Disaster Risk ManagementDisaster Risk Management

Basic Concepts

31 Dec 2003 RJ 2

Disasters and DevelopmentDisasters and Development

Major natural hazards have larger consequences in developing countries than in industrialized nations

Factors related to relatively-lower development levels contribute to magnify such consequences

The impact of disasters on long term development prospects is higher in developing economies

31 Dec 2003 RJ 3

Disasters and Development..Disasters and Development..

In recent years, more than 90 per cent of deaths caused by disasters in the world have occurred in developing countries

The effects of major disasters have negatively affected living conditions and development prospects in said countries

During the past three decades, disasters have caused more than US$ 50 billion in damages and losses in selected countries of the Latin America and Caribbean region, and caused lower economic performance and living conditions

31 Dec 2003 RJ 4

Disasters and Development...Disasters and Development...

Recent, major disasters have imposed heavy burdens on the economy and society of Latin America and the Caribbean

As an example, Hurricane Mitch in Honduras

- Caused damage and losses that were equivalent to 70% of GDP in 1998

- And economic performance in 1998 and subsequent years suffered a serious setback

-8

-6

-4

-2

0

2

4

6

8

1996 1997 1998 1999 2000 2001 2002

An

nu

al G

DP

gro

wth

, %

Before Mitch After Mitch

31 Dec 2003 RJ 5

Damage and losses in Central Damage and losses in Central America 1972-2001America 1972-2001

0

1000

2000

3000

4000

5000

6000

7000

8000

Mill

ion

US

Do

llars

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

214 MillionAnnually

Due toMinor Events

31 Dec 2003 RJ 6

Frequency of disasters and magnitude of Frequency of disasters and magnitude of damages are increasingdamages are increasing

0

10

20

30

40

50

60

70

80

90

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

Nu

mb

er

of

dis

as

ters

0

100

200

300

400

500

600

Bill

ion

US

$

Number of Disasters Damage and Losses

31 Dec 2003 RJ 7

Damage, Losses, and Damage, Losses, and Macroeconomic EffectsMacroeconomic Effects

Direct Damages: total or partial destruction of assets immediately following a disaster

Indirect Losses: Modifications to production flows or to the provision of essential services

Macro-Economic Effects: Modifications to performance of main aggregates of the affected economy

31 Dec 2003 RJ 8

Source:Source:

31 Dec 2003 RJ 9

Hazard, Vulnerability and RiskHazard, Vulnerability and Risk

Hazard is the probability of occurrence of a natural event that may cause significant damages, losses and other economic effects

Vulnerability is the propensity that a community may have to sustain human losses, physical damage and economic losses due to the occurrence of a major natural event

Risk is the probability that damage and losses may occur as a result of the occurrence of a natural event of a given magnitude, in a given time and place

31 Dec 2003 RJ 10

RiskRisk

Risk is the result of the combination of the occurrence of a natural hazard and of a vulnerable human settlement or activity

Natural Hazard(With Damage and Loss

Potential)

Vulnerability(Propensity to

Damage and Losses)

RISKRISK(Probability and Magnitude of(Probability and Magnitude of

Damage and Losses)Damage and Losses)

Disaster Risk ManagementDisaster Risk Management

Risk management is a process of analysis and quantification of the probability that damage and losses are produced so that prevention and mitigation measures can be implemented to reduce risk

31 Dec 2003 RJ 12

Disaster Risk ManagementDisaster Risk Management

Risk management involves implementing two types of activities:

- Planning of vulnerability reduction- Adoption of protection measures against

potential economic damage and lossesA comprehensive risk management scheme

should include:- Ex Ante measures undertaken before a

disaster- Ex Post measures carried after a disaster

occurs

31 Dec 2003 RJ 13

Disaster Risk Management..Disaster Risk Management..

Ex Ante• Risk Analysis• Prevention and

Mitigation Measures

• Risk transfer• Emergency

Preparedness

Ex Post• Emergency

Response (Humanitarian Assistance)

• Rehabilitation• Reconstruction

Ex AnteEx Ante Activities for Activities for Risk ManagementRisk Management

31 Dec 2003 RJ 15

Ex AnteEx Ante Activities for Activities for Risk ManagementRisk Management

Natural hazard frequency analysis using historical records of natural events

Vulnerability analysis• Physical• Social• Economic• EnvironmentalRisk analysis: potential

damage and losses under different scenarios

Mitigation• Retrofitting of

infrastructure• Slope stabilizing• Environmental

protection

Prevention• Construction standard

updating• Public awareness and

education programmes

31 Dec 2003 RJ 16

Ex Ante Activities for Ex Ante Activities for Risk Management..Risk Management..

