Disaster Risk Financing - World Bank Experience
-
Upload
asean-drr-portal -
Category
Documents
-
view
241 -
download
1
Transcript of Disaster Risk Financing - World Bank Experience
Disaster Risk Financing and Insurance
Case Studies – The World Bank
SEMINAR-FORUM ON DISASTER RISK FINANCING IN ASEAN
March 31, 2011
Vijayasekar KalavakondaInsurance for the Poor (IfP)
Global Capital Markets Non BankFinance and Private Sector Department, The World Bank
Outline
• Natural Disaster Risks & Its Impacts
• How are the Disaster Losses being financed?
• Disaster Risk Financing and Insurance – Approach of the World Bank
• Case Studies
• Way Forward
2
Natural Disaster Risk and Impact
• 82% of all lives lost and 85% of all those affected by disasters since 1997 live in South East Asia
• In 2009, six of the ten countries with highest natural disaster related mortality rates, and the GDP most impacted by natural disasters were from Asia and Pacific region.
• With the fastest rate of urbanization in history—over one million urban migrants a month in South East Asia — reducing the impact of disasters has become intrinsic to fighting poverty
3
Countries most vulnerable to Natural Disasters
4
Country Rank
Percent of Total Area at
Risk
Percent of Population in Areas at Risk
Number of Hazard Types
Taiwan, China 1 73.1 73.1 4Vanuatu 3 28.9 20.5 3Philippines 4 22.3 36.4 5Japan 8 10.5 15.3 4Vietnam 9 8.2 5.1 3Solomon Islands 10 7.0 4.9 3
Source: World Bank 2005
Countries at Relatively High Economic Risk from Multiple Hazards
5
Country Rank
Percent of Total Area at
Risk
Percent of Population in Areas at Risk
Percent of GDP in Areas
at RiskTaiwan, China 1 97.5 97.0 96.9 Korea, Rep. of 6 82.8 92.2 91.5 Vietnam 7 33.2 75.7 89.4 Japan 8 65.6 86.5 89.0 Philippines 13 50.3 81.3 85.2 Thailand 17 47.8 70.1 81.2 Indonesia 37 11.5 67.4 62.3 China 39 13.1 49.8 56.6 Cambodia 9.1 31.3 34.5
Source: World Bank 2005
How are the Countries Financing Disaster Losses?
7
Insured losses are on average 10 times lower in Asian emerging countries than in most developed countries
• Insurance requires sophisticated financial infrastructure
• Market imperfections can impede the emergence of competitive catastrophe insurance markets
• Catastrophe insurance market imperfections can justify intervention by the public sector, supported by the development community
Indonesia
Indian Ocean EQ & Tsunami 2004 (Aceh)
Yogyakarta EQ
2006
Estimated Economic Loss (USD)
4,450 m 3,100 m
Estimated Insured Loss (USD)
225 m 35 m
Ratio of Insured / Economic Loss
5.0% 1.1%
Number of Houses Destroyed
127,000 (15%)154,000
(16%)
Number of Houses Damaged
152,000 (18%)199,000
(20%)
PHILIPPINES – % of Damage Funded out-of Annual Budget Appropriations
8
Source: World Bank (2010)
VIETNAM – Estimated Natural Disasters Losses funded out-of Contingent Budget
9
Year
Natural Disaster losses
(VND Billion)
Contingency Budget
(VND Billion)
% Funding
Gap2000 5098 1600 -68.6%2001 3370 2400 -28.8%2002 1958 2700 37.9%2003 1590 3100 95.0%2004 407 4885 1100.2%2005 5809 6900 18.8%2006 18566 11250 -39.4%2007 11514 9050 -21.4%2008 13301 10700 -19.6%
CAVEATS:1. Only a proportion of the
reported estimated losses in fact fall under the direct responsibility of the Central and Local governments, and hence funded via Contingency Funds
2. Only a fraction (and never in excess of 50%) of the central contingency budget is available for post-disaster response
3. Almost all of the reconstruction activities of pubic assets and infrastructure are financed through the planned capital expenditures of future yearsSource: World Bank (March, 2010)
10
Disaster Risk Financing and Insurance within the Disaster Risk Management framework
• Mainstream disaster risk financing and insurance in national DRM strategies– Knowledge management
and capacity building
– Product Development
– Technical assistance and operations
11
World Bank Disaster Risk Financing and Insurance Program
PartnershipsWithin World Bank Group: Financial VP, Treasury, Sustainable Development VPAcademic partners: Wharton School, NTU Singapore, etc.Practioners: Willis Research Network, brokers, reinsurersRegional development banks: IADB, etc.
