accurately. In such cases, risk assessment models offer valuable scientific guidance by anticipating credible events that could occur in the future, but have not yet taken place. These probabilistic models have been recently developed to assess the risk of rapid onset natural disasters (e.g., earthquakes, floods, hurricanes, cyclones). Using a similar approach, the World Bank Insurance Practice is working on a drought risk assessment model.

The methodology relies on simulation techniques and has the following four components: (i) hazard module, (ii) exposure module, (iii) vulnerability module and (iv) loss module.

The hazard module defines occurrence parameters of the peril and the probability of occurrence of all events likely to cause damage to assets. The relevant parameters are selected from the analysis of historical data and scientific studies available. These parameters in the case of earthquakes are location, magnitude, and depth. In the case of drought, they include intensity (measured by an appropriate drought index involving precipitation, soil moisture, etc.), duration, starting date and spatial coverage.

The exposure module defines the items at risk of loss and their average value of replacement. In the case of rapid onset natural disasters, items at risk are mainly stock items, while they are mainly flow items (e.g., agricultural crop yields) in the case of drought.

The vulnerability module quantifies the damage caused to each item at risk by the intensity of a given event at a particular location. Vulnerability is measured in terms of the damage factor, which is the ratio of the repair cost to the replacement cost. This ratio is equal to one for flow items.

The loss module estimates the losses by multiplying the damage ratio by the value at risk. This estimation is done for each item class at each location.

The probabilistic risk assessment model, build upon the four modules, provides a set of risk metrics, i.e., quantitative measurements of the potential losses with respect to the frequency of the event, such as the average annual loss or the probable maximum loss (defined as the largest likely loss from a specific catastrophic event, for a given return period.

# **_Identifying the resource gap_**

The level of risk retained by the country depends on its ability to absorb this shock without affecting its ability to invest in long-term economic development projects. The ex post sources of funding include redirected budget, tax increases, diverted loans (usually involving the development banks) and increased borrowing (Gurenko and Lester 2004). The size and the availability of the country’s fiscal resources can be typically approximated by the size of the fiscal surplus or the percentage of the fiscal budget that can be reallocated to address unexpected major events. The surplus of this fiscal capacity can then be used to determine the size of events in terms of probability of occurrence that can be self-financed by the government. Assume, for example, that a loss up to 8 percent of the current national budget, estimated at US$1 billion, can be absorbed without disrupting the fiscal and macroeconomic performance and that a US$80 million loss event has a return period of 10 years, then the government can retain losses from events 10