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Financial and Fiscal Instruments for Catastrophe Risk Management

Financial and Fiscal Instruments for Catastrophe Risk Management

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This applied study addresses the large flood exposures of Central Europe and proposes efficient financial and risk transfer mechanisms to mitigate fiscal losses from such natural catastrophes. In 2010 the V-4 Visegrad countries (i.e., Poland, Czech Republic, Hungary and Slovakia) demonstrated their historical vulnerability to floods – Poland suffered $3.2 billion in flood related losses, comparable to it $3.5 billion of losses in 1997. Flood modeling analysis of the V-4 shows that a disaster event with a 5 percent probability in any given year can lead to economic losses in these countries of between 0.6 percent to 1.9 percent of GDP, as well as between 2.2 percent to 10.7 percent of government revenues. Larger events could quadruple such losses. The European Union Solidarity Fund is available as a mechanism for disasters but it comes into effect at only very high levels of losses, does not provide sufficient funding, and is not speedy
This applied study addresses the large flood exposures of Central Europe and proposes efficient financial and risk transfer mechanisms to mitigate fiscal losses from such natural catastrophes. In 2010 the V-4 Visegrad countries (i.e., Poland, Czech Republic, Hungary and Slovakia) demonstrated their historical vulnerability to floods – Poland suffered $3.2 billion in flood related losses, comparable to it $3.5 billion of losses in 1997. Flood modeling analysis of the V-4 shows that a disaster event with a 5 percent probability in any given year can lead to economic losses in these countries of between 0.6 percent to 1.9 percent of GDP, as well as between 2.2 percent to 10.7 percent of government revenues. Larger events could quadruple such losses. The European Union Solidarity Fund is available as a mechanism for disasters but it comes into effect at only very high levels of losses, does not provide sufficient funding, and is not speedy

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Publish date: Jul 2012
Added to Scribd: Jul 02, 2012
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12/19/2015

1.1. Territorial Scope

The analysis explores the possible losses caused by foods in the Czech Republic, Po-
land, Hungary, and the Slovak Republic. The respective territories of these V-4 countries
are administratively divided into three principal hierarchical levels, that is, provinces,
districts, and municipalities.4 The provinces correspond to NUTS-3 level5 in the Nomen-
clature of Units for Territorial Statistics (NUTS)6 that is used for comparisons within the
EU, while the districts correspond to LAU-17 and municipalities to LAU-28 level. For the
purposes of the analysis, the districts are used as the smallest territorial unit.

1.2. Thematic Scope

The main aim of this analysis is to map possible extreme losses on both public services9
and public commercial enterprises.10 Private properties are mapped as well. Based on
the experience from recent extreme foods, the governments have been providing sub-
stantial amounts of resources covering the losses on private property, especially those
for residential buildings and their contents.
Due to efcient application of modeling, the assets have been divided into few class-
es using a three-dimensional classifcation used by national accounting in the respective
countries that have been standardized to a certain level for all the EU member states. The
three-dimensional classifcation contains the following dimensions: Industry Branch,11
Asset Category,12 and Institutional Sector.13

1.3. Value Defnitions

1.3.1. RepRoduction (Replacement) veRsus HistoRical pRices

The Reproduction price stands for the price, for which the property would be purchased
in the current year, that is, the current market price of the property. The Historical price
represents the value of the property expressed either in the prices of a fxed historical
year (for example, 2000) or in those of the year of purchase. When the analysis estimates
real losses, the reproduction prices of the property are applied.

1.3.2. time dimension

The property values as well as estimated loss values are related to year-end 2007 values.14

Financial and Fiscal Instruments for Catastrophe Risk Management

35

1.3.3. GRoss veRsus net asset value

The Gross value represents the price of the property without depreciation, that is, the
value of the new property when purchasing. The Net value is the depreciated gross value
(with depreciation amortization subtracted). For the loss modeling as well as property
structure classifcation, the net value (in reproduction prices) is used.

1.3.4. tRansnational estimates

For the transnational cross-country comparison, the loss values were denominated in
EUR. Pertinent conversions used either Exchange Rates or Purchasing Power Parity (PPP)
measures. As the structure of the property considered in the model may signifcantly
difer from the basket of goods used for PPP estimates, the Exchange Rate is used for
transnational comparisons rather than PPP. The average exchange rates to convert from
national currencies to EUR were used according to the European Central Bank (ECB)
data for the period between July 1, 2008 and June 30, 2009.15

1.4. Flood Defnition

The analysis focuses on the efects of the extreme events of river/fuvial food. The river
network considered streams with catchments greater than 20 square kilometers in the
headwater areas. Pluvial/fash foods were considered only to the extent that they con-
tributed to the losses caused by the river network (that is, when collecting the water
from the thunderstorm or collapse of a human structure such as a dam). Losses were not
considered when caused by surface water in areas with no permanent rivers/streams.
Furthermore, tidal/coastal foods/storm surge were not considered.

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