12
Disaster Risk Financing and Insurance : Products and Services
Agricultural InsuranceIndex-Based Agricultural Insurance • Area-yield crop insurance programs
• Weather based crop insurance schemes
Agricultural Insurance Pools • Mongolia Index-based livestock insurance pool
Property Catastrophe Risk InsuranceProperty Catastrophe Insurance Pools • Turkish Catastrophe Insurance Pool
• Romania Catastrophe Insurance Pool• South East Europe and Caucasus Catastrophe Risk Insurance Facility
Technical assistance and catastrophe risk insurance supervision
• Kazakhstan, Morocco, Indonesia, etc.
Sovereign Disaster Risk Financing Technical Assistance in Budget Planning for Natural Disasters
Analysis of fiscal impact of natural disasters (e.g., stress test) Ex ante budget planning against natural disasters National disaster risk financing strategies
Contingent Financing • CAT DDO – a committed credit line for catastrophe risk • Contingent emergency response window in standard investment projects
Sovereign Catastrophe Insurance Pools • Caribbean Catastrophe Risk Insurance Facility (CCRIF)
Insurance-Linked Securities • Catastrophe bonds / catastrophe swaps• Weather hedges (IBRD and IDA)
Disaster Microinsurance
13
Creating a cost-effective and sustainable Disaster Risk Financing Strategy
14
Matching the post-disaster funding needs
15
Costs and benefits of financial instrumentsInstruments Indicative Cost
(multiplier)Disbursement
(months)Amount of funds available
Donor support (relief) 0-1 1-6 Uncertain
Donor support (recovery & reconstruction) 0-2 4-9 Uncertain
Budget contingencies 1-2 0-9 Small
Reserves 1-2 0-1 Small
Budget reallocations 1-2 0-1 Small
Contingent debt facility (e.g., CAT DDO)
1-2 0-1 Medium
Domestic credit (bond issue) 1-2 3-9 Medium
External credit (e.g. emergency loans, bond issue)
1-2 3-6 Large
Parametric insurance 2 & up 1-2 Large
ART (e.g., CAT bonds, weather derivatives) 2 & up 1-2 Large
16
Three-Tier Disaster Risk Layering
17
WBG products and services on Disaster Risk Financing
Risk T
ransfer
Risk
Rete
ntion
Catastrophe Bond
(CAT Bond)
Insurance-Linked
Securities
Recently launched a multi-country, multi-peril catastrophe bond platform to pool and transfer risks to the capital markets. Mexico has issued a USD 290 million bond to protect against earthquake and hurricane risk.
CaribbeanCatastrophe
Risk InsuranceFacility (CCRIF)
Insurance Pools
Parametric insurance against natural disasters
WBG Assisted 16 Caribbean Countries in establishing CCRIF against hurricanes and earthquakes
Catastrophe Risk Deferred
Drawdown Option(CAT DDO)
Contingent Loans
Provides immediate liquidity following a natural disaster, in the form of a contingent loan with associated risk framework reforms
Insurance against weather-related losses, based on an index
WBG provided Malawi its first-ever weather risk management contract to protect against the risk of severe drought
Weather Derivatives
Malawi Drought Hedge
Pro
ba
bil
ity
of
Ev
en
t
Se
ve
rity
of
Imp
ac
t
Minor
Major
High
Low
18
Provides immediate liquidity after a natural disaster resulting in a declaration of state of emergency
Macro framework reviewed at commitment and at renewal
A disaster risk management program has to be implemented in accordance with Bank standards (promotes pro-active disaster risk management)
Full loan amount is available for three years, renewable up to four times with RVP approval, for a total maximum drawdown period of 15 years
Amounts repaid during the drawdown period will be available for subsequent drawdowns
Volume/ Optionality
Terms
Drawdown/ Fund Availability
Pricing
Repayment Terms
Maximum size of 0.25% of GDP or the equivalent of USD 500 million (exceptions possible for small countries on case-by-case basis)
The client can choose among the same conversion options (interest rate, currency) that are available for IBRD loans
Repayment terms can be determined at the time of commitment or drawdown
Repayment schedule will commence from date of drawdown
Each drawdown may have different repayment schedules
Same as regular IBRD loans.
