Why Poor Countries Need Disaster Insurance

In the wake of the quake in Haiti, observers have scrambled from all corners to reach out with much-needed relief and loans. But what if in future times of crisis, disaster-stricken countries like Haiti didn't need emergency loans at all?

It sounds like a purely whimsical question. But fresh on the heels of our post about relieving Haiti of its $1 billion in debt, I wanted to flag David Roodman's latest thought-piece, in which he advances just that argument.

Between boomeranging food prices, natural disasters and fluctuations in currency rates, poor nations are much more vulnerable to short-term shocks than their wealthier counterparts. So when a crisis hits a country like Haiti, the pattern's fairly regular: 1). Country needs cash injection, 2). IMF or World Bank steps in to bail them out with a loan, 3). Loan sometimes gets paid back, but usually does not (or if it does, it can quickly create a natural backlash, when repayments privilege the creditor more than the country's people), 4). Wait, rinse and repeat.

Not surprisingly, that doesn't lead to the greatest level of financial stability or inspire much long-term confidence. Neither is it very efficient.

So what if donors set up a disaster relief insurance cooperative for poor countries instead? That's the idea proposed by Guillermo Perry, former World Bank chief economist for Latin America, which Roodman riffs on in his piece. The cooperative could offer disaster insurance to member countries for a premium -- one that would be paid by donors. A broad mix of countries would minimize risk, and the cooperative could also sell investors bonds linked to natural disaster frequency, if needed to cover additional risk.

And in fact, Roodman makes the case that on a small scale, the system has actually worked. In 2007, the World Bank jump-started something similar with an initial investment, which became the Caribbean Catastrophic Risk Insurance Facility (CCRIF). The CCRIF has 17 members, among them Haiti. The premiums are paid by donor nations -- and in times of crisis, payout is quick. On Jan. 13, just after the quake struck, the CCRIF was ready with its $8 million payout faster than any other institutions, including the World Bank, the IMF and the U.S. government.

That's a small number, but it's still the kernel of an idea worth further exploration. At the very least, it's hard to argue the continued cycle of debt relief, construction and dismantling is terribly compelling, either.

You can check out the rest of Roodman's article on debt and disaster relief here -- it wonks out pretty quickly, but is still very much worth a read.

Photo Credit: vidiot