Increasing countries’ financial resilience through global catastrophe risk pooling

Extreme weather events severely impact national economies, particularly in low- to middle-income countries (LMICs), often making their recovery reliant on slow and uncertain foreign financial aid. The Sendai Framework and the Paris Agreement advocate for more resilient financial instruments, such as sovereign catastrophe risk pools. This paper introduces a method for optimizing these pools to maximize risk diversification, comparing global pooling with regional approaches. Results show that global pooling consistently offers superior risk diversification, better distributes risk shares, and benefits more countries. Optimal global pooling could improve existing pools' diversification by up to 65%.

Alessio Ciullo, Eric Strobl, Simona Meiler, Olivia Martius, David N. Bresch