The Development of Vulnerability Functions Relating Household Poverty Outcomes to Crop Failures in Ethiopia with the Prospect of Developing a Probabilistic Catastrophe Risk Model

Porter, C. and White, E. (2017) The Development of Vulnerability Functions Relating Household Poverty Outcomes to Crop Failures in Ethiopia with the Prospect of Developing a Probabilistic Catastrophe Risk Model. Geneva Papers on Risk and Insurance: Issues and Practice, 42 (4). pp. 657-674.

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Abstract

We analyse the potential to combine catastrophe (CAT) risk modelling with economic analysis of vulnerability to poverty using the example of drought hazard impacts on the welfare of rural households in Ethiopia. The aim is to determine the potential for applying a derived set of damage (vulnerability) functions based on realised shocks and household expenditure/consumption outcomes, onto a forward-looking view of drought risk. We outline the CAT risk modelling framework and the role of the vulnerability module. We present results of a regression model estimating ex post drought impacts on consumption for heterogeneous household types. We assess the generalisability of the derived functions to infer applicability to a CAT risk modelling framework. We stress test the model using statistical models of resampling to establish external validity: whether the relationships established in the data set can be used beyond the context in which they were derived. We conclude with caution that a full CAT risk model could be applied. © 2017 The International Association for the Study of Insurance Economics.