december 19-20, 2006

World Bank World Bank GroupGroup

Hazards of Nature, Risks and Opportunities for Development in South Asian Countries

Regional Conference in New Delhi, India

All About Risk Financing: Theory and Practice

Eugene N. Gurenko, Ph.D., CPCU, ARe Lead Insurance Specialist

December 19-20, 2006


Agenda

Catastrophe insurance in developing countries

Enabling the development of catastrophe insurance market

through public policies

The potential role of the World Bank


Catastrophe insurance in developing countries: the current status quo

Very low catastrophe insurance penetration

Growing government fiscal liabilities to natural disasters

Volatile, and often unaffordable, reinsurance premium



Catastrophe insurance penetration in developing countries (% dwellings covered)

% homes covered

India – under 0.3%

Philippines – 0.3%

Iran – under 0.05%

Romania – under

4%

Bulgaria – under

3%

China – under

0.5%

Turkey – 18%

0

5

10

15

0 200 400 600 800 1,000 1,200GDP/ Capita $US

Prem

ium

/ Cap

ita $

US

Vietnam IndiaIndonesia

China

Philippines

Global Indicator

PERSONAL INSURANCE PREMIUM = 1.3*(GDP/1000)^2PERSONAL CAT INSURANCE PREMIUM = 0.1*PERSONAL INSURANCE PREMIUM


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To illustrate the point, I put together some numbers on the level of insurance penetration (the right side) expressed as % of dwellings covered by insurance.The graph in the middle depicts how consumption of insurance per capita (P&C) is affected by GDP/per capita. The blue squares on the chart represent the projected consumption of insurance based on our quantitive analysis of (, while the dark blue diamonds stand for consumption of insurance in specific countries. As you can see, not only the consumption of insurance is small in absolute terms, in developing countries it is well below the projected line. As consumption of catastrophe insurance is typically only a fraction of total insurance penetration, you get the real picture.


Insured and economic damages from natural disasters (%)

Over 25 years the share of economic loss covered by insurance in developed

Markets increased considerably while remaining stagnant in poorer countries.

Insured vs. economic losses in rich and poor countries

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

Developing

Developed

Source: Munich Re NatCatService database, 2005

•More than 45% of

economic damages

covered by insurance

in rich countries

•Less than 3 percent

covered in developing

countries

6



Loss (USD, bn) Insured Loss (%) Uninsured Loss % GDP % Govt. revenues

Earthquake Turkey 22.0 5% 5% 21%Izmit (1999)

Hurricane Honduras 3.0 6% 34% 158%Mitch (1998)

Earthquake India 6.0 2% 1% 7%Gujart/Bhuj (2001)

Floods India 5.0 7% 0.8% 5.5%Mumbai (2005)

Quake Pakistan 5.0 0% 5% 40%Kashmir (2005)

Earthquake USA 43.0 47% 0.3% 2%Northridge (1992)

Winter Storm France 6.2 100% - -(1999)

Economic Loss from Uninsured Natural Disasters


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The underdeveloped state of catastrophe insurance market in developing countries leads to the increasing government fiscal risk exposures to natural disasters. The slide illustrates the point. I have taken the largest recent natural disasters in both developing and developed countries and recast them as percentage of gov fiscal revenue and GDP.


Major sources of disaster finance

0

10000

20000

30000

40000

50000

60000

70000

80000

$ mm

1987-1989

average

1991 1993 1995 1997 1999 2001 2003

Financing of catastrophe losses in developing countries

Emergency relief aid Insured loss Retained loss

•On average, 92,6% of economic loss was retained by developing countries.

Sources: OECD, Munich Re

•Loss retention was on

average $31 bn per year

•Loss retention has been

highly variable – 50%

coefficient of variation


World Bank World Bank GroupGroupIndia is Illustrative of the Trend

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Direct losses from natural catastrophes (USD bn):1976-1981 - 2.9; 1981-1995 -13.4; 1996-2001 - 13.8; billion;2005 alone over $7 billion.

2005 events (USD,bn)

•Orisa floods: 0.12

•AP floods: 0.4

•Mumbai flood: 5.0

•Gujarat flood: 0.4

•Kashmir EQ: 5 bn

Source: SwissRe, 2006

World Bank World Bank GroupGroupGrowing Fiscal Costs of Natural Disasters

Margin Money/ CRF Expenditures Rs millions India

0

5000

10000

15000

20000

25000

74-79 79-84 84-89 90-95 95-00 00-05


Agenda






Country Assets (people, housing, factories, schools…)

Country Assets (people, housing, factories, schools…)

Risk AnalysisExpected Annual Loss

Loss Exceedance (PML’s)Risk Transfer Cost/Benefit

Risk AnalysisExpected Annual Loss

Loss Exceedance (PML’s)Risk Transfer Cost/Benefit

Risk Transfer and Financing Strategy

Reinsurance/Alternative Risk Financing Strategies

Risk Transfer and Financing Strategy

Reinsurance/Alternative Risk Financing Strategies

Manage PositionManage Position

NoNo

Yes

Lower RiskMitigation, Land use

planning

Lower RiskMitigation, Land use

planning

(Risk Transfer/Financing) (Risk Reduction)

Achieve Risk Management

Objectives?

Achieve Risk Management

Objectives?

Flood, Earthquake, Wind….Flood, Earthquake, Wind….

National Catastrophe Risk Management

Source: EQE


Low cost of IBRD capital

Public policies

Public risk awareness, education campaigns

Sovereign catastrophe risk coverage (Mexico bond, Caribbean Cat Facility, GCIF)

Making insurance compulsory or semi-compulsory (Turkey/Romania/Columbia/France);

Creation of national pools;

Drawing a clear line between public and private liabilities (Spain)

Enabling public policies for catastrophe insurance

Making catastrophe reinsurance capacity more affordable for developing countries through (i) global mutualisation of risk; (ii) partial risk retention; (iii) premium subsidies to poorest nations; (iv) subsidies for market infrastructure and product development

Enabling the development of catastrophe insurance market through public policies


First step: Recognize catastrophe risk exposure in the national budget

National Budget

DisasterBudget

Calamity Calamity TrustTrust

$$

$$


However, self-insurance funds like Fonden are typically underfunded

National Budget

FondenBudgeted

Fonden Fonden TrustTrust

$$

$$

How one can create a larger Fonden Trust w/o asking for more budget?

Re-insurers

Investors

InsuranceInsurance

Premium Additional Capital


Mexico: Catastrophe Risk Transfer in a Nutshell

Annual Expected Loss Probabilities

Zone A Zone B Zone C

0.63% 0.96% 0.30%

The FONDEN through an international public bid process, hired Swiss Re Capital Markets, Swiss

Reinsurance Company and Deutsche Bank Securities.

+

Needed a Financial Needed a Financial Entity with experience Entity with experience

and proved results and proved results

+

Insured InvestorsSPVProtection

Funds = Bonds

PremiumReturn + Premium

Collateral Account

ReturnFunds

Funds + Return + Premium

“Insurance Company”

Insured InvestorsSPVProtection

Funds = Bonds

PremiumReturn + Premium

Collateