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ARC 5th IDCR 27 August 2014 Richard Wilcox v3

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

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


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  • The most complex and challenging component, there are several possible research approaches one could take for Pillar 2, building on recent science and climate research on the detection of time-dependent climate change. A full research proposal is yet to be developed, but promising approaches, as part of a multi-methodology R&D programme, would likely draw on extreme-value theory and Empirical Orthogonal Function Analysis to understand the modes of variability within the ECI, identifying modes associated with high extreme event probabilities, and defining indicators or thresholds that could signal the climate moving into such modes (regimes).

    ARC will partner with leading researchers in the field of climate science and extreme event detection for this cutting-edge research work-stream.

    Definitions:

    Extreme Value Theory: A branch of statistics dealing with the extreme deviations from the median of probability distributions
  • Transcript

    • 1. ARC Extreme Climate Facility (XCF) Dr. Richard Wilcox, ARC Director General a.i. 5th International Disaster & Risk Conference IDRC Davos 24-27 August 2014
    • 2. The ARC Group Structure • SDFR pilot as input to the Agency’s Peer Review Mechanism (PRM) to apply for Certificate of Good Standing (CGS) required for insurance with the ARC Ltd • Objective and independent disaster finance ratings also facilitate private sector entry and public accountability. • ARC-XCF will be a data-driven climate protection scheme, supporting country-level climate adaptation to build resilience to future climate shocks • Members of the ARC Ltd are eligible to participate in ARC-XCF to access adaptation financing beyond that afforded by insurance ARC Group provides Africa’s climate change management and adaptation infrastructure Sovereign Disaster Finance Ratings (SDFR) Extreme Climate Facility (ARC-XCF) OPERATIONAL OPERATIONAL OPERATIONAL IN DESIGNPILOT
    • 3. ARC 2014 Inaugural pool launched 1st May 2014 with five countries insured for US$ 135 million against drought for a premium of US$ 17.5 million • Kenya, Mauritania, Mozambique, Niger, Senegal Aggregate XL reinsurance structure placed in market providing US$ 55 million in coverage for 2014 policy period ARC Agency starting to work with 8 more countries for 2015 • Aim to reach 20 countries by 2019 by providing coverage against drought and flood  ARC serves as an operational and concrete example of countries taking innovative steps to reduce climate risk and access private capital 24 ARC Signatories
    • 4. Context Estimates give an adaptation investment cost need of USD 14-17 billion per year over the period 2010-2050 for sub-Saharan countries to adapt to an approximately 2C warmer climate by 2050 To date, funds have not been forthcoming in the magnitude required and it is recognised that innovative and diverse sources of financing will be needed As adaptation finance investment grows, it will be critical to have a fair and objective mechanism for its allocation and distribution to help prioritise the geographical location of the available investment flows
    • 5. XCF The XCF will be a data-driven financial facility, supported by both private and public funds, that tracks extreme climate shocks and pays out directly to countries to undertake adaptation if event frequency and intensity increases ARC Agency was mandated to develop the XCF concept by the African Ministers of Finance on 30 March 2014 “Requests the Secretariat of the African Risk Capacity Agency to develop a proposal for a vehicle by which African Governments can gain access to climate financing, linked to increased climate volatility, for adaptation activities and implementation of climate-resilient development pathways” (Resolution L15)
    • 6. Concept Data-driven financial vehicle that tracks the frequency and magnitude of extreme climate shocks in Africa • Function: Additional financing for countries already managing their current weather risks through ARC • Data-driven: Payments to countries will be entirely data-driven over a 30 year period – if there is no significant increase in extreme events over current climatology, then no payment is made • Climate Adaptation: Where payments are made, countries must use those funds to invest in DRR or climate change adaption measures specified in pre-defined country-level adaptation funds • Scale: Payment size would increase with extreme event number and magnitude over and above a severe threshold, corresponding to the degree of confidence that extreme events are increasing, the climate has changed and that intensified adaptation is needed • Action: Leveraging ARC’s existing infrastructure, XCF will ensure that countries and the international community properly monitor climate shocks and are financially prepared to undertake greater adaptation measures should their frequency and intensity increase
    • 7. Recent Climate in Africa, 1983-2013
    • 8. XCF Mechanism • Designed to access private capital, the XCF would be structured along the lines of a catastrophe bond programme issuing a series of multi-year cat bonds • Donors would support cat bond coupon payments, while investors provide the capital • Cat bonds would be parametric, based on an objective, multi-hazard Extreme Climate Index (ECI) and focus on each climatological region of Africa • Payments would be triggered from the bond principal should the ECI exceed a set threshold at bond maturity, indicating a potential change in frequency and intensity of extreme weather events in the region • Should they occur, payments would start small and would increase with subsequent cat bond issuances, growing alongside increasing evidence of observed deviations from the baseline climatology • Should extreme events continue to occur countries could stand to receive a predetermined maximum dollar amount over the 30 year XCF adaptation period
