Policy discussion on disaster risk management through insurance instruments: public-private sector synergy as the only model for building greater financial resilience of the state
It is necessary to open a dialogue between public and private sectors and look at new perspectives for managing financial risks from natural disasters, it was concluded at a policy discussion organized by the Croatian Employers’ Association, the world’s largest insurance broker Marsh, global reinsurance broker Guy Carpenter (both from Marsh McLennan) and Vlahovic Group LLC.
According to the recent World Bank study “Financial Risk and Opportunities to Build Resilience in Europe”, whose findings were presented to the participants, Croatia ranks 4th in the EU in terms of 100-year natural disaster in terms of government liabilities relative to GDP.
We are aware that information on the financial risks associated with climate change and natural disasters, and then the available financial instruments, is rather limited and needs to be worked on across Europe.
Iva Rogovic Lekic, director of Marsh Croatia
The approach that the World Bank promotes in the management of financial risks of natural disasters is to classify risks into layers according to frequency and severity and to determine the financial instruments of coverage adequate to that classification. Accordingly, budget reserves and reallocations can cover frequent minor hazards, medium ones are recommended to be covered from additional sources such as contingency funds, while for the rarest but also the most financially demanding hazards, such as those that have recently hit Croatia, the transfer of risk through insurance instrument is recommended. Natural disaster insurance enables the transfer of disaster risk to insurance and reinsurance companies and is a well-known practice in EU Member States and even neighboring countries in the region.
Mario Baotic, a London-based managing director at Guy Carpenter, global reinsurer intermediary, explained how parametric insurance works. “If the state insures itself against a natural disaster such as an earthquake, there is no need to wait for damage assessments. As soon as the intensity of the earthquake is above the agreed parameter, the payment is activated, and governments dispose of funds freely and invest them where they are most needed”, Baotic explained, saying that the practice is to form the so-called national disaster insurance pool require the cooperation of the national insurance sector, the international reinsurance sector, development banks, and the commitment and support of the government. “Everyone has to work together to build a successful model”, Baotic said.
The financial and physical resilience of the crisis management system should be built at the same time by considering new models to strengthen the overall capacity of the crisis response system and to climate changes, which are an increasing challenge, concluded the expert panel attended by State Secretary Zdravko Zrinusic and the head of the Sector for disaster risk reduction in the Civil Protection Directorate Drazen Stajduhar, while the current model of earthquake reconstruction was presented by the State Secretary in the Ministry of Construction Zeljko Uhlir.
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