Risk Transfer: to reduce financial impact of disasters to levels commensurate with country’s capacity for reconstruction, when mitigation and prevention measures are unable to avoid disasters

Ex Ante financial sources:

• Without risk transfer

• With risk transfer

31 Dec 2003 RJ 17

No Risk-Transfer Financial SchemesNo Risk-Transfer Financial Schemes

Non-Reimbursable resources

• Calamity funds• Reserve funds• Budgetary resource

allocation• Development and

Social Funds

Reimbursable resources

• Contingency Funds• Development and

Social Funds

31 Dec 2003 RJ 18

No Risk-Transfer No Risk-Transfer Non-Reimbursable resourcesNon-Reimbursable resources

Special Calamity Funds set up by governments to finance mitigation and prevention (i.e. Colombia)

Reserve Funds set up by governments to finance Ex Post activities, that might be also utilized for Ex Ante endeavors (i.e. Mexico’s FONDEN)

Government Budget Resources that may be reallocated to finance prevention and mitigation

Development and Social Funds that may be used to finance Ex Ante activities

31 Dec 2003 RJ 19

No Risk-Transfer No Risk-Transfer Reimbursable resourcesReimbursable resources

Contingency Loans (may be tapped Ex Ante and require payment of administration costs)

• International (IDB and World Bank)• Domestic (Public and private banks)Development and Social Funds (may

also provide contingency financing to finance prevention and mitigation)

31 Dec 2003 RJ 20

Risk-Transfer Financial SchemesRisk-Transfer Financial Schemes

Insurance and Re-Insurance with Damage and Loss Coverage

Catastrophe Bonds- Reimbursement on basis of actual

damage and losses- Reimbursement based on parametric

activation indicators

Ex PostEx Post Activities for Activities for Risk ManagementRisk Management

31 Dec 2003 RJ 22

The Three Phases after a DisasterThe Three Phases after a Disaster

Disaster

EmergencyEmergency

Int’lAssistance

RehabilitationRehabilitation

RapidAssessment

ReconstructionReconstruction

Strategic Assessment

31 Dec 2003 RJ 23

Facing ReconstructionFacing Reconstruction

Reconstruction requires:• Diagnosis on direct damages and indirect

losses caused by disaster • Formulation of strategy and plan for

reconstruction• Specific sectoral project formulation • Financing, local and internationalFinancing of reconstruction usualley

undertaken by drawing on more immediately available and lower cost resources

31 Dec 2003 RJ 24

Ex PostEx Post Financial Sources Financial Sources

Non Reimbursable Funds

• Reallocated resources from national or municipal budget

• Use of Government monetary reserves

• Donations

Reimbursable Funds• Emergency Funds

(IDB’s Emergency Reconstruction Facility, World Bank)

• Reallocation of existing loans

• Fresh loans

Who Bears Risk in Latin Who Bears Risk in Latin America and the Caribbean America and the Caribbean

at the Present Timeat the Present Time

31 Dec 2003 RJ 26

Who Bears RiskWho Bears Risk

Governments are (non consciously and for moral reasons) assuming risks beyond their ownership and, at times, beyond their financial capacity:

• Infrastructure (roads and bridges, ports and airports, hospitals and schools, office buildings, and water and energy facilities, when not privatized)

• Housing for the poor

31 Dec 2003 RJ 27

Who Bears Risk..Who Bears Risk..

The private sector normally bears risk on:

• Property and production, usually resorting to insurance

• Privatized essential services of electricity, water supply, telecommunications

• Housing, except for the lower income population

31 Dec 2003 RJ 28

Disaster Risk ManagementDisaster Risk Management

Decision makers do not perceive the need for undertaking disaster risk management due to:

- Difficulties in accurately and reliably forecasting the possible occurrence of natural events

- Estimated return periods are longer than their periods of office

Thus, the need for risk management only becomes obvious when a major disaster – having high social, economic, environmental and political consequences – or when succesive disasters occur

Reconstruction FinancingReconstruction Financing

A Recent Example:El Salvador after the 2001

Earthquakes

31 Dec 2003 RJ 30

El Salvador Earthquakes: El Salvador Earthquakes: Summary of Damage and LossesSummary of Damage and Losses

Sector and Subsectors

Damage and Losses, million US Dollars

Total Direct IndirectSectoral Distribution

Public Private

Social SectorsEducationHealthHousing

617 496 120 211 190 20 72 56 16 334 250 84

238 379 69 142 72 --- 96 237

InfrastructureElectricityWater SupplyTransport

472 97 376 16 3 13 23 19 4 433 75 358

171 301 3 12 13 10 155 278

Production SectorsAgricultureIndustry, Trade, Tourism

339 244 96 93 38 55 246 205 41

15 324 13 80 2 244

Environment 103 102 1 103 ---

Other Damages 73 --- 73 40 33

Total 1604 939 665 567 1043

31 Dec 2003 RJ 31

Participation in Reconstruction FinancingParticipation in Reconstruction Financing

Million US $Reconstruction Costs 2,000GOES 320International Grants 404Loans, reallocation 363Loans, new 370Private Sector 241Insurance 302

16%

20%

18%19%

12%

15%

GOES Funds Int'l Grants Loans, ReallocatedLoans, Fresh Private Sector Insurance

31 Dec 2003 RJ 32

Results of reconstruction schemeResults of reconstruction scheme

After completing reconstruction of the 2001 earthquakes -- resorting to fresh and re-oriented loans, using monetary reserves, and having refinanced short-term loans through long-term ones -- El Salvador has reached a total debt that is equivalent to 47% of its GDP, or 4.6 billion US Dollars

Source: ECLAC, Balance preliminar de las economías de América Latina y el Caribe 2003, December 2003.

Disaster Risk ManagementDisaster Risk Management

Basic Concepts