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

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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 Framework for 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.”

Entities Working on RTM • World Bank Global Facility for Disaster

Reduction and Recovery (GFDRR) Through its 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

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.

What are the RTM Categories (MCII)? • (Traditional) Insurance

Insurance is a contractual transaction that guarantees financial protection against potentially 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

Catastrophe reserve funds are typically set up by governments

• Risk pooling

Risks pools aggregate risks regionally (or nationally (e.g. Caribbean Catastrophe Risk Insurance Facility)

• Insurance-linked securities

Insurance-linked securities, most commonly catastrophe (cat) bonds, offer an avenue to share risk more broadly with the capital markets.

What are the RTM Categories (GFDRR)? • Sovereign disaster risk financing Financial strategies to increase the financial response capacity of

governments in the aftermath of natural disasters, while protecting their long-term fiscal balances.

• Property catastrophe risk insurance

Develop catastrophe insurance 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 against extreme weather events and promote disaster risk reduction in conjunction with social programs such as conditional cash transfer programs.

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 targets poor households, which otherwise are shunned by traditional insurance product design

RTM and ASEAN National Policies • In the Philippines

The Climate Change Act of 2009 and the Philippine Disaster Risk Reduction and Management Act 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 Management Plan (NDRRMP) and the National Climate Change Action Plan (NCCAP)

RTM has already been piloted in Southern Philippines at the community level  through  the  project  “Climate  Resilient  Farming  Communities  in  Agusan del Norte through Innovative Risk Transfer Mechanisms

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 Management Agency (BNPB). Subsequently, the National Action Plan for Disaster Risk Reduction 2010-2012 was formulated, promoting the implementation of an Indonesian disaster risk financing strategy, including risk transfer instruments 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 assistance funding mechanism.

•

RTM and ASEAN National Policies • In Vietnam Its Government formulated the National Strategy for Natural Disaster

Prevention, Response and Mitigation to 2020 in November 2007. The said national plan includes a strategy on the development of catastrophe risk financing solutions (including insurance) to complement other disaster risk management measures.

The Government of Vietnam also availed of the technical assistance on disaster risk 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.”

Regional Trends: ASEAN DRFI World Bank, the Global Facility

for Disaster Reduction 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 management agenda.

ASEAN Finance Ministers n highlighted the

importance of regional cooperation on disaster risk

financing and insurance in Bali in April 2011.

Regional Trends: ASEAN DRFI World Bank, the Global Facility

for Disaster Reduction 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 management agenda.

ASEAN Finance Ministers n highlighted the

importance of regional cooperation on disaster risk

financing and insurance in Bali in April 2011.

Indonesian Strategy on DRFI

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 through Innovative Risk Transfer Mechanisms.”

ILO will scaleup in Asia, starting with Nepal and Bangladesh, with other project sites under negotiation.

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/community level (e.g. flood insurance, parametric/agricultural insurance)

THANK YOU!

Presented by Dennis G. dela Torre

Climate Change Commission dennisdelatorre@gmail.com