Historically, a substantial part of the losses due to disasters in developing countries has been financed by relying on diversions from the budget, as well as loans and donations from the international community. This strategy involves considerable uncertainty with regard to the availability and timeliness of necessary funds, and for this reason emphasis is being put on financial planning.
This led to the development of the CATastrophe SIMulation model (CATSIM) to assess the financial vulnerability of the public sector to extreme events in hazard-prone developing countries and to illustrate the tradeoffs and choices a country government must make in managing the economic risks due to natural disasters.
The model can assist policy makers in developing public financing strategies for disaster risk, by showing the respective costs and consequences of financing alternatives on important indicators, for example, economic growth or debt. The model is equipped with a graphical interface that allows the user to change default parameters defining hazards, vulnerability and the elements exposed. There are two modules: the first assesses risk and the second shows the costs and benefits of different strategies to manage risk. Since the user can interactively change parameters and assumptions, financial strategies are shown in a transparent fashion. Furthermore, in another mode an optimal mix of ex-ante and ex-post measures can be calculated by solving a multistage stochastic optimization problem.
This toolbox entry has been labelled with the following tags:
| Sector: | independent | |
| Spatial scale: | national | |
| Temporal focus: | present | |
| Onset: | sudden | |
| Role in decision process: | diagnostic | |
| Level of skills required: | modest | |
| Data requirements: | modest | |
| Adaptation tasks: | Appraise regulation options; Potential impact projection; Residual impact projection |
CATSIM has been used in a number of policy workshops in Honduras (2004), at IIASA (2004), in the Philippines (2006) and in the Caribbean (2006).
The IIASA workshop was the first to involve multiple countries. It was sponsored by the World Bank's Hazard Management (HMU) and the ProVention Consortium. Policy makers and practitioners from Colombia, Mexico, India, the Philippines, and Turkey interacted with IIASA and World Bank staff and consultants. The purpose of the workshop was to exchange insights and practice on loss-mitigation and pre-disaster financial strategies for reducing the vulnerability of the public and private sectors to the economic losses of disasters. Each of the participating countries is advanced in pre-disaster financial planning, or is considering developing advanced schemes.
The workshop demonstrated the potential of CATSIM for building the capacity of policy makers to evaluate ex-ante financial instruments, including insurance, catastrophe bonds, contingent credit arrangements and other disaster hedges, and compare their benefits with investments in loss reduction.
In a one day hands-on exercise as part of a recent two-day workshop on budgetary and financial approaches to disaster risk management in Barbados, senior representatives of Ministries of Finance and Planning, and National Disaster Coordinators from 18 Caribbean countries used CATSIM to develop strategies for financially coping with disaster risk. At this workshop, which was organized by the IDB and the Caribbean Development Bank (CDB), CATSIM was useful for putting into practice the workshop concepts and approaches for incorporating disaster risk management into fiscal and development planning, as well as exploring the feasibility of physical and financial disaster risk management options. At the request of participants, CATSIM was distributed to 10 Caribbean countries as well as CDB and IDB staff.
A version of the CATSIM model is made publicly available via the International Institute For Applied Systems Analysis' website. This version of the tool allows for an initial investigation of a country's financial risk and resilience, given a limited number of input parameters.
CATSIM utilizes risk curves depicting the probability of losing a percentage of capital stock in a disaster, as well as necessary economic input data such as national capital stock, budget, current debt estimates, and other factors that contribute to estimates of national exposure and financial resilience. Outputs of the model include an estimate of damages from return-period level events, a "resource gap" where a country can no longer finance the damages from a disaster, as well as estimates of the long term, indirect effects of a disaster on national development. Adaptation strategies can be pursued on an aggregate level, estimating the possibility and costs / benefits of balancing investments between growth and stability / resilience to events.
While limited data is needed as input, an understanding of extreme events, probability and extreme value theory is recommended when using the tool, and without proper training, results from the model should be taken as uncertain.
More in-depth analysis using the CATSIM methodology may be possible on a case-by-case basis; it is recommended to contact the researchers involved with any requests.
Hochrainer-Stigler, S. and Mechler, R. (2013). Assessing Financial Adaptation Strategies to Extreme Events in Europe. Routledge (Forthcoming).
Hochrainer-Stigler, S., Mechler, R. and Pflug, G. (2012). The CATSIM Model for Assessing Policy Responses to Disasters on the Country Level. In: Amendola et al. (eds.): Integrated Catastrophe Risk Modeling. Advances in Natural and Technological Hazards Research, Springer.
Mechler, R., Hochrainer-Stigler, S. and Nakano, K. (2012). Modelling the Economic Effects of Disaster Risk in Nepal. In: Amendola et al. (eds.): Integrated Catastrophe Risk Modeling. Advances in Natural and Technological Hazards Research, Springer.
Mechler, R., Hochrainer, S., Pflug, G., Lotsch, A. with Williges, K. (2009). Assessing the Financial Vulnerability to Climate-Related Natural Hazards. Policy Research Working Paper, 5232 (Background Paper for the Development and Climate Change World Development Report 2010), Washington, DC, World Bank.
Hochrainer, S., and Mechler, R. (2009). Assessing Financial and Economic Vulnerability to Natural Hazards: Bridging the Gap between Scientific Assessment and the Implementation of Disaster Risk Management with the CatSim Model. In: Patt, A., Schröter, D., Klein, R., and de la Vega-Leinert, A. (eds.): Assessing Vulnerability to Global Environmental Change. London, Earthscan: 173-194.
Mechler, R., Hochrainer, S., Linnerooth-Bayer, J. and Pflug, G. (2006). Public Sector Financial Vulnerability to Disasters. The IIASA-CatSim Model. In: Birkmann, J. (eds.): Measuring Vulnerability to Natural Hazards. Towards Disaster Resilient Societies. Tokyo, United Nations University Press: 380-398.
Hochrainer, S. (2006). Macroeconomic Risk Management against Natural Disasters. German University Press (DUV), Wiesbaden, Germany.
Hochrainer, S., Mechler, R. and Pflug, G. (2004). Financial natural disaster risk management for developing countries. Proceedings of the EAERE conference, 26-28 Juni 2004, Budapest.
