Increasing CCRIF's Risk Diversification under Climate Change: Strengthening Disaster Risk Financing Efforts in Latin America and the Caribbean
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2024-03-07
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Master Thesis
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Abstract
Risk disaster financing efforts are an important pillar for building resilience in the aftermath of an event to reduce macro-economic effects on a country’s economy through pre-agreed financial arrange- ments (Bollmann Andreas & Wang Shaun S., 2019). Moving from ex-post to ex-ante financial instru- ments the certainty on the amount of money and time delivered is increased which can positively in- fluence the recovery of a country (World Bank Group, 2017). In Latin America and the Caribbean many small island states are especially vulnerable and over proportionally affected to tropical cyclone activity (Hallegatte et al., 2017). An unchanged frequency but an increase in magnitude is projected on the global scale (Knutson et al., 2020; S.I. Seneviratne et al., 2021). Sovereign risk pools are seen as a promising insurance vehicle to pool countries within an insurance structure to profit from an in- creased cost-efficient setting to make uninsurable risk insurable or affordable (Jarzabkowski et al., 2023). This thesis builds on the regional optimal pooling from Ciullo et al. (2023) by maximizing risk diversifi- cation of a sovereign risk pool to reduce premiums or increase coverage. We have extended the opti- mization to the future climate in Latin America and the Caribbean under two different risk transfer ranges (policies) and with a regional optimal pooling and regional extension pooling approach. The effect on the regional optimal risk pool’s risk diversification and composition of their member portfo- lios was subject to evaluation. Risk diversification only shows minor changes under future climate models as the correlation of the losses between countries are similar to the current climate’s correlations. Major influences are shown in the selection of the pooling approach on the risk diversification, pool size, and the member portfo- lio’s country composition. We have shown that the regional optimal pooling has the highest risk diver- sification of up to approximately 80% for the relative required capital reduction with the lowest number of countries mostly including low-risk and low-loss countries. Countries which are more at risk and can be seen as the more vulnerable countries are often excluded. The regional extension pooling shows a lower risk diversification with a relative capital reduction up to approximately 68% but in- cludes more high-risk and high-loss countries. Risk diversification is linear correlated to the relative required capital reduction. 0.01 increase in risk diversification yields in 1% reduction in relative re- quired capital. Disaster risk financing efforts have shown to be an important pillar for resilience building. This thesis has shown that the relevance is in choosing the right pooling approach and by setting objectives to yield optimal pooling options which are feasible for operation and establishment. It can set a basis for establishing also pools on a global and inter-regional scale to yield a maximum protection of countries at-risk with the best cost-effective possibilities.
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Examiner: Kropf, Chahan Michael
Examiner: Ciullo, Alessio
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ETH Zurich
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09576 - Bresch, David Niklaus / Bresch, David Niklaus