Small fee charged for extension of the drawdown
World Bank Development Policy Loan (DPL) with CAT DDO
19
MultiCat Mexico 2009 offers parametric-based insurance to Mexico’s FONDEN MultiCat Mexico 2009 offers parametric-based insurance to Mexico’s FONDEN covering 3 different perils and 6 regionscovering 3 different perils and 6 regions Earthquake in the Pacific coast and the area surrounding Mexico CityEarthquake in the Pacific coast and the area surrounding Mexico City Pacific Hurricanes in two different parts of the coastPacific Hurricanes in two different parts of the coast Atlantic Hurricanes in the Yucatan peninsulaAtlantic Hurricanes in the Yucatan peninsula
MultiCat Mexico 2009 successfully issued US$290mm of 3-year bondsMultiCat Mexico 2009 successfully issued US$290mm of 3-year bonds Swiss Re and Goldman Sachs, Joint-Lead Managers; Munich Re, advisorSwiss Re and Goldman Sachs, Joint-Lead Managers; Munich Re, advisor AIR conducted the risk modelingAIR conducted the risk modeling
19
Class A Class B Class C Class D
Peril EarthquakePacific
HurricanePacific
HurricaneAtlantic
HurricaneNotional (US$mm)
140 50 50 50
Risk Period 3 years 3 years 3 years 3 years
Trigger Type Parametric Parametric Parametric Parametric
Trigger* 7.9; 8.0 944 944 920
AIR Modeled Annualized Expected Loss
4.65% 3.94% 4.00% 2.36%
Multiple 2.47 2.52 2.43 4.29
*Trigger for Earthquake is Magnitude (Richter scale) and for Hurricanes is Central Pressure (milibars)
MultiCat Mexico, 2009
20
Cost of Catastrophe Bond issuances, 1997-2010
Total non-life bonds outstanding (as of March 2011)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
0 50 100 150 200 250 300 350 400 450 500
Mul
tipl
e (S
prea
d Pr
emiu
m/E
xpec
ted
Loss
)
Expected Loss in Basis Points
All PerilsPeak: US Wind and Earthquake
Non-Peak: Euro Wind and Japan EarthquakeDiversifying: Mexico, Japan, Taiwan, Mediterranean,
Latin America, Australia Earthquake; Japan, Australia WindMulti-Peril: Multiple Perils in Same Transaction
Catastrophe Bond Market
21
Caribbean Catastrophe Risk Insurance FacilityProviding immediate budget support to the Caribbean island states in
case of major natural disasters
Return Period Amount ($ M)
1,000.0 131.0
$47.5M $18.5M
37.0 65.0
CCRIF
$1.35M
10.7 35.0
CCRIF
$0.625M
5.9 20.0
1.5 0.0
CCRIF Reinsurance Structure, 2010/11
$20MCCRIF RETENTION
LAYER 1
LAYER 2
LAYER 3 TRAD LAYER 3 CAP MKT
$28.65M
$14.325M
A joint initiative by the World Bank, the Asian Development Bank, and SOPAC
Co-funded by the Japan Policy and Human Resources Development Fund and the Global Facility for Disaster Reduction and Recovery
With technical assistance from Air Worldwide, GNS, and Geoscience Australia
Pacific Catastrophe Risk Assessment and Financing Initiative
Pacific Disaster Reserve FundSecuring immediate access to liquidity in the aftermath of a disaster
Probable Maximum Losses (PML), 1-in-150 year event Risk Pooling Benefits and Country Participation
23
24
Insureds(Clients)
EUROPA Re Agents
Government/Shareholders
CapitalROI
GrossPremium
Capacity
CedingPremium
R/I capacity
NetPremium
Capacity
Claim payment Claim paymentClaim payment
Underwriting Business GenerationUnderwriting andRisk & Capital Management
Distribution Channel
Insurer
SOUTHEAST EUROPE AND CAUCASUS CATASTROPHE RISK INSURANCE FACILITY
Source: World Bank (November, 2010)
25
EUROPA Re
Country A:Primary Insurers
Country A:Homeowners & SMEs
premium coverage
Country A:Primary Insurers
Country A:Homeowners & SMEs
premium coverage
Country B:Primary Insurers
Country B:Homeowners & SMEs
premium coverage
Country B:Primary Insurers
Country B:Homeowners & SMEs
premium coverage
Country C:Primary Insurers
Country C:Homeowners & SMEs
premium coverage
Country C:Primary Insurers
Country C:Homeowners & SMEs
premium coverage
-premium-risk info
-premium-risk info
-premium-risk info
-underwriting tools-pricing guidelines-reinsurance coverage-claims management training
Country -shareholders
Management Company
Independent BoardBoard Chairman
Reinsurers
-premium-risk info -retrocession
Governance
Lenders
Donors
-sub-debt
-grants
Countries -equity
Capitalizationsources
Insurance Operations
Swiss Financial Market Supervisory Authority
Supervision
Country Insurance Regulators
Risk management
CEO
Source: World Bank (November, 2010)
SOUTHEAST EUROPE AND CAUCASUS CATASTROPHE RISK INSURANCE FACILITY
What could the World Bank Offer?• Technical Assistance – Catastrophe Insurance Solutions
– Catastrophe risk modeling?– Assessment of fiscal impact of natural disaster?– Review of current fiscal management of natural disasters?– Catastrophe risk insurance regulatory framework?– Design and implementation of national/regional disaster risk
financing and insurance solutions?– Capacity building and training on disaster risk financing and
insurance• Financing/Investments
26