Fiscal Shortage Risk and The Potential Role for Tropical Storm Insurance: Evidence from the Caribbean

Recently a number of multi-country insurance schemes have been introduced to deal with short-term fiscal liquidity gaps after natural disasters. However, little is known about the actual underlying risk to the fiscal sector just after such events. We estimate the risk of fiscal shortages due to tropical storms in the Caribbean. To this end, first we use a panel VAR and estimate that while government expenditure does not respond to damages due to tropical storms, there is a significant contemporaneous effect on fiscal revenue. The results also reveal that different components of expenditure and revenue respond differently to hurricane shocks. Then, employing a parametric bulk extreme value model on estimated losses due to historical events we then show that the fiscal shortage due to storms can potentially be sizeable depending on the rarity of the event, but varies considerably across islands. However, any risk assessment is fraught with considerable uncertainty, particularly for rare but potentially very damaging tropical storm strikes.