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2018 DRR Financing 3.1 Karina Whalley


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Parametic Insurance: A Key Tool in Disaster Risk Financing

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2018 DRR Financing 3.1 Karina Whalley

  1. 1. Parametric Insurance: A key tool in disaster risk financing AXA Global Parametrics UNDP Disaster Risk Reduction Financing Regional Conference Istanbul, 4 October 2018
  2. 2. 1Climate change impacting ECIS region
  3. 3. Natural disasters already have a major negative social and economic impact in the Caucasus, Central Asian and SEE states Source: World Bank, Europe and Central Asia - Country risk profiles for floods and earthquakes (2017) 6.9mn Average number of people impacted every year by floods and earthquakes in region $40.8bn Average GDP value affected every year by floods and earthquakes in region 3
  4. 4. South Eastern Europe Most countries in SEE region impacted by a range of natural disaster risks Source: UN Risk Assessment for South Eastern Europe (2008) 4
  5. 5. Disaster risks in ECIS region are exacerbated by climate change Region is projected to suffer from rising temperatures and increased weather volatility Central Asia: Kyrgyzstan, Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan Floods, earthquakes, landslides, mudflows and droughts Most seismically active areas in the world due to fault lines Source: IPCC Fourth Assessment Report (2008) South Eastern Europe: Earthquakes, floods, landslides, drought extreme temperature, wildfires, windstorms South Caucasus: Georgia, Armenia, Azerbaijan Rising temperatures caused by climate change exacerbate natural disasters such as floods and landslides 5
  6. 6. Agriculture in parts of ECIS region will be impacted by climate change Reduction in yield of major staple crops in Europe and Central Asia by 2050 due to climate change 7% 6
  7. 7. South Caucasus Rise in extreme temperatures and lower overall precipitation expected Source: United Nations Environment Programme (2015) 7
  8. 8. 2Parametric insurance: key financing tool
  9. 9. Parametric insurance is a key financing tool for governments to transfer their rising climate and disaster risk to the international risk markets to create the most relevant cover that is correlated to the insured’s damages, financial losses or funding needs Parametric insurance is based on the use of a parameter How does it work? 9
  10. 10. Parametric insurance uses improved technology and innovation in product design AXA builds parametric coverages using both satellite and weather station data More precise satellites with data worldwide, in high frequency or even in real-time Improvements in correlational models, machine learning, predictive analysis and data processing New channels at marginal costs, eg. Leverage traditional agribusinesses to distribute insurance Better technology Enhanced models and data processing methods Innovative Distribution 10
  11. 11. In the face of climate change, there are challenges with traditional insurance Tailor-made & transparent Claims payment is automatic and received within a few days No claims handling costs and adapted to insured’s budget and risk aversion 4. Not adapted to my case 3. Compensation perceived as being “influenced” by insurer 2. Too costly 1. Claims payment takes too long 5. Not available in my location Compensation triggered by independent weather parameter Available globally Indemnity insurance Parametric solution 11
  12. 12. Parametric insurance’s value proposition Parametric insurance offers greater economic value that governments can utilize … Traditional insurance 25 – 35% Traditional insurance in developing countries Index Insurance combined with a meso-approach/light broker Frictional costs Payback ✓ Lower distribution costs ✓ No claims handling costs ✓ No adverse selection ✓ No moral hazard - Higher distribution costs - Higher claims handling costs - Higher cost of support functions - Distribution costs - Claims handling costs - Support functions - Uncertainty loading 100% 50 – 70% 10% 12
  13. 13. Parametric insurance provides fast and guaranteed liquidity to governments which is critical in the wake of a natural disaster Speed is critical in the immediate aftermath of a disaster Governments need rapid access to financial resources in order to save lives and livelihoods Parametric insurance is therefore perfectly suited to provide fast funding By partnering with governments/municipalities, existing public structures can be leveraged: To insure a large portion of people; and To coordinate disaster relief funding This allows distribution costs to be significantly reduced Speed Scale 13
