Unavailability of historical data makes it difficult for insurance companies to penetrate in the market as they can not accurately calculate the risks. This would set the premiums high and insurance becomes expensive for most of the people in developing countries.---Governments need assistance in analyzing pre- and post- disaster needs as well as implementing effective disaster risk reduction strategies to minimize their risks. This may also reduce their cost of insurance.
The framework is divided into four levels: macro, state, community or market and micro. There are four steps at each level for the analysis of interactions among entities and risks due to these interactions. Each level has different entities involved in DRR and disaster risk financing. All these entities interact with the entities at their level as well as with the entities from other level, for instance interaction of federal government with multi-lateral agencies at macro level and with state government from state level. These interactions would hedge risks of one entity to the other. The impact of these interactions and risks is modeled in the third step at each level. These impact analysis models would generate indicators at each level for purposes like decision making, monitoring and control.
Risk for financial agencies in providing affordable disaster insurance to developing countries
IDRC Davos 2012 Risks for Financial Agencies in Providing Affordable Disaster Insurance to Developing Countries Patel, Saumyang and Hastak, Makarand Presented by: Makarand (Mark) Hastak, PhD, PE, CCE Professor and Head, Construction Engineering and Management, Purdue University, USA.
Disaster Occurrences2008 Earthquake and TsunamiHaiti MidwestTsunami in 2004Japan Ocean FloodsIndianEarthquake• Released energy of 23,000 unleashedmore frequent and• 500magnitude earthquake Hiroshima-type atomic bombs year flood• Disasters have become 23-ft• 7.0 magnitude earthquake in January-2010 Tsunami 8.9• (USGS) around 3 million people• 13 fatalities reported• Affected millions of people and infrastructureprevious• more people were deadand affected recovery Affected devastating than their facilities• 150,000 buildings were damaged and millions Up to 50% infrastructure or missing• Damaged damage of $10 billion• Estimated in 13 countries homeless• occurrencesup to in excess of $10 billion• Total estimated damage up to $6 billion• Estimated damage well $14 billion Estimated damages
Disaster Events WorldwideNumber of Disaster EventsCatastrophes Worldwide 1950 – 2010 Great Natural Worldwide During 1950-2010 (Source:NatCatSERVICE) Percentage Distribution Per Event Group (Source:NatCatSERVICE)
Disaster Losses Vast gap between overall losses and Insured lossesImpacts of major disasters on from Natural Disasters Compared to GDP (Source: Cummins and Mahul 2009)Average annual Direct Losses countries differentiated by income groups (1985-2000)(Source: Munich Re 2000)Overall and Insured Losses due to Disaster Worldwide during 1950-2010 (Source:NatCatSERVICE)
Funds for Disaster • Emergency Response services• Build capacity Disaster risk Funds needed Recovery • Temporary• Insurance shelter reduction by Governments • Repair/ rehabilitation/ Reconstruction reconstruction • Support under or un-insured private assets and home owners Ex ante Ex post
Funds for Disaster Reserve / Reallocation Funds Debt Taxes financing Govt. Disaster Financing Options ILS/CAT Donations / Bonds Aid (Re-) Insurance CompaniesTimeline of resource requirements and availability of different funding sources during post-disaster for Government and Mahul 2010) Disaster Financing Options phases (source: Ghesquiere
Need• There is a need: – To reduce the gap between overall losses and insured losses: • By implementing disaster risk reduction strategies to reduce overall risks • Increase and providing easy access to people in need – To provide financial protection (ex ante) for post- disaster services Capacity Reduced Resiliency building vulnerability
Participation of Financial Institutions (Source: Banks 2005) (Source: Lane 2008)
Collateralized Capital Structure for ILS Example: Mexico MultiCAT Bond (Source: GFDRR 2011)
Other Innovative Initiatives• Overlapping Coverage- the Residential Re program of United Services Automobile Association (USAA)• The Cafeteria Approach- the Successor 2001 2002 2003 program of Swiss Re 2002 2003 2004 2003 2004 2005 (Source: Lane Financial LLC)
Role of Financial Institutions• Financial institutions such as (re)insurance companies can assist developing countries in: – Developing catastrophe models to accurately calculate disaster risks – Policy development and implementation to improve the condition of its citizens and their businesses – Analyzing pre- and post- disaster needs as well as implementing effective disaster risk reduction strategies – Providing access to capital market to spread/hedge risks
Risks for Financial Institutions• Additional risks for financial institutions: Additional risks – Risks for making the insurance affordable at country level – If they enter in the local market for which the data is not available or inaccurate, they may design misleading catastrophe models. – Risks due toReduced of disaster risk reduction failure strategies disaster risks • Ineffective to effective due DRR strategies • Faulty impact analysis • Other financial risks if they fund DRR projects
Risk Analysis Framework for Entities Involved in DRR Impact analysis modules Risk indicators at macro Entities at macro level Risks at macro level Impact analysis modules for entities at macro level Risk indicators at macro level Entities at macro level Risks at macro level for entities at macro level level• Federal government or its • Disaster risks • Economic impact • Socio-economic risk indicators ministry • Country risks • Social impact • Environmental risk indicators• Multi-lateral financial • Credit risks • Environmental impact • Development indicators institutions • Market risks • Financial impact modules • Monitoring and control Impact analysis Risk indicators at state• (Re) Insurance companies Entities at state level • Event risks at state level Risks indicators level for entities at state level• Special purpose vehicles • Liquidity risks Risk structure and their Interaction among entities relationships Impact analysis modules Risk indicators Impact analysis modules Risk indicators atEntities at community level Risks at community level for entities at community community level level •Interactions or •Risk parameters •Economic impact •Probability graphs relationships •Risk equations module •Risk tables •Needs •Interdependencies •Financial impact •Roles and moduleanalysis modules Impact Risk indicators at micro responsibilities level Entities at micro Risks at micro level for entities at micro level level •Organization structure Risk structure and theirInteraction among entities Impact analysis modules Risk indicators relationships Expected Results- Input/Output
Expected Contribution• Such a framework would… – enable all involved entities to analyze their risks – Provide a structure to hedge different risks under same structure – Enhance coordination for effective disaster risk reduction strategies – Reduce the gap between overall and insured losses
Thank You!!! Authors’ Information: Saumyang Patel PhD Student, Construction Engineering and Management, Purdue University, USA. Email: firstname.lastname@example.org Makarand (Mark) Hastak, PhD, PE, CCE Professor and Head, Construction Engineering and Management, Purdue University, USA. Email: email@example.com