Instruments for Disaster Risk Financing


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  • Modeling and pricing of property risk Insurance policy design Developing TCIP policy distribution and accounting systemsUnderwriting, rating and operational guidelines Public relations campaignTrainingInvestment policy and fund managementImproving regulatory framework and enforcement of building codes
  • Instruments for Disaster Risk Financing

    1. 1. Instruments for Disaster Risk Financing<br />Abhas K. Jha<br />Program Leader,<br />Disaster Risk Management <br />East Asia and the Pacific<br />The World Bank.<br />Manila, January 25, 2011<br />
    2. 2. Three Objectives Today<br />Demonstrate the rising impact of disasters in developing countries<br />2. Provide an overview of the markets for disaster risk financing.<br />3. Provide some examples of World Bank disaster risk financing instruments.<br />
    3. 3. Main Messages<br />Disaster risks, economic and insured and non-Insured Losses are increasing<br />Governments cannot and should not fund ex-ante DRM and recovery costs alone.<br />There are a number of innovative catastrophe risk financing instruments available that fund liquidity and risk transfer to the private sector. <br />
    4. 4. 1. The Impacts of Disasters<br />
    5. 5. Natural Events Becoming More Extreme<br />                                                                                                                                      <br />Source: Munich Re<br />
    6. 6. Climate Change and DRM<br />Decreasing Confidence<br />Humans are affecting climate<br />Models are predicting significant warming (Global Mean Temperature)<br />Models are predicting sea level rise (magnitude and timing considerably uncertain)<br />Models are predicting slight drop overall hurricanes but a higher percent of Cat 4 and 5.<br />
    7. 7. Climate change and insurance<br />“Stationarity is dead‟<br /> –“Climate is what you expect, weather is what you get” no longer applies<br />Agriculture becomes riskier<br />•Roles for insurance:<br />–Protect against catastrophic events<br />–Signal risk through price<br />–Provide cash to adapt (after event)<br />–Promote new (adaptive) technology<br />
    8. 8. <ul><li> Catastrophe Bonds
    9. 9. Parametric Insurance
    10. 10. Traditional insurance</li></ul>Probable Maximum Loss<br />Transfer<br /><ul><li>Contingent lines of credit
    11. 11. Loans (Standard or Emergency)
    12. 12. Budget reallocations</li></ul>Retention<br /><ul><li>Reserves/Calamity funds</li></li></ul><li>Liquidity gaps often emerge in the early days after a disaster<br />Need for an instrument to provide liquidity early on until other sources of funds can be accessed<br />
    13. 13. The Financial Protection of the State :<br />Source of Financing Post-Disaster<br /> Availability Cost <br /> Instruments of funds (multiplier)<br /> Reserves Immediate 1-2 <br /> Budget reallocations - 1-2 <br /> Contingent lines of credit Immediate 1-2 <br /> Emergency loans 3-6 months 1-2 <br /> Donor contributions 3-6 months 0-1 <br /> Traditional insurance 3-6 months 3-6 <br /> Parametric insurance Immediate 2-5 <br /> Catastrophe Bonds Immediate 2-5 <br />How do we combine these instruments to protect the fiscal balance of the state and improve its capacity to respond in case of a natural disaster ?<br />
    14. 14. 2. The Market for Disaster Risk Finance<br />
    15. 15. people, assets<br />social/econ/phys<br />conditions<br />geophysical<br />drivers<br />Exposure<br />Hazard probability<br />Vulnerability<br />The Standard Risk Assessment Model<br />
    16. 16. Developing Countries Have an Insurance Gap<br />Insured Uninsured<br />Peril / Event Country Loss ($bn) Loss (% Loss) Loss % GDP % Govt. Revenues<br /><ul><li>Earthquake - Izmit (1999) Turkey 22.0 5 5 21
    17. 17. Hurricane - Mitch (1998) Honduras 3.0 6 34 158
    18. 18. Floods - (1997) Poland 3.5 6 3 11
    19. 19. Earthquake - Gujarat/Bhuj (2001) India 0.6 2 1 7
    20. 20. Earthquake – Northridge (1992) USA 43.0 47 0.3 2
    21. 21. Winter Storm – (1999) France 6.2 100 – –</li></li></ul><li>Benefits: Rate on Line Volatility<br />The World ROL index (Rate On Line) of broker traces historical catastrophe reinsurance premiums <br />Catastrophe reinsurance premium volatility over the 1990-2010 period has been about 29%<br />In the recent period premiums have experienced a post-Katrina increase of 36% in 2006<br />14<br />Source : reinsurance brokerage firm Guy Carpenter Rate On Line Index<br />
