Policy brief on local climate financing thru risk transfer mechanisms

1. RISK TRANSFER
MECHANISMS:Towards
Policy Innovations
in the Philippines
14 May 2014
UP NCPAG Center for Policy and Executive Development
University of the Philippines, Diliman, Quezon City

2. OutlineofPresentation

3. Bases in International Policy
• The Bali Action Plan
In the 13th Conference of Parties of the UN
Framework Convention on Climate Change in
2007, one of the climate change adaptations
actions pushed was risk transfer mechanisms
(RTMs), as part of “enhanced adaptation action”
in the nature of “risk management and risk
reduction strategies.” (1/CP.13, par. (c)(ii))
• The Hyogo Frameworkfor Action (HFA)
This identified RTMs as part of risk-reducing
measures, specifically as part of the 4th priority
action which seeks to “reduce underlying risk
factors.”

4. Entities Working on RTM
• World BankGlobal Facility for Disaster
Reductionand Recovery (GFDRR)
Throughits Track II Projects, is already
spearheading the preparation of innovative risk
finance instruments as part of its work in 31
focus countries (including five in Southeast Asia:
Cambodia, Indonesia, Lao People’s Democratic
Republic, the Philippines and Vietnam).
• Munich Climate Insurance Initiative (MCII)
- Innovative insurance will play a key role in
long-term adaptation financing and “provide
timely finance to recompense loss & damage”
- Southeast Asia is largely inadequately insured
with a property insurance premium of only <10
US$ per capita, compared to >1,000 US$ for
highly insured countries

6. What is Risk Transfer?
• Risk transfer defined
“process of shifting the burden of financial loss or responsibility for
risk financing to another party, through insurance, reinsurance,
legislation, or other means.”
- should be distinguished from risk pooling, which is defined as the
“aggregation of individual risks for the purpose of managing the
consequences of independent risks
• Features of RTMs
- ex ante risk financing mechanisms/innovative insurance
- seen as a critical part of a comprehensive risk management strategy
that must be inclusive, meaning/should reach the poor
Hence, microinsurance is seen as part of a sustainable model that
targets poor households.

7. What are the RTM Categories (MCII)?
• (Traditional)Insurance
Insurance is a contractual transaction that guarantees financial protection
againstpotentially large loss in return for a premium (e.g. fire, theft
insurance, automobile liability insurance)
• Microinsurance
Characterized by low premiums or coverage and is typically targeted at
lower income individuals who are unable to afford or access more
traditional insurance (e..g. weather index-based insurance or parametric
• Reserve fund
Catastrophereserve funds are typically set up by governments
• Riskpooling
Risks pools aggregaterisks regionally (or nationally (e.g. Caribbean
CatastropheRisk Insurance Facility)
• Insurance-linkedsecurities
Insurance-linked securities, mostcommonly catastrophe (cat) bonds, offer
an avenue to share risk more broadly with the capital markets.

8. What are the RTM Categories (GFDRR)?
• Sovereigndisaster riskfinancing
Financial strategies to increase the financial response capacity of
governmentsin the aftermath of natural disasters, while protecting their
long-term fiscal balances.
• Property catastropheriskinsurance
Develop catastropheinsurance markets and increase property catastrophe
insurance penetration among homeowners, small and medium
enterprises, and public entities.
• Agricultural insurance
Develop programs for farmers, herders and agricultural financing
institutions (e.g., rural banks, microfinance institutions) to increase their
financial resilience to adverse natural hazards.
• Disaster microinsurance
Facilitate access to disaster insurance products to protect the livelihood of
the poor againstextreme weather events and promote disaster risk
reduction in conjunction with social programs such as conditional cash
transfer programs.

9. What is Parametric Insurance?
• Parametric insurance defined
“makes indemnity payments based not on an assessment of
the policyholder’s individual loss (proof of indemnity), but
rather on measures of a parametric index that is assumed to
proxy actual losses.” Hence also the similar term “index-based
insurance;” synonymous with innovative insurance (MCII)
• Elements of innovative RTMs
Immediacy of payout: Once threshold values or parameters are
breached, insurance payouts are triggered, doing away with
the long claims process for traditional insurance
Targeting of the poor: Properly designed microinsurance
targetspoor households, which otherwise are shunned by
traditional insurance product design

