Public-Private Partnerships in Risk Management


Published on

Public-Private Partnerships in Risk Management

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • Following a severe drought, Malawi would receive a payout from the World Bank. The payout is based on an index, designed to reflect effect of the drought on the country’s maize production The contract was structured as a put option on a maize index. Malawi will receive the payout if the maize production in the country, as measured by the index, falls 10% below the historical average. The payout will be proportional to the effects of the drought up to a maximum level. The index links rainfall and production, with rain precipitation being the only variable.
  • Public-Private Partnerships in Risk Management

    1. 1. Public-Private Partnerships in Risk Management Swiss Re Public Sector | June 2010
    2. 2. Massive gap between economic and insured losses Note: Loss amounts indexed to 2009 Source: Swiss Re, sigma No 2/2010 Natural catastrophe losses 1980-2009, in USD billion
    3. 3. Disasters place a significant burden on the public sector Natural catastrophe losses <ul><li>Despite prevention and mitigation efforts, no country can fully insulate itself against extreme natural disasters </li></ul><ul><li>The majority of economic losses from natural disasters ends up with individuals, corporations and governments, both on national and sub-national level </li></ul><ul><li>Government budgets are impacted by primary effects as well as secondary effects: </li></ul><ul><ul><li>Primary effects include immediate expenses for emergency relief efforts, costs for rebuilding public infrastructure or loss of capital and durable goods </li></ul></ul><ul><ul><li>Secondary effects, for instance, include declined economic output growth, lower tax and non-tax revenues, budget deficits, increased indebtedness and costs from refinancing, higher inflation or currency movements </li></ul></ul>
    4. 4. Case study Mexico: MultiCat - Funding for immediate relief efforts after disasters <ul><li>Background information </li></ul><ul><li>In 1996 the Mexican government created FONDEN (Fund for Natural Disasters) to enhance the country’s financial preparedness for natural disasters </li></ul><ul><li>FONDEN’s objective is to prevent imbalances in the government finances from outlays caused by natural catastrophes </li></ul><ul><li>The fund does not support private infrastructure, nor does it act as insurer of last resort. It grants financial support only to those private individuals that, due to their poverty status, require government assistance </li></ul><ul><li>Because of risk transfer budget constraints, FONDEN should retain or cover at least the frequent losses </li></ul><ul><li>A risk transfer solution should be able to provide capital for disaster relief and emergency actions </li></ul><ul><li>Solution features </li></ul><ul><li>Insured peril: Earthquake and Hurricane </li></ul><ul><li>Payments to be used for immediate emergency relief after disasters </li></ul><ul><li>Parametric cat bond: USD 290 million </li></ul><ul><li>Trigger type: Index </li></ul><ul><ul><li>Earthquake: physical trigger (quake magnitude) </li></ul></ul><ul><ul><li>Hurricane: physical trigger (barometric pressure) </li></ul></ul><ul><li>Time horizon: October 2009 – October 2012 </li></ul><ul><li>1st cat bond launched through the World Bank’s new MultiCat facility and second cat bond for Mexico </li></ul><ul><li>Involved parties </li></ul><ul><li>Insured: Fund for Natural Disasters (FONDEN) of Mexico </li></ul><ul><li>Arranger: World Bank Treasury </li></ul><ul><li>Swiss Re: Co-lead manager and joint bookrunner </li></ul>
    5. 5. Case study Caribbean: Caribbean Catastrophe Risk Insurance Facility (CCRIF) <ul><li>Solution features </li></ul><ul><li>The CCRIF offers parametric hurricane and earthquake insurance policies to 16 CARICOM governments </li></ul><ul><li>The policies provide immediate liquidity to participating governments when affected by events with a probability of 1 in 15 years or over </li></ul><ul><li>Member governments choose how much coverage they need up to an aggregate limit of USD100 million </li></ul><ul><li>The mechanism will be triggered by the intensity of the event (e.g. winds exceeding a certain speed). </li></ul><ul><li>The facility responded to events and made payments: </li></ul><ul><ul><li>Dominica & St. Lucia after earthquake (2007) </li></ul></ul><ul><ul><li>Turks & Caicos after Hurricane Ike (2008) </li></ul></ul><ul><ul><li>Haiti (2010) </li></ul></ul><ul><li>Involved parties </li></ul><ul><li>Reinsurers: Swiss Re and other overseas reinsurers </li></ul><ul><li>Reinsurance program placed by Aon Benfield Ltd. </li></ul><ul><li>Derivative placed by World Bank Treasury </li></ul><ul><li>Background information </li></ul><ul><li>Caribbean states are highly susceptible to natural disasters and have only limited options available to respond. With small economies and high debt levels, they often depend on donors to finance post-disaster needs, but donor resources often arrive late or not at all </li></ul><ul><li>The CCRIF was launched in June 2007 on behalf of the Caribbean Community (CARICOM) heads of government under the guidance of the World Bank with financial support from international donors </li></ul><ul><li>CCRIF participating governments are: Anguilla, Antigua & Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St Kitts & Nevis, St Lucia, St Vincent & the Grenadines, Trinidad & Tobago, Turks and Caicos Islands </li></ul>
