The document summarizes instruments for disaster risk financing. It demonstrates rising impacts of disasters in developing countries and provides an overview of disaster risk financing markets and World Bank instruments. Specifically, it discusses how catastrophe bonds, parametric insurance, and pooling mechanisms like the Caribbean Catastrophe Risk Insurance Facility can provide liquidity and risk transfer to help governments and countries recover from disasters.

1. Instruments for Disaster Risk FinancingAbhas K. JhaProgram Leader,Disaster Risk Management East Asia and the PacificThe World Bank.Manila, January 25, 2011

2. Three Objectives TodayDemonstrate the rising impact of disasters in developing countries2. Provide an overview of the markets for disaster risk financing.3. Provide some examples of World Bank disaster risk financing instruments.

3. Main MessagesDisaster risks, economic and insured and non-Insured Losses are increasingGovernments cannot and should not fund ex-ante DRM and recovery costs alone.There are a number of innovative catastrophe risk financing instruments available that fund liquidity and risk transfer to the private sector.

4. 1. The Impacts of Disasters

5. Natural Events Becoming More Extreme Source: Munich Re

6. Climate Change and DRMDecreasing ConfidenceHumans are affecting climateModels are predicting significant warming (Global Mean Temperature)Models are predicting sea level rise (magnitude and timing considerably uncertain)Models are predicting slight drop overall hurricanes but a higher percent of Cat 4 and 5.

7. Climate change and insurance“Stationarity is dead‟ –“Climate is what you expect, weather is what you get” no longer appliesAgriculture becomes riskier•Roles for insurance:–Protect against catastrophic events–Signal risk through price–Provide cash to adapt (after event)–Promote new (adaptive) technology

8. Catastrophe Bonds

9. Parametric Insurance

10. Traditional insuranceProbable Maximum LossTransferContingent lines of credit

11. Loans (Standard or Emergency)

12. Budget reallocationsRetentionReserves/Calamity fundsLiquidity gaps often emerge in the early days after a disasterNeed for an instrument to provide liquidity early on until other sources of funds can be accessed

13. The Financial Protection of the State :Source of Financing Post-Disaster Availability Cost Instruments of funds (multiplier) Reserves Immediate 1-2 Budget reallocations - 1-2 Contingent lines of credit Immediate 1-2 Emergency loans 3-6 months 1-2 Donor contributions 3-6 months 0-1 Traditional insurance 3-6 months 3-6 Parametric insurance Immediate 2-5 Catastrophe Bonds Immediate 2-5 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 ?

14. 2. The Market for Disaster Risk Finance

15. people, assetssocial/econ/physconditionsgeophysicaldriversExposureHazard probabilityVulnerabilityThe Standard Risk Assessment Model

16. Developing Countries Have an Insurance GapInsured UninsuredPeril / Event Country Loss ($bn) Loss (% Loss) Loss % GDP % Govt. RevenuesEarthquake - Izmit (1999) Turkey 22.0 5 5 21

17. Hurricane - Mitch (1998) Honduras 3.0 6 34 158

18. Floods - (1997) Poland 3.5 6 3 11

19. Earthquake - Gujarat/Bhuj (2001) India 0.6 2 1 7

20. Earthquake – Northridge (1992) USA 43.0 47 0.3 2

21. Winter Storm – (1999) France 6.2 100 – –Benefits: Rate on Line VolatilityThe World ROL index (Rate On Line) of broker traces historical catastrophe reinsurance premiums Catastrophe reinsurance premium volatility over the 1990-2010 period has been about 29%In the recent period premiums have experienced a post-Katrina increase of 36% in 200614Source : reinsurance brokerage firm Guy Carpenter Rate On Line Index

22. A viable alternative and complement to insurance for dealing with disaster reliefCat Bonds have shown resilience and diversification value throughout the crisisCat Bond issuance has restarted in 201015Benefits: Update on cat bond marketsTotal Non-Life Bonds Outstanding, By Year (As of End 2010) Cumulative Performance from January 2002 Source: BloombergSource: Goldman Sachs and Swiss Re

23. The Weather MarketFirst weather derivative transaction in U.S. 1997Deregulation of the energy industryMarket has rapidly grown, well over $100b transacted to date (PWC Survey 2008)Non-energy applicationsNew participantsGlobal developmentBroader product offeringKey Players: (Re)insurersBanksHedge FundsMarket wants to diversify and grow their portfolios, wants new risks

24. 3. World Bank Disaster Risk Financing Instruments

25. Caribbean Catastrophe Risk Insurance Facility16 Caribbean countries covered against hurricane and earthquake risks18

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