During past centuries, natural disasters occurred more often in our environment and caused more serious damage worldwide. The Hurricane Irene in the Caribbean and the USA, the floods in Australia, the earthquake in New Zealand and especially in Japan in 2011 had enormous extends concerning the caused loss and damages in the specific regions.
Within the past four decades, the frequency of large natural disasters raised three times more. Furthermore, the economic losses - after adjusting for inflation – increased even eight times more compared to the past decades. This also has a great impact on the insurance industry, since the insured losses increase even in a larger amount compared to other factors affected by natural disasters. However, the insurance industry uses in spite of these unfavorable loss trends, a wide range of coverage against disasters such as Cat Bonds to transfer the disaster risk, and to avoid unnecessary expenses.
Climate change also plays a big role in the frequently occurring amount of disasters. Since it is still hard to estimate the impacts of future climate changes for the frequency and intensity of natural disasters with its huge losses, new policies such as Green Growth have been introduced for mitigation effects.
The purpose of this thesis is to represent and describe the economics of natural disasters due to climate change with its macroeconomic aspects and structural effects.
While demonstrating the impacts on natural disasters to a region’s economy, it is important to know that many other factors are linked with natural disasters that have an effect on a region’s economy. Therefore, after defining the important terms in the first section of this thesis, the scope and costs of natural disasters will be illustrated in chapter 2 for a better
demonstration of the disaster events impacts in general. This will start by describing the reasons for climate change to demonstrate in the latter the increasing number of disaster appearances due to the effects of climate change.
Different regions will be considered within this analysis, whereas in the following sections only the regions which are economically vulnerable to natural disasters will be taken into account to illustrate the costs of natural disasters........
Table of Contents
1. INTRODUCTION
1.1. Problem Investigation and objectives.
1.2. Approach
1.3. Definitions
2. SCOPE AND COSTS OF NATURAL DISASTERS
2.1. Reasons for Climate Change
2.2. Appearance of Natural Disasters
2.3. Costs of Natural Disasters
2.4. Disaster Hedging with Cat Bonds
2.4.1. Development of Disaster Bonds
2.4.2. Application of Cat Bonds
2.4.3. Cat Bonds versus Reinsurance
3. ECONOMICS OF NATURAL DISASTERS
3.1. Natural Disasters in a Neoclassical Economy
3.2. Natural Disasters and Poverty Traps – Multiple Equilibria Models
3.3. Macroeconomic Impacts of Natural Disasters
3.3.1. Theoretical Negative Macroeconomic Impacts
3.3.2. Theoretically Conceivable Positive Macroeconomic Impacts
3.3.3. Weakness of the GDP Concept
3.4 Evaluation of the Empirical Studies on the Macroeconomic Impacts by Natural Disasters
3.4.1. Long-Term Negative Macroeconomic Effects of Natural Disasters
3.4.2. Long-Term Positive Macroeconomic Effects of Natural Disasters
3.4.3. Short-to Medium-Term Effects of Natural Disasters
3.4.4. Alternative Methods for Determining the Effects
3.5 Influencing Factors on the Vulnerability of Countries due to Natural Disasters
4. GREEN GROWTH
4.1 Background and Definition
4.2 Roles of Green Growth Application in Disaster Risk Management and Climate Change Adaptation and Mitigation
4.3 Trends of Increasing Vulnerability and Natural Disaster Risk in the Context of Socio-Economic Development
4.4 The Path of Climate Change and Green Growth
4.5 The Macroeconomics of Green Growth
4.5.1 Valuing the Welfare of Future-Generations
4.5.2 Aggregate Supply and Demand Analysis
4.5.3 Financing Developing Countries Green Economies
5. CASE STUDY
6. CONCLUSION
Research Objectives and Themes
The thesis examines the economic consequences of natural disasters caused by climate change, specifically focusing on their macroeconomic impacts and structural effects on economies. It aims to analyze how such disasters influence development paths and to identify strategies, such as green growth and disaster hedging through catastrophe bonds, for mitigating these economic shocks.
