5th International Disaster and Risk Conference IDRC 2014 Integrative Risk Management - The role of science, technology & practice 24-28 August 2014 in Davos, Switzerland

1. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Prevention as adaptation measure against
natural disasters in a non-cooperative game
Oliver Fiala
TU Dresden,
Faculty of Business and Economics
oliver.fiala@tu-dresden.de
Daniel Lukas
TU Dresden,
Faculty of Business and Economics
daniel.lukas@tu-dresden.de

2. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Introduction
• flooding is one of the most significant natural hazards in
Europe (EEA 2010)
• climate change may likely lead to a higher frequency and
magnitude
• increasing economic losses are a consequence of growing
populations and increasing economic activities in flood risk
areas (Barredo 2009; te Linde et al. 2011; IPCC 2012; Surminski and Oramas-Dorta 2013)
• this presentation will show interactions between different
regions, where various prevention policies can affect each
other in unintended ways
• theoretical examination of the interdependency of preventive
measures against exogenous loss events

3. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Fundamentals of the model and basic equilibriums
• paper considers theoretically two homogenous, symmetrical
regions
• prevention can reduce the probability of the actual damage
for the individual region (self-protection)
• region can take a discrete decision regarding its prevention
efforts; model with prevention costs
No disaster
Occurrence of a
disaster
No investment
in Prevention
Case 1
𝑈𝑖 = 𝑌𝑖
Case 2
𝑈𝑖 = 𝑌𝑖 − 𝐿𝑖
Investment in
Prevention
Case 3
𝑈𝑖 = 𝑌𝑖 − 𝑐 ∗ 𝑃𝑖
Case 4
𝑈𝑖 = 𝑌𝑖 − 𝑐 ∗ 𝑃𝑖 − 𝐿𝑖

4. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Fundamentals of the model and basic equilibriums
• theoretical model shows interactions of the single prevention
decisions and their effects
• spill-over-effects of the other region’s prevention on the own
region and vice versa through the shift of loss probability
• direction of the spill-over-effect is not clear: both a positive
impact of the prevention effort of one region on the other
(positive externality) and a negative impact (negative
externality) are possible
• four different equilibriums:
– both regions undertake prevention (prevention as dominant decision)
– one region expends prevention efforts and the other region does not
(and vice versa)
– no region undertakes any prevention measures

5. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Fundamentals of the model and basic equilibriums
Individual prevention decision
prevention decision
of region 1, given
region 2 conducts
prevention
prevention
decision of region 1,
given region 2 conducts
no prevention

6. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Role of different externalities
• externalities through prevention efforts of one region can be
directed in both directions:
– positive effects: partial protection for inactive region, for example
through a alert system
– negative effects: higher risk probability or losses for inactive region as
consequence of a unilateral flood protection

7. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Role of different externalities
Postitive externalities
• positive effects through better protection and therefore a
reduction of the probability for damage are not limited to the
region, which undertakes the prevention measures
• a region profits through a reduction of the damage probability
due to the efforts of the other region without incurring any
costs for prevention
• could yield to ‘free-rider’ behaviour in the decision process
for or against prevention
• underlying technology – how the single prevention efforts of
every region are working together – has a vital importance
– in extreme cases, prevention measures can collaborate as perfect
substitutes or perfect complements

8. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Role of different externalities
Negative externalities
• own prevention measures have a positive effect on the own
damage probability, indeed the effect on the other region is
negative (increasing probabilities for damage)
• (te Linde et al. 2011): due to an advanced dyke system in the
Netherlands that aims to prevent significant areas from being
inundated, floods may occur in upstream sections of the river
in Germany, due to lower flood safety levels there

9. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Role of different externalities
Negative externalities (cont’d)
• every region would conduct a cost-benefit-analysis and will
undertake prevention measures if individual effort is smaller
than related costs  the effects on the other region are not
be considered in this analysis
• this mean not that such a prevention effort shouldn’t be
conducted  but show the problem that the related total
economic costs and benefits have to be analysed

10. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Conclusion
• research investigates interdependencies between two regions
regarding the prevention decision against natural catastrophes in a
non-cooperation game
• four different equilibriums: both regions undertake prevention
(prevention as dominant decision), one region expends prevention
efforts and the other region does not (and vice versa), no region
undertakes any prevention measures
• positive and negative effects of own prevention decisions can be
discussed
• next steps for research:
– model should analyse asymmetry between the regions, especially for
negative effects
– main idea this research is based on was to examine the influence of such
interdependencies of prevention decisions on insurance companies

11. 5th
International Disaster and Risk Conference IDRC 2014
‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland
www.grforum.org
Added value for the Post 2015 Framework for
Disaster Risk Reduction
• How did your work support the implementation of the Hyogo
Framework for Action:
– prevention decisions should be analysed with consideration of impacts
on other regions (otherwise well-meant policies could have negative,
not intended consequences)
– planning in coordination with neighbour regions and superior level
• From your perspective what are the main gaps, needs and
further steps to be addressed in the Post 2015 Framework for
Disaster Risk Reduction in Research
– deeper understanding about determinants of demand for disaster
microinsurances
– influence of index-based insurances on prevention effort