became available to those in the insurance industry who wanted to overlay hazard estimates on current estimates of property exposure<sup>7</sup> . Complex, largely non-transparent, and often subject to commercial non-disclosure agreements, catastrophe models nonetheless provide the support for public and private rate setting on billions of dollars of insurance in the United States each year— consider, for example, the Florida Hurricane Catastrophe Fund<sup>8</sup> and the California Earthquake Authority<sup>9</sup> ; public statements regarding their necessity and capital adequacy involve the use of catastrophe models.

Catastrophe risk models are well developed for developed economies where there is a demand for such models, for example from insurance and reinsurance companies that offer catastrophe coverage to their clients. In developing countries, where the property insurance market is usually under development (such as most middle income countries) or undeveloped (such as most lowincome countries), the demand for catastrophe insurance is almost non-existent and, consequently, catastrophe risk models are scarce. The donor community has been recently sponsoring the development or the enhancement of catastrophe risk models. Hurricane and earthquake risk models have been developed for the Caribbean region under the sponsorship of the Caribbean Catastrophe Risk Insurance Facility. Likewise, donors have financed the development of country-specific catastrophe risk models for the South Pacific Islands. In addition, there have recently been attempts to develop catastrophe risk models on open platform. For example, the Central American Probability Risk Assessment (CAPRA) initiative, supported by the World Bank and other development agencies, is based on an open and modifiable platform which allows governments and institutions to supplement the model with previous and ongoing initiatives (Cummins and Mahul, 2009). Such models are not only useful for insurance purpose, but also they offer policy makers new tools for their country management and mitigation programs. Such models are expensive to develop and the private sector may be reluctant to invest due to uncertainty about generating sufficient business to recover development costs. There is clearly a role for donors to finance such models to help countries better assess their economic and fiscal exposure to natural disasters, and ultimately, help reduce the physical and financial vulnerability of developing countries to natural disasters.

For those unfamiliar with catastrophe models, we describe here a highly simplified hurricane model. To calculate the Average Annual Loss (AAL) from US hurricanes, consider the following landfall model specification, outlined here only for illustration purposes: where _i_ is a coastal segment (CS) index;

> 7 Karen Clark (1986): “A Formal Approach to Catastrophe Risk Assessment and Management,” _Proceedings of the Casualty Actuarial Society_ , vol. LXXIII, no. 139. http://www.casact.org/pubs/proceed/proceed86/86069.pdf

> 8 Florida Hurricane Catastrophe Fund (FHCF) website. See in particular the annual reports under the “FHCF Reports” section. http://www.sbafla.com/fhcf/

9 California Earthquake Authority (CEA) website. See in particular the history of the CEA reports under the “About the CEA” section. http://www.earthquakeauthority.com/ 4