Executive Summary
The likelihood that a hazardous event will have a significant impact on the Marshall Islands has risen with the increasing levels of population and assets in the urban areas of Majuro and Ebeye. The low-lying atolls are at risk of damage to both assets and people as a result of storm surges and tsunamis. In December 2008, a state of emergency was declared following weeks of high seas, which resulted from storm surges coinciding with high tides and two tropical depressions (Marshall Islands Government 2009; UNOCHA 2008). These events caused damage to roads, houses, and other infrastructure on the lowlying atolls of Majuro and Ebeye. Similar events are expected to become more frequent with climate change and rising sea levels.
The Marshall Islands is expected to incur, on average over the long term, annual losses of US$3 million due to earthquakes and tropical cyclones. In the next 50 years, the Marshall Islands has a 50 percent chance of experiencing a loss exceeding US$53 million, and a 10 percent chance of experiencing a loss exceeding US$160 million (PCRAFI 2011).
The government takes an ex-ante approach to financing the cost of disasters, but the resources available are limited. While the government has a contingency budget and access to the Disaster Assistance Emergency Fund (DAEF), the immediate cash available through the former is only US$200,000 and through the later only US$100,000. Consequently the government relies heavily on donor support to fund post-disaster expenditures.
The Marshall Islands has a maximum amount of US$15.6 million potentially available in ex-ante instruments to facilitate disaster response, which is equivalent to 44 percent of the recurrent budget in 2013. These contingent funds are composed of US$0.2 million from the contingency budget, US$0.1 million from the DAEF, and the maximum payout of US$15.3 million from the Pacific Catastrophe Risk Insurance Pilot. It is estimated that there is a 1 percent chance in any year that disaster losses will exceed the total amount available. However, it should be noted that the risk insurance pilot will release funds only if certain pre-agreed upon event magnitudes are reached. If the contingency budget and DAEF alone are considered, there is an 18.6 percent chance that funds will be exceeded in any one year.
The government’s post-disaster budget execution process relies on a variety of financial tools, but the size of the economy limits access to immediate post-disaster cash resources./// The government has dedicated, yet limited, funds that can be accessed following an event and used effectively; however, not all currently followed procedures are embedded within the financial legislature, including those related to the unique requirements of post-disaster financing.
A number of options for improving disaster risk financing and insurance are presented here for consideration:
(a) develop an integrated disaster risk financing and insurance strategy;
(b) assess the domestic insurance market for both public and private assets to establish what products are currently offered and to determine their level of uptake;
(c) carry out a quantitative analysis to determine whether contingent credit could be an effective tool to access additional liquidity post-disaster; and
(d) investigate the possibility of establishing policies for financial assistance to disaster victims in remote communities.