# **Section I: The Costs of Rapid Onset Natural Disasters in Developing Countries, Limitations of the Existing Coping Mechanisms and an Alternative Approach**

## **Costs of Rapid Onset Natural Disasters in Developing Countries**

The most massive economic losses from rapid onset natural disasters occur in developed countries, where the value of exposed capital is higher in absolute terms. There have been 15 natural disasters in the United States in the last 15 years that have resulted in a total of $43 billion in losses.<sup>22</sup> However, the relative impact of natural disasters is greater and more disruptive in developing countries, where infrastructure is less resilient, building standards are lower, incentives for mitigation are absent, private markets do not provide catastrophe insurance for homeowners and small businesses, and there are greater constraints on government resources available to cope with disasters. As a consequence, hazard related events cause more loss of life and injury, and the subsequent fiscal and economic consequences are more extensive. Of the 40 worst catastrophes in terms of the number of victims in 19702001, 39 occurred in developing countries.<sup>23</sup> Specific events demonstrate the dramatic impact of catastrophes on developing countries. For example, the toll from the 1999 Marmara earthquake in Turkey was close to 16,000 killed and 44,000 injured, with physical damages of about $10 billion or 5% of GDP, or 21% of government revenues.<sup>24</sup> The 1985 El Salvador earthquake destroyed property and 13 A hazard is any exogenous event that can destroy capital, including natural perils, epidemic and terrorism.

14 There is some evidence that natural disasters can, in some circumstances, provide an economic stimulus in industrial countries because of the efficient funding and mitigation mechanisms in place, and the opportunity provided to replace aged infrastructure and facilities.

> 15 Direct losses usually refers to the replacement value of property and infrastructure destroyed or severely damaged.

16 Gurenko, Eugene. “Building Effective Catastrophe Insurance Programs at the Country Level: A Risk Management Perspective” in Catastrophe Risk and Reinsurance: A Country Risk Management Perspective, Risk Books, London 2004. pg. 4 17 Lester, Rodney and Eugene Gurenko. “Financing Rapid Onset Natural Disaster Losses in India: A Risk Management Approach.” World Bank, August 2003. pg. 1.

> 18 Exposure refers to the extent and value of property, infrastructure and lives exposed to hazard. Vulnerability refers to the response of structures (and their inhabitants) to hazards.  Disasters are essentially man made.

19 Gurenko (2004). pg. 2.

20 A power curve applies with insurance consumption rising on average by 1.3% for every 1.0% rise in income per capita.

21 This is not confined to developing and transition countries. One recent US President declared a disaster every week for three of the years he was in office.

22 Ibid. pg. 5.

> 23 Swiss Re, _Sigma._ No.1 (2002). pg. 23.

> 24 Gurenko, Eugene.  “Building Effective Catastrophe Insurance Programs at the Country Level: A Risk Management Perspective” in Catastrophe Risk and Reinsurance: A Country Risk Management Perspective, Risk Books, London 2004. pg. 4

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