Earthquake risk from the financial protection perspective: a metric for fiscal vulnerability evaluation in the Americas

Abstract

Extreme disasters can generate financial deficit due to the sudden an elevated need of resources for recovering the affected inventories. This paper presents the Disaster Deficit Index (DDI), developed to measure sovereign financial risk and contingent liabilities in a country according to possible catastrophic events. DDI captures the relationship between the economic loss that a country could experience when a catastrophic event takes place and the availability of funds to address the situation. The proposed model uses the procedures of the insurance industry in establishing probable losses, based on critical impacts during a given period of exposure; for economic resilience, the model allows calculating the country’s financial ability to cope with a critical impact. The DDI can be a guide for fiscal sustainability and macroeconomic risk management; these results can be studied by economic, financial and planning analysts who can evaluate the budget problem and the need to take into account these figures in the financial planning.