definition

Building a catastrophic reserve fund is one of the measures assisting risk management as it will enable claims to be provided in years with unusually costly flood disasters. Many countries maintain a catastrophe reserve fund financed from tax revenues and invested in readily liquid assets. This financing option also spreads the costs among the taxpayers, but it differs importantly from a post-disaster tax. There is an additional cost equal to the foregone return from maintaining liquid funds and an additional benefit in having the funds immediately available. In principle, insurance companies also operate with a reserve to cover large outlays; however, private insurers are more concerned than the government that their reserves are sufficient to avoid insolvency. In the absence of a solvency constraint, the government can assess the comparative attractiveness of a catastrophe fund by weighing the costs of holding liquid reserves in comparison with the costs associated with hedging instruments
(Kunreuther H. and Linnerooth-Bayer J., 2003, p. 632).

Co-benefits and impacts

Financial preparedness.

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Last modified: Sept. 14, 2016, 9:57 a.m.