- Macroeconomic implications of natural disaster shocks
- Analysis of disaster-induced poverty traps and multiple equilibria models
- The role of "Green Growth" in disaster mitigation and climate adaptation
- Financial risk management through Catastrophe Bonds (Cat Bonds)
- Empirical evaluation of disaster effects on national economic indicators
Excerpt from the Book
2.4 Disaster Hedging with Cat Bonds
Catastrophe Bonds are risk linked securities that transfer a specified set of risks from a sponsor to investors, such as reinsurance or direct insurer companies. They were created and first used in the mid-1990s in the aftermath of Hurricane Andrew and the Northridge earthquake. The short form for Catastrophe Bonds is Cat Bonds. Compared with the instruments of self-financing and risk transfer through reinsurance, the cat bonds have the advantage that the insurer does not bear the credit risk. While a reinsurance contract, for example, is only a promise to supply the insurer in the occurrence of a disaster with additional capital, the capital that was invested in a cat bond completely free of other claims and may be used to supply new capital to the insurer when a disaster occurs.
However, for the emission of a cat bond a less or higher amount of capital needs to be invested liquid – also completely independent from the likelihood if and when a disasters occurs or not.
Like the traditional bonds (corporate bonds or government bonds) Cat Bonds are also based on agreements on contract period, interest payments and refund-form or refund-amount. The crucial difference with cat bonds compared to other bonds is that at least one of these values is linked to an actuarial size, and thus it is a conditional form of a capital-investment.
Summary of Chapters
1. INTRODUCTION: Introduces the research problem, objectives, and the methodological approach for analyzing the economics of natural disasters linked to climate change.
2. SCOPE AND COSTS OF NATURAL DISASTERS: Details the causes of climate change, the increasing frequency of natural disasters, and examines disaster hedging strategies using Catastrophe Bonds.
3. ECONOMICS OF NATURAL DISASTERS: Provides a theoretical and empirical analysis of how natural disasters impact neoclassical economies, including discussions on poverty traps and macroeconomic performance.
4. GREEN GROWTH: Explores the Green Growth concept as a strategy for sustainable development, disaster risk reduction, and macroeconomic transition toward a low-carbon economy.
5. CASE STUDY: Examines the economic impacts and reconstruction responses following the 2011 earthquake and tsunami in Japan.
6. CONCLUSION: Synthesizes findings on the macroeconomic effects of natural disasters and underscores the necessity of integrated policies for risk mitigation and economic resilience.
Keywords
Natural Disasters, Climate Change, Macroeconomics, Green Growth, Catastrophe Bonds, Disaster Hedging, Economic Growth, Poverty Traps, Sustainability, Risk Management, Insurance, Reinsurance, Japan, GDP, Vulnerability
Frequently Asked Questions
What is the core subject of this thesis?
The thesis explores the economic impacts of natural disasters that are increasingly driven by climate change, analyzing these events through macroeconomic models and assessing potential mitigation strategies.
What are the primary themes discussed?
Key themes include the relationship between climate change and disaster frequency, the macroeconomic shock effects of these events, the use of Catastrophe Bonds as financial hedging instruments, and the "Green Growth" policy framework.
What is the main objective of the research?
The primary goal is to provide a comprehensive analysis of the macroeconomic consequences of natural disasters and to determine how structural economic changes and new policy initiatives can enhance economic resilience.
Which scientific methods are employed?
The study utilizes neoclassical growth models (including Solow-Swan adaptations), empirical meta-analysis of disaster impacts, and economic input-output assessments to evaluate the efficiency and risks associated with disaster management.
What topics are covered in the main body?
The main body covers the physical and economic scope of disasters, macroeconomic models (including poverty traps), empirical evidence of short- and long-term effects, and the potential for green, sustainable development.
Which keywords characterize the work?
The work is characterized by terms such as climate change, natural disasters, macroeconomics, green growth, catastrophe bonds, risk transfer, and resilience.
How do "Cat Bonds" mitigate disaster risks?
Cat Bonds transfer risk from insurers to capital market investors. Unlike traditional reinsurance, they provide immediate liquidity via pre-invested capital, which is triggered when specific disaster events occur.
What is the significance of the Japan Case Study?
The Japan Case Study serves as an empirical example of how a highly developed economy experiences and recovers from extreme shocks, providing insights into reconstruction spending and GDP impacts post-earthquake.
What is a "poverty trap" in the context of this thesis?
A poverty trap refers to a self-reinforcing mechanism where severe natural disasters shift an economy from a stable, high-income equilibrium to a lower-income state or development path, hindering recovery.
- Quote paper
- Derya Dogan (Author), 2012, Economics of Natural Disasters and Climate Change, Munich, GRIN Verlag, https://www.grin.com/document/208936