    • 9. Extreme Climate Index (ECI) • An objective, weather data-based regional index that tracks extremes in heat, drought, cyclones, flood and other relevant weather events over the XCF adaptation period • If extremes occur during the adaptation period, the ECI increases with each event • No or small increases in the ECI would mean no significant change in extremes from the baseline period • An increasing ECI could indicate a change in the climate regime with respect to the frequency and intensity of extremes ECI: A composite index based on the average of several underlying extreme weather indictors including e.g.:1 • % of region in severe drought according to the Standardized Precipitation Index (SPI) • % of region in severe moisture surplus according to the SPI • % of region with maximum temperatures much above normal • etc… 1 The ECI will be based on existing extreme climate indicators, e.g. World Meteorological Organization, 2009: Guidelines on Analysis of Extremes in a Changing Climate in Support of Informed Decision for Adaptation, Climate Data and Monitoring, WCDMP-No. 72; Karin L. Gleason, Jay H. Lawrimore, David H. Levinson, Thomas R. Karl, and David J. Karoly, 2008: A Revised U.S. Climate Extremes Index. J. Climate, 21, 2124–2137.
    • 10. XCF Illustration • The XCF adaptation period is broken down in to non-overlapping 5-yr periods, or “financing windows” • Each represents an issuance in the XCF cat bond series • Payments are triggered to eligible countries at the end of the financing window if the ECI exceeds a pre-specified threshold at the end of the 5-yr period • The thresholds are set with reference to the baseline climatology to capture upward shifts in the ECI and therefore an increase in frequency and intensity of extreme weather events in the region ECI
    • 11. XCF Illustration $5m/ECI Unit $10m/ECI Unit $15m/ECI Unit $20m/ECI Unit Multi-Hazard Extreme Climate Index (ECI) XCF Cat Bond Payment Trigger Accruing ECI Events per Country: Graphic Key: Payment Released at end of 5-Yr Financing Window ECI
    • 12. XCF Illustration ECI• Should severe events occur, cat bond attachment levels could shift up to reflect the heightened risk in a potentially new climate regime (as shown in example). Risk below this level, but above the original threshold would be funded through an insurance sub-layer (shown in green) • Donor capital may be required to fund this sub- layer should the affordability or interest from the private sector for the cat bond programme and/or insurance sub-layer provision decrease • This model leverages private capital to fund the uncertain risk, particularly during the start of the 30 year adaptation period , with donor funds reserved for more certain/frequent risk
    • 13. XCF Illustration: Worked Example $5m/ECI Unit $10m/ECI Unit $15m/ECI Unit $20m/ECI Unit Multi-Hazard Extreme Climate Index (ECI) XCF Cat Bond Payment Trigger Accruing ECI Events per Country: (as-needed insurance sublayer, green) Graphic Key: Payment Released at end of 5-Yr Financing Window ECI Payment of $190m/Country; attachment level moves Payment of $220m/Country from donor-funded sub-layer Payment of $30m/Country Replicated for all regions in Africa, with an ECI/thresholds defined uniquely for each region
    • 14. XCF Structure & Operation Capital Market Investors XCF Ltd Principal Coupon (Return + Premium) Principal Returned at Maturity if No Triggering ECI Event Occurs* Principal to Region if Triggering ECI Event Occurs* Premium (Paid by Donors) Collateral Account Principal Return ARC Agency facilitates direct contracting with countries and approves country participation * Either all or a partial amount of the principal could be triggered depending on the severity/frequency of ECI events during cat bond tenor and the region or regions in which the events occur • XCF Ltd would be a second financial affiliate of ARC Agency, a special purpose company that would enter into direct swap agreements with participating countries and then issue a series of multi-year cat bonds linked to these agreements to investors • ARC Agency would be the gateway for country participation in XCF by approving country adaptation plans and facilitating country interactions with XCF Ltd Example of possible XCF structure and funds flow: Region 2 Country 1 Country 2 Country 3… Region 1 Country 1 Country 2 Country 3… Region 3… Country 1 Country 2 Country 3…
    • 15. Back Up Slides
    • 16. XCF Design R&D Programme Work to elaborate XCF concept and design its structure and operational principles is planned over an 18 month period, focusing on four core R&D pillars:  Pillar 1: Adaptation Planning & Standards for Climate Resilient Investments • Ascertain to what extent implementation-ready country-level adaptation plans exist, and compile best practice for the development of investment-ready adaption plans • Identify the absorption capacity for direct climate funding in Africa  In discussion with Climate Development Knowledge Network (CDKN) for a 12 month GBP 250,000 Pillar 1 research collaboration
    • 17. XCF Design R&D Programme Work to elaborate XCF concept and design its structure and operational principles is planned over an 18 month period, focusing on four core R&D pillars:  Pillar 2: Extreme Climate Indices and Severe Event Thresholds • Identify appropriate climate indices and thresholds that could be used to track increasing severity and frequency of weather extremes across Africa • Building on the success of Africa RiskView, the XCF indices would need to be multi- hazard and region-specific in order to effectively track the range weather events critical to a geographical area • Cutting-edge climate work would build on existing research in the field of time- dependent climate change detection to develop thresholds and an objective threshold-setting methodology that could be applied to signal a statistically significant shift in a regional climate regime to one more conducive to generating extreme weather events  Outlining work programme with ARC climate research partners in Africa, US and Europe
    • 18. XCF Design R&D Programme Work to elaborate XCF concept and design its structure and operational principles is planned over an 18 month period, focusing on four core R&D pillars:  Pillar 3: Financial Structure • Using the ARC platform, explore legal structures and domiciles that could be considered for the XCF, including identifying viable financing options for XCF’s long- term and innovative risk • Identify market/donor risk appetite and potential size of the facility • Define work-plan and budget to establish and operationalise the facility  Initial discussions with ARC partners and advisors
    • 19. XCF Design R&D Programme Work to elaborate XCF concept and design its structure and operational principles is planned over an 18 month period, focusing on four core R&D pillars:  Pillar 4: Towards a Global Mechanism • Investigate how a supra-regional XCF could be structured and how the concept would have to be modified to allow for a global XCF mechanism • Ascertain country-level interest for an expansion of the XCF beyond Africa • Assess the additional work required to develop such a global mechanism  Collaboration with the Caribbean Catastrophe Risk Insurance Facility, and outreach to other regional insurance initiatives

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