  14. 14. Parametric insurance :ex-ante financing tool that provides large volumes of funding in Relief phase and onwards following a disaster Source: Sovereign Disaster Risk Financing Concept Note, World Bank (2012) 14
  15. 15. Three-tiers risk layering approach: Parametric insurance is ideal for covering major disasters in the immediate aftermath TransferRisk Relief phase Recovery phase Reconstruction phase ▪ Catastrophe Bonds ▪ Parametric Insurance ▪ Traditional Insurance ▪ Tax Increase ▪ Domestic Credit ▪ External Credit ▪ Loans ▪ Contingent Credit ▪ Budget reallocations ▪ National Reserves/ Contingency budget High Severity Low Frequency Eg. Major quakes + cyclones Low Severity High Frequency Eg. Localised floods Medium Severity Medium Frequency Eg. Floods, small quakes Source: World Bank Disaster Risk Financing and Insurance Programme, Olivier Mahul (2011) RetainRisk 15
  16. 16. 3Case studies of parametric applications
  17. 17. AXA Global Parametrics is active in 40+ countries including multiple partnerships with international institutions Typhoon and earthquake Philippines (World Bank) Typhoon and earthquake Pacific Islands (World Bank) Typhoon and earthquake Caribbean Islands (World Bank) 17
  18. 18. AXA Global Parametrics has a strong focus on Public-Private Partnerships ✓ Signed MoU with GIIF in 2015 ✓ Working with GIIF on Cameroon and Cote d’Ivoire pilots ✓ Working with IFC on energy, agriculture and other projects ✓ Supports World Bank’s $206mn Philippines deal ✓ Working with BOAD to expand index insurance in West Africa including a successful initiative in Senegal ✓ Lead reinsurer of WFP’s R4 programme in Ethiopia ✓ ARC: One of lead reinsurers for the African risk pool which has transferred $221mn in 4 years ✓ PCRAFI: One of lead reinsurers on World Bank’s $45mn Pacific Islands risk pool deal ✓ CCRIF: Reinsurer of Caribbean and Central American risk pool 18
  19. 19. Risk pooling lowers insurance premium Cost of capital (reserves and risk transfer) Operating costs Annual Expected Loss Cost of capital (reserves and risk transfer) Operating costs Annual Expected Loss - Lower reinsurance costs due to better structured and diversified portfolio - Joint reserves to retain the first aggregate loss Economies of scale in operating costs Underlying risk is unchanged Technical insurance premium WITHOUT risk pooling Technical insurance premium WITH risk pooling Source: World Bank Disaster Risk Financing and Insurance Programme, Olivier Mahul (2011) 19
  20. 20. Case Study: CCRIF parametric catastrophe risk pool The Caribbean Catastrophe Risk Insurance Facility (CCRIF) has made 36 payouts totalling $130,5m to 13 governments helping millions of people impacted by cyclone and earthquakes CCRIF is a sovereign disaster risk pool covering ~20 Caribbean Island and Central American governments against cyclone and earthquake risks. AXA is one of the risk pool’s reinsurers CCRIF’s value: Supporting governments in disaster risk management Insurance based on cyclone and earthquake model pays out very quickly within two weeks which helps reduces overall impact of disasters. 20
  21. 21. Case Study: Philippines parametric insurance scheme for 25 provinces The Philippines natural catastrophe programme provides $206mn in coverage The programme provides coverage against losses from major cyclones and earthquakes to national government assets It also provides coverage to 25 participating provinces against losses from major cyclones. Philippines is expected to incur, on average, $3.5bn in asset losses each year due to typhoons and earthquakes The programme uses a parametric trigger based on modelling firm AIR Worldwide 21
  22. 22. Case study: Mexico’s CADENA agriculture pool CADENA started in 2003 by the Mexican government The insureds: Provincial and federal government End beneficiaries are smallholder farmers CADENA offers: Traditional livestock insurance Crop Area-yield Index Insurance (area yield measured in field) Parametric Crop Weather Index insurance – Using weather station data to cover drought, excess rain, flood and hurricane windstorm Parametric insurance for livestock – Using satellite imagery (the Normalised Difference Vegetation Index (NDVI)) to assess the level of greenness of pasture lands. – Low NDVI levels, which indicate insufficient grazing land, trigger an automatic and speedy payout to cover the additional costs of buying extra fodder for livestock. Componente de atencion a desastres naturales (CADENA) 22
  23. 23. Thank You!