    6. 6. Case study Turkey: Earthquake pool for residential dwellings <ul><li>Solution features </li></ul><ul><li>Insured Peril: Earthquake </li></ul><ul><li>Insured assets: Private residential dwellings </li></ul><ul><li>Significantly increased penetration of earthquake coverage in Turkey </li></ul><ul><li>Limit of policy coverage: TLY 140 000; 2% deductible Additional cover can be bought from private insurers. </li></ul><ul><li>Inception: in 2000 </li></ul><ul><li>Funding: Compulsory premiums paid by homeowners </li></ul><ul><li>Involved parties </li></ul><ul><li>Insurance supplier: TCIP/DASK, a legal public entity </li></ul><ul><li>Operational manager: Eureko Sigorta </li></ul><ul><li>Distributors: 30 local insurance companies and their agencies on behalf of TCIP/DASK </li></ul><ul><li>Reinsurers: Swiss Re and other overseas reinsurers </li></ul><ul><li>Background information </li></ul><ul><li>The two major earthquake events in 1999 caused enormous economic losses and thousands of deaths </li></ul><ul><li>This impact on the Turkish economy and government and the low earthquake insurance penetration forced the government to act. In 2000 it established a compulsory earthquake insurance scheme and created the Turkish Catastrophe Insurance Pool (TCIP/DASK) </li></ul><ul><li>The purposes of the implemented scheme are among others (i) to limit the financial burden of an earthquake event on the government’s budget, (ii) to ensure risk-sharing by residents, (iii) to promote standard building practices and (iv) to build reserves to finance future earthquake events </li></ul>TCIP
    7. 7. Case Study Central America: Natural Catastrophe Risk Transfer Facility for Central American Countries <ul><li>Solution features </li></ul><ul><li>Each country transfers risk to its own risk retention vehicle (captives) </li></ul><ul><li>Captives buy risk transfer protection (Earthquake and potentially Hurricane) from (re-)insurers / capital markets in the form of reinsurance and, potentially a cat bond </li></ul><ul><li>Inter-American Development Bank serves as facilitator by financing premium and advising on setup of Facility </li></ul><ul><li>Involved parties </li></ul><ul><li>Reinsurers: Swiss Re and other reinsurance companies </li></ul><ul><li>Facilitator: Inter-American Development Bank (IDB) </li></ul><ul><li>Background information </li></ul><ul><li>Transaction Isthmus will develop a natural catastrophe risk transfer facility for several Central American countries </li></ul><ul><li>Exposure to natural catastrophes in Central America is very high, at the same time, the insurance penetration is very low </li></ul><ul><li>The deal reflects a model public-private partnership with the Inter-American Development Bank (IDB) </li></ul><ul><li>Swiss Re’s role </li></ul><ul><li>Implement: Design and execute the captive structure </li></ul><ul><li>Reinsure: Structure and quote parametric reinsurance for the captives </li></ul><ul><li>Syndicate: syndicate the remaining risk for the reinsurance panel </li></ul><ul><li>Transform: Structure and issue the cat bond </li></ul>Country A Country B Country C Country Z Captive Manager Country A Captive Country B Captive Country C Captive Country Z Captive IDB Auditor Cat Bond Reinsurance Country A Country B Country C Country Z Captive Manager Country A Captive Country B Captive Country C Captive Country Z Captive IDB Auditor Cat Bond Reinsurance
    8. 8. Case study Malawi: Weather derivative covering drought-related shortfalls in maize production 1352 Cipo3,v3.00 ab <ul><li>Solution features </li></ul><ul><li>Malawi suffers from recurring droughts </li></ul><ul><li>Under the contract, the Government of Malawi will receive up to USD 5 million through the World Bank in case of extreme drought affecting maize production </li></ul><ul><li>The contract is structured as an option on a rainfall index. If the maize production falls 10% below the historical average due to shortfalls in rainfall, the Government of Malawi will receive the payout </li></ul><ul><li>Involved parties </li></ul><ul><li>The UK Department of International Development (DfID) provided financial support to pay the initial premium </li></ul><ul><li>Background information </li></ul><ul><li>The drought which hit Malawi in 2005 cost the government USD 200 million </li></ul><ul><li>Apart of reducing weather-related financial risks the contract helps to reduce food insecurity, as maize is the main food source for a large part of the population </li></ul>Government of Malawi World Bank Swiss Re
    9. 9. Public-Private Partnerships in Risk Management Swiss Re Public Sector | June 2010
    10. 10. Basic Copyright Notice & Disclaimer for Swiss Re Presentations provided to External Parties ©2010 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivatives of this presentation without the prior written permission of Swiss Re. This presentation is for information purposes only and contains non-binding indications as well as personal judgment. It does not contain any recommendation, advice, solicitation, offer or commitment to effect any transaction or to conclude any legal act. Any opinions or views expressed are of the author and do not necessarily represent those of Swiss Re. Swiss Re makes no warranties or representations as to this presentation’s accuracy, completeness, timeliness or suitability for a particular purpose. Anyone shall at its own risk interpret and employ this presentation without relying on it in isolation. In no event will Swiss Re or one of its affiliates be liable for any loss or damages of any kind, including any direct, indirect or consequential damages, arising out of or in connection with the use of this presentation.