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Fiscal shortage risk and the potential role for tropical storm insurance: evidence from the Caribbean

Published online by Cambridge University Press:  22 June 2018

Bazoumana Ouattara ,
Eric Strobl ,
Jan Vermeiren  and
Stacia Yearwood
Bazoumana Ouattara*
Affiliation:
University of Manchester, UK
Eric Strobl
Affiliation:
University of Bern, Switzerland
Jan Vermeiren
Affiliation:
Kinetic Analysis Corporation, Silver Spring, MD, USA
Stacia Yearwood
Affiliation:
Caribbean Catastrophe Risk Insurance Facility, St. Michael, Barbados
*
*Corresponding author. Email: osman.ouattara-2@manchester.ac.uk
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Abstract

Recently a number of multi-country insurance schemes have been introduced to deal with short-term fiscal liquidity gaps after natural disasters. However, little is known about the actual underlying risk to the fiscal sector just after such events. In this paper, we estimate the risk of fiscal shortages due to tropical storms in the Caribbean. To this end, first we use a panel VAR and estimate that while government expenditure does not respond to damages due to tropical storms, there is a significant contemporaneous effect on fiscal revenue. The results also reveal that different components of expenditure and revenue respond differently to hurricane shocks. Then, employing a parametric bulk extreme value model on estimated losses due to historical events, we show that the fiscal shortage due to storms can potentially be sizeable depending on the rarity of the event, but varies considerably across islands. However, any risk assessment is fraught with considerable uncertainty, particularly for rare but potentially very damaging tropical storm strikes.

Keywords

Catastrophic risksinsurance schemesnatural disasterspublic finance

JEL classification

Q54: Climate • Natural Disasters and Their Management • Global Warming D8: Information, Knowledge, and Uncertainty G22: Insurance • Insurance Companies • Actuarial Studies
Type
Research Article
Information
Environment and Development Economics , Volume 23 , Issue 6 , December 2018 , pp. 702 - 720
Copyright
Copyright © Cambridge University Press 2018 

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