    22. 22. A viable alternative and complement to insurance for dealing with disaster relief<br />Cat Bonds have shown resilience and diversification value throughout the crisis<br />Cat Bond issuance has restarted in 2010<br />15<br />Benefits: Update on cat bond markets<br />Total Non-Life Bonds Outstanding, By Year (As of End 2010) <br />Cumulative Performance from January 2002 <br />Source: Bloomberg<br />Source: Goldman Sachs and Swiss Re<br />
    23. 23. The Weather Market<br />First weather derivative transaction in U.S. 1997<br />Deregulation of the energy industry<br />Market has rapidly grown, well over $100b transacted to date (PWC Survey 2008)<br />Non-energy applications<br />New participants<br />Global development<br />Broader product offering<br />Key Players: <br />(Re)insurers<br />Banks<br />Hedge Funds<br />Market wants to diversify and grow their portfolios, wants new risks<br />
    24. 24. 3. World Bank Disaster Risk Financing Instruments<br />
    25. 25. Caribbean Catastrophe Risk Insurance Facility<br />16 Caribbean countries covered against hurricane and earthquake risks<br />18<br />
    26. 26. 19<br />
    27. 27. Benefits of Pooling in the Pacific<br />By pooling their catastrophe risks, South Pacific countries can reduce their capital requirements by 50%<br />The regional risk diversification benefits can reduce the estimated technical premium ratesby 45% on average<br />Note 1. Technical premium rates estimated for a hypothetical insurance portfolio, which offers parametric coverage for combined perils (earthquakes and topical cyclones) with return periods between 10 yrs and 150 yrs.<br />Note 2. Estimated technical premium rates may differ from commercial premium rates due to market conditions.<br />14<br />
    28. 28. Turkey Cat Insurance Pool<br />TCIP Claim Paying Capacity<br />Overall protection against losses up to $1 billion in the first 5 years<br />Reinsurance program of A+ quality with dozens of international reinsurers of $750 mm.<br />World Bank up to $17 million on the first loss basis and on 40/60 basis proportional basis with reinsurers or TCIP, up to $163 million.<br />TCIP’s own surplus funds - $120 mm<br />If claims exceed TCIP’s available financial resources, GoT acts as reinsurer of last resort<br />>$1 bn<br />Turkish Government<br />World Bank<br />Reinsurance<br />Reinsurance<br />$1 bn<br />Reinsurance<br />World Bank<br />TCIP<br />Private reinsurance is by far the largest <br />source of TCIP’s claims paying capacity<br />
    29. 29. Multi-Country Cat BondStructure and Cash Flows<br />Disaster Contingent payments<br />MCCB<br />Countries<br />Re-insurers & Capital Market Investors<br />Principal<br />Premiums<br />Coupons<br />Subsidies<br />AAA Assets<br />Coupons<br />Collateral Trust<br />Donors<br />
    30. 30. Two possible approaches to insurance the WB now supports<br />
    31. 31. Boosting Demand for Index Insurance<br />There are currently at least 36 pilot projects introducing index insurance in developing countries.<br />Take-up is low<br />Higher payout ratios<br />Liquidity constraints<br />Trust<br />Attention (“Last mile issues”)<br />
    32. 32. World Bank Risk Financing Initiatives<br />China Catastrophe Risks Assessment and the <br />Development of Disaster Risk Management strategies<br />Europe and Central Asia Regional – <br />Disaster Risk Mitigation and Adaptation<br />Bangladesh: Agricultural Risk <br />Insurance Feasibility Study<br />Nepal: Agricultural <br />Insurance Feasibility Study<br />India Crop Insurance: <br />Developing Market-based Products<br />Swaziland Capacity Needs Assessment <br />for Disaster Risk Management<br />Caribbean Risk Atlas<br />CAPRA Central America Probabilistic <br />Risk Assessment for Central American Countries<br />Cook Islands, Fiji, <br />Papua New Guinea, <br />Samoa, Solomon Islands, <br />Tonga, Tuvalu, and Vanuatu. <br />Pacific Catastrophe Risk <br />Pool Feasibility Study<br />Ethiopia: Weather Risk Management <br />Framework using Weather-Based Indices<br />Costa Rica Public Asset Catastrophe <br />Risk Insurance Facility Feasibility Study<br />Chile and Mexico: Global Catastrophe <br />Mutual Bond Risk Modeling <br />
    33. 33. Thank you!<br />ajha(at)<br />202-458-1050<br />