Increasing countries’ financial resilience through global catastrophe risk pooling

Extreme weather events like tropical cyclones and floods severely impact economies, causing growth losses, tax revenue declines, and increased government debt due to short-term deficit financing. This challenge is particularly acute for countries with existing debt issues, which often rely on slow and uncertain foreign aid whose terms are typically agreed upon only ex-post. In contrast, ex-ante financial instruments, such as insurance and sovereign catastrophe risk pools, offer faster, more predictable funding while encouraging risk reduction and adaptation investments.

Sovereign risk pools, such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF), African Risk Capacity (ARC), and Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), have proven valuable. However, they may not fully realize their financial resilience potential, as pooling within the same region can limit risk diversification. This presentation will introduce a method to design risk pools by maximizing diversification across countries regardless of region. Results show this approach consistently enhances risk diversification, more evenly distributes risk shares within the pool, and increases the number of benefiting countries.

Related publication:

Ciullo, A., Strobl, E., Meiler, S. et al. Increasing countries’ financial resilience through global catastrophe risk pooling. Nat Commun 14, 922 (2023). https://doi.org/10.1038/s41467-023-36539-4