Daniel Morris: Fiscal impacts of major disasters on government planning

How do we ensure funds are available on a national or even international scale when climate disasters strike?

Daniel Morris, who is currently Advisor to the U.S. Executive Director at the World Bank, has spent recent years thinking about how to make communities and countries more financially resilient in the face of catastrophic disasters in the future.

At his previous job at the U.S. Department of the Treasury, he was an International Economist who looked at how changes due to climate change could impact national economies and government balance sheets. He says if we are worried about government responsibility, fiscal balances, and the use of taxpayer dollars, climate change is important because it increases the difficulty of having coherent and predictable responses to disasters.

For example, the National Flood Insurance Program (NFIP) aims to reduce the impact of flooding on private and public structures by providing affordable insurance to property owners, renters and businesses and by encouraging communities to adopt and enforce floodplain management regulations. The program was solvent until 2005, when it had to start borrowing funds due to Hurricanes Katrina, Rita and later Sandy, and is now around $25 billion in debt. The problem is, as Morris wrote in a white paper around the time Trump took office, that average annual government payouts could increase 5 to 6 times above historical annual payouts due to increased frequency and severity of major hurricanes. Since he wrote the paper, Hurricanes Harvey, Maria and Irma have devastated large parts of Puerto Rico, Texas, and Florida. Moving forward, the program will need either more borrowing authority from Congress to pull money from the Treasury or to have its debt forgiven, as President Trump did for the 2017 storm season. Potential flood damages are not included in yearly budgets or spending projections, so they will be covered on an emergency funding basis, which is unsustainable and unpredictable over the long term, says Morris.

Thus the NFIP exemplifies two challenges with insurance for climate disaster: it is expensive to fully fund recovery on a massive scale, and it is difficult to predict the timing of when funding will be needed.

Instead of trying to catch up financially in the days, weeks, and months after a disaster using emergency funding, Morris says disaster research has shown that ensuring countries and regions have access to a quick influx of liquid capital in the days immediately after a disaster is more effective. One solution that particularly interests him and many national and international players is parametric insurance with regional or global pooling.

Parametric insurance is a type of insurance that pays out a predetermined amount when a triggering event occurs, but does not provide 100% replacement costs. In the case of a hurricane, as soon as a predetermined meteorological condition is met, parametric insurance would pay an immediate lump sum to a government in order to provide emergency relief, but would not pay to replace the structures lost.

This insurance is currently being offered by a few risk insurance facilities which allow governments to buy into risk pools built out of countries with varying climate change risks. The facilities are self-sustaining private entities governed by participating countries, but are still quite new and experimental.

The World Bank is particularly interested in this concept because they can help countries prepare themselves for disaster by pooling risk and incentivizing mitigating actions to reduce that risk. Different countries are at potential risk for different kinds of disasters, so larger risk pools reduce the chance of all members of the pool being hit at the same time.

Regardless of whether we choose to continue programs like the NFIP, or embrace parametric insurance or global risk pools, Morris says it is important to remember that we cannot just pay our money and walk away. We have to build resilience programs on a national scale. In fact, this requirement is specified in the facilities themselves. Risk pools play a big part, but we have to incentivize countries to prepare for disasters.