10. RTM and ASEAN National Policies
• In the Philippines
The Climate Change Act of 2009 and the Philippine Disaster Risk Reduction
and ManagementAct of 2010 both mandate the appropriate design of risk
transfer mechanisms as part of resiliency measures.
Consequently, RTM has been identified as part of the key actions in both
the National Disaster Risk Reduction and ManagementPlan (NDRRMP)
and the National Climate Change Action Plan (NCCAP)
RTMhas already been piloted in Southern Philippines at the community
level through the project “Climate Resilient Farming Communities in
Agusandel Norte through Innovative Risk Transfer Mechanisms

11. RTM and ASEAN National Policies
• In Indonesia
Its National Action Plan Addressing Climate Change (NAPACC) articulates
that “several funding mechanism should be immediately tried,” including
market instruments like insurance and reinsurance as part of its climate
actions.
Significantly in April 2007, Law 24/07 was enacted on National Disaster
Management, creating the National Disaster ManagementAgency (BNPB).
Subsequently, the National Action Plan for DisasterRisk Reduction 2010-
2012 was formulated, promotingthe implementationof an Indonesian
disaster riskfinancing strategy,including risktransferinstruments like
insurance.
The Government of Indonesia has also availed of the technical assistance
of the World Bank in improving its financial response capacity after the
occurrence of a natural disaster, including post-disaster assistancefunding
mechanism.

12. RTM and ASEAN National Policies
• In Vietnam
Its Government formulated the National Strategy for Natural Disaster
Prevention, Responseand Mitigation to 2020 in November 2007. The said
national plan includes a strategy on the developmentof catastrophe risk
financingsolutions(includinginsurance) tocomplement other disaster
risk managementmeasures.
The Government of Vietnam also availed of the technical assistanceon
disasterrisk financing strategy from World Bank.
• In Thailand
Its Second National Communication to the UNFCCC specifies that “in
addition to prioritization and integration into local development, financial
support, insurance (emphasis mine), and technology transfer are also
highly important.”
The Climate Change Master Plan (currently being finalized) seeks the
creation of a “financial mechanism to support the implementation of
adaptation for coping with the negative effects of climate change.”

13. Regional Trends: ASEAN DRFI
World Bank, the Global Facility
for DisasterReduction and Recovery (GFDRR),
the ASEAN Secretariat, and UNISDR formulate
a comprehensive body of knowledge on
the state of disaster risk financing and insurance
in ASEAN Member States to promote the
development of national and regional disaster risk
financing and insurance strategies in ASEAN
Member States within the context of the
broader disaster risk managementagenda.
ASEANFinance Ministers n highlighted the
importance of regional cooperation on disaster risk
financing and insurance in Bali in April 2011.

14. Regional Trends: ASEAN DRFI
World Bank, the Global Facility
for DisasterReduction and Recovery (GFDRR),
the ASEAN Secretariat, and UNISDR formulate
a comprehensive body of knowledge on
the state of disaster risk financing and insurance
in ASEAN Member States to promote the
development of national and regional disaster risk
financing and insurance strategies in ASEAN
Member States within the context of the
broader disaster risk managementagenda.
ASEANFinance Ministers n highlighted the
importance of regional cooperation on disaster risk
financing and insurance in Bali in April 2011.

15. Indonesian Strategy on DRFI

16. Regional Trends: ILO Piloting
RTM has already been piloted in Southern Philippines
at the community level through the MDG-F 1656
Joint Program on Strengthening the Philippines’
Institutional Capacity to Adapt to Climate Change
(Outcome 3.4), entitled “Climate Resilient
Farming Communities in Agusan del Norte
throughInnovative Risk Transfer Mechanisms.”
ILO will scaleup in Asia, starting with Nepal and
Bangladesh, with other project sites under
negotiation.

17. Issues and Challenges
• On the operational entity: Technical Working Group and
Secretariat/s
• Possible work program:
Design/Typology of Microinsurance/RTMs
Insurance Science and Technology
Delivery Mechanisms and Financing
Reforms on Policy Barriers (e.g. taxation, guaranty, ease of
doing business)
• Capacity development: platform for sharing, especially given
the piloting activities at the project/communitylevel (e.g.
flood insurance, parametric/agricultural insurance)

18. THANK YOU!
Presented by
Dennis G. dela Torre
Climate Change Commission
dennisdelatorre@gmail.com