Evaluating sovereign disaster risk finance strategies: a framework

This paper proposes a framework for ex ante evaluation of sovereign disaster risk finance instruments available to governments for funding disaster losses. The framework can be used by governments to help choose between different financial instruments, or between different combinations of instruments, to achieve appropriate and financially efficient strategies to fund disaster losses, taking into account the risk of disasters, economic conditions, and political constraints.

The framework provides evidence to support the tiered approach to sovereign risk financing, and provides a methodology to allow governments to select a risk financing strategy based on their objectives (for example to minimise average costs or minimise the costs for a disaster of given magnitude). The proposed framework allows the government to consider the costs of funding their contingent liability to disasters using different combinations of financial instruments, and to minimise this cost based on their preferences towards risk.