Financing the costs of disasters

Disaster risks are increasing globally and the economic damages are becoming more severe. The associated costs have grown continuously over the last 60 years, and financing these costs remains a major challenge. Both broadening disaster risk finance options and formulating an effective policy mix of different financial tools have become increasingly important in tackling rising disaster costs. This paper examines two disaster-cost financing tools: catastrophe bonds and taxation, based on a macroeconomic theoretical approach. The results suggest that as far as welfare is concerned, bond options are comparatively advantageous. The paper also discusses the importance of utilising catastrophe bonds and taxation appropriately within the context of disaster response policy.