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An R-Based Landscape Validation of a Competing Risk Model
Published on: September 16, 2022
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Increasing countries' financial resilience through global catastrophe risk pooling.
Alessio Ciullo1,2, Eric Strobl3, Simona Meiler4,5
1Institute for Environmental Decisions, ETH Zurich, Zurich, Switzerland. alessio.ciullo@usys.ethz.ch.
Nature Communications
|February 22, 2023
Summary
Global pooling of sovereign catastrophe risk offers superior diversification compared to regional approaches. This strategy enhances financial resilience for low- and middle-income countries facing extreme weather events.
Area of Science:
- Economics
- Environmental Science
- Finance
Background:
- Extreme weather events significantly impact national economies, particularly low- to middle-income countries.
- Reliance on foreign aid for recovery is hindered by its slow and uncertain nature.
- The Sendai Framework and Paris Agreement promote resilient financial instruments like sovereign catastrophe risk pools.
Purpose of the Study:
- To introduce a method for forming sovereign catastrophe risk pools that maximizes risk diversification.
- To assess the benefits of global pooling versus regional pooling for financial resilience.
Main Methods:
- Developed a novel method for constructing risk pools by maximizing risk diversification.
- Applied the method to compare global pooling strategies against existing regional pooling models.
Main Results:
- Global pooling consistently yields higher risk diversification than regional pooling.
- Global pooling more equitably distributes countries' risk shares within the pool.
- Global pooling increases the number of countries benefiting from risk pooling mechanisms.
Conclusions:
- Optimal global pooling significantly enhances risk diversification, offering up to a 65% increase for existing pools.
- Global risk pooling presents a more effective financial instrument for national economic resilience against extreme weather events.
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