Using Probabilistic Models to Appraise and Decide. Ley-Borrás and Fox 8. **Take into account indirect consequences** . Job losses, reduction in public revenue and other consequences are harder to quantify but can have important negative impacts on development achievements and poverty reduction efforts (World Bank and G20, p.13).

Some of the items in this list may be redundant if a good job is done in defining a complete structure of objectives and designing catastrophe risk models that take into consideration all the consequences related to the defined fundamental objectives.

Including the suggested elements and increasing the capabilities of catastrophe risk models will contribute to better informed decision making and likely to a stronger endorsement of the use of ex‐ante financial instruments and other preventive policies.

# **Conclusions**

Making good decisions on disaster risk management (DRM) strategy and sovereign disaster risk financing and insurance (SDRFI) strategy increases the probability that the countries maximize the value of their investments on disaster risk mitigation, minimize the negative impact from severe natural phenomena and, in general, achieve the objectives they set for disaster risk response. The significance of sovereign response to disaster risks and the variety and growing sophistication of SDRFI instruments makes the task of building better decision and risk models even more important.

Probabilistic catastrophe risk models are a fundamental element of the process of deciding on sovereign DRFI instruments. However, for a catastrophe risk model to be useful it is required that each of its components (hazard module, exposure module, vulnerability module and loss module) be developed. Even if that is done at a rough resolution, it would allow the production of risk modeling outputs; and those rough probability distributions will be valuable inputs for the decision model.

Deciding on sovereign DRFI instruments is a challenging undertaking, particularly for developing countries that do not have the same level of resources available as advanced economies (World Bank and G20 2013 p.9); it is also a responsibility with great impact on the economy and society. Using a clear and logical SDRFI decision process can help governments to better fulfill that responsibility.

Decision makers can use a decision model (e.g., an influence diagram) to have an overall image of what they can do, what uncertain events the country faces, what are the possible consequences of their actions and what are the relationships between these three elements. In addition, influence diagrams can facilitate productive participation and consensus building.

As part of that process, decision makers can design coherent SDRFI strategies and use probabilistic catastrophe risk model to better understand the consequences of each strategy and make a choice with the potential to create the most value for their country.

Better catastrophe risk models and a better decision process for SDRFI can get us closer to the higher objective of making disaster risk financing and insurance a cost‐effective way of reducing poverty and improving valued development outcomes (Clarke 2013a).

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