Contributions might worsen the humanitarian consequences of natural disasters

The new report “Applications of Risk Financing Techniques to Manage Economic Exposures to Natural Hazards” by Torben Juul Hansen, CBS, outlines those inappropriate states of independence that might occur when the “rich” provide financial aid after natural disaster in developing countries.

The financial consequences of natural disasters in developing countries are typically financed by bilateral contributions from rich donor countries or multilateral institutions after the disasters’ consequences have been proved by the international press (as an example, take a look at the restructuring after the tsunami and the earth quake in Pakistan).

Inappropriate states of independence

In many ways this leads to inappropriate states of independence (moral hazards) that helps to create unwanted political incentives that worsen the humanitarian and financial consequences of disasters in developing countries.

“The problem is that a very small part of the financial risks attached to natural disasters are insured in the developing countries where the insurance markets are underdeveloped and the financial losses caused by natural disasters grow heavily. When the developments in the bilateral donations do not grow as fast as financial losses, an important finance problem will occur in the longer term,” says the man behind the report Torben Juul Andersen.

The report states that the possible financial consequences of future natural disasters in developing countries must be described so that both local governments, donor countries and the multilateral institutions in advance can make an effort in reducing the risks.

Torben Juul Andersen has been part pf the four-member expert group to the OECD Task Force on Terrorism Insurance with Howard Kunreuther (Wharton, University of Pennsylvania), Dwight Jaffee (Haas School of Business, Berkeley) and John Cooke (International Economic Relations Consultant, London).