other countries and other catastrophe insurance in the PRC, data issues, loss risk modeling issues, financial risk modeling issues, legislative issues, and public awareness issues. The paper concludes with several policy directions that the Asian Development Bank can take to help the PRC in its design and implementation of earthquake insurance.earthquake insurance; China; earthquake risk; Wenchuan earthquake; catastrophe insurance

Reflections on U.S. Disaster Insurance Policy for the 21st Century

The devastation caused by hurricanes during the 2004 and 2005 seasons has been unprecedented and is forcing the insurance industry to reevaluate the role that it can play in dealing with future natural disasters in the United States. As shown in Table 1 the four hurricanes that hit Florida in the fall of 2004 -- Charley, Frances, Ivan and Jeanne---and Hurricanes Katrina and Rita in 2005 comprised half of the top 12 disasters with respect to insured losses between 1970 and 2005. On a related note, 18 of the 20 most costly disasters occurred between 1990 and 2005 and 10 occurred in the 21st Century. This context is totally different than the scale of economic loss the country has suffered from natural disasters and other extreme events in the 20th century. The first section of the paper addresses the first question by outlining two principles on which a disaster insurance program should be based. Section 3 then focuses on the second question by analyzing the insurability of a risk and examining the challenges facing the private sector in providing coverage against natural disasters. Section 4 turns to the third question and delineates the opportunities and challenges of a comprehensive disaster insurance program. Section 5 poses a set of open issues that are currently being addressed by a research project on disaster insurance undertaken by the Wharton Risk Center in conjunction with the Insurance Information Institute and Georgia State University. The concluding section summarizes the key issues associated with providing disaster insurance in the 21st century.

Reflections on U.S. Disaster Insurance Policy for the 21st Century

This paper proposes that we examine the feasibility of including earthquake and water damage as part of a global homeowners policy for dealing with the catastrophic risk problem from natural disasters. By undertaking such an analysis one is forced to address the question as to who should pay for disasters and how can we encourage individuals to undertake protective measures in advance of the event. Two key principles underlying any disaster insurance program is that the rates reflect the risk and that coverage is affordable. For lower income individuals it will be impossible to satisfy the first principle without some type of subsidy from the public sector. There are also a set of questions as to whether the private sector has the ability to cover losses from catastrophic disasters on their own or will need some type of public sector involvement. There are a set of related issues that have to be considered when developing any type of disaster insurance program. These include the ability to assess the risk and the uncertainty of the models, the appropriate role of regulation, balancing the concerns of the different stakeholders concerned with this issue and the types of subsidies and back-up provision that can be offered by the public sector. Finally we need a clear understanding of the political and social landscape as well as how choices are actually made so as to develop a disaster insurance program as part of a hazard management strategy that achieve its desired impacts. The challenges in this regard are quite different today than they were in the 20th century because of the magnitude of losses from these disasters in the past few years.Health and Safety

Responding to Threats of Climate Change Mega-Catastrophes

There is a low but uncertain probability that climate change could trigger “mega-catastrophes,” severe and at least partly irreversible adverse effects across broad regions. This paper first discusses the state of current knowledge and the defining characteristics of potential climate change mega-catastrophes. While some of these characteristics present difficulties for using standard rational choice methods to evaluate response options, there is still a need to balance the benefits and costs of different possible responses with appropriate attention to the uncertainties. To that end, we present a qualitative analysis of three options for mitigating the risk of climate mega-catastrophes—drastic abatement of greenhouse gas missions, development and implementation of geoengineering, and large-scale ex ante adaptation— against the criteria of efficacy, cost, robustness, and flexibility. We discuss the composition of a sound portfolio of initial investments in reducing the risk of climate change mega-catastrophes.climate change, catastrophe, risk, decisionmaking under uncertainty

Risks, ex-ante actions, and public assistance: Impacts of natural disasters on child schooling in Bangladesh, Ethiopia, and Malawi

"This paper uses panel data from Bangladesh, Ethiopia, and Malawi to examine the impacts of natural disasters on schooling investments, with a particular focus on the roles of ex-ante actions and ex-post responses. We find that the importance of ex-ante actions depends on disaster risks and the likelihood of public assistance, potentially creating substitution between the two actions. We find that higher future probabilities of disaster increase the likelihood of agents holding more human capital and/or livestock relative to land; this asset-portfolio effect is significant in disaster-prone areas. Our empirical results support the roles of both ex-ante and ex-post (public assistance) responses in coping with disasters, but we see interesting variations across countries. In Ethiopia, public assistance plays a more important role than ex-ante actions in mitigating the impact of shocks on child schooling. In contrast, Malawi households rely more on private ex-ante actions than on public assistance. The Bangladesh example shows that active roles are played by both ex-ante and ex-post actions. These observations are consistent with our findings on the relationship between ex-ante actions and disaster risks. Our results also show that among ex-ante actions, human capital accumulated in the household prior to disasters helps mitigate the negative effects of a disaster in both the short and long runs." from authors' abstractNatural disasters, Ex-ante actions, Ex-post responses, Human capital investment, Poverty reduction, Social protection, Gender, Childcare and work,

Responding to Threats of Climate Change Mega-Catastrophes

There is a low but uncertain probability that climate change could trigger "mega-catastrophes," severe and at least partly irreversible adverse effects across broad regions. This paper first discusses the state of current knowledge and the defining characteristics of potential climate change mega-catastrophes. While some of these characteristics present difficulties for using standard rational choice methods to evaluate response options, there is still a need to balance the benefits and costs of different possible responses with appropriate attention to the uncertainties. To that end, we present a qualitative analysis of three options for mitigating the risk of climate mega-catastrophes--drastic abatement of greenhouse gas emissions, development and implementation of geoengineering, and large-scale ex ante adaptation--against the criteria of efficacy, cost, robustness, and flexibility. We discuss the composition of a sound portfolio of initial investments in reducing the risk of climate change mega-catastrophes.

CLIMATE CHANGE ADAPTATION, NATURAL HAZARD MITIGATION, AND INNOVATIVE RESPONSES

This dissertation is comprised of three essays which examine innovation, both technological and institutional, as a response aimed to adapting to climate change and natural disasters. Specifically, the first two papers seek to understand the drivers and implications of adaptation-related technological innovations. The third paper draws on the policy innovation theory to examine factors that shape the decision of state governments to engage in comprehensive climate adaptation planning. In Chapter 1, I examine the drivers of technical innovation as an important form of adaptation by investigating the impact of three types of natural disasters—floods, droughts and earthquakes—on the patenting activities of their respective mitigation technologies. Using patent and disaster damage data, this study is the first to empirically examine adaptation responses across multiple sectors at the country level. My empirical analysis, using a panel of 28 countries over a period of 25 years, shows that a country’s risk-mitigating innovations increase significantly with the severity of disasters it has recently experienced, while the degree of impact varies across different types of disasters and technologies. In Chapter 2, I evaluate the effectiveness of the risk-mitigating innovations in reducing disaster impacts in the case of earthquakes. By conceptualizing adaptation as a learning process, I examine the effect of technical knowledge stocks, constructed by patent counts in quake-proof building technologies, and informal knowledge, measured by prior earthquake experiences, on reducing earthquake-related losses. Using a global cross section, I find that countries with more earthquake-mitigation technical innovations and more earthquake exposure in the past suffer fewer fatalities. This “learning-by-doing” effect is much larger in high-income countries, which suggests their stronger adaptive capacity. Finally, Chapter 3 focuses on climate adaptation planning in the U.S. by examining the factors that drive state governments to develop comprehensive adaptation plans. I use an event history analysis to examine both internal factors (states’ climate risks, adaptive capacity and political interests in climate change) and policy diffusion among states within the same climate regions. This study finds that the state-level adaptation decision is highly driven by the extreme weather events the state has recently experienced, and also associated with the state’s potential exposure to climate risks, income level, civic engagement and environmental preferences. By examining the motivation for and barriers to subnational adaptation responses, this research has important implications for environmental federalism and governance. From the innovation perspective, my dissertation contributes to a deeper understanding of adaptation as a dynamic social-learning process, and sheds light on what drives society to adapt to environmental changes and shocks. It also informs an integrated policy approach to facilitating efficient climate adaptation and natural hazard mitigation

Modeling the fiscal impacts caused by climate change

Aim of the paper: The purpose is to gather the practices and to model the impacts of climate change on fiscal spending and revenues, responsibilities and opportunities, balance and debt related to climate change (CC). Methodology of the paper: The methodology will distinguish fiscal cost of mitigation and adaptation, besides direct and indirect costs. It will also introduce cost benefit analyses to evaluate the propensity of policy makers for action or passivity. Several scenarios will be drafted to see the different outcomes. The scenarios shall contain the possible losses in the natural and artificial environment and resources. Impacts on public budget are based on damage of income opportunities and capital/wealth/natural assets. There will be a list of actions when the fiscal correction of market failures will be necessary. Findings: There will be a summary and synthesis of estimation models on CC impacts on public finances, and morals of existing/existed budgeting practices on mitigation. The model will be based on damages (and maybe benefits) from CC, adjusted with probabilities of scenarios and policy making propensity for action. Findings will cover the way of funding of fiscal costs. Practical use, value added: From the synthesis of model, the fiscal cost of mitigation and adaptation can be estimated for any developed, emerging and developing countries. The paper will try to reply, also, for the challenge how to harmonize fiscal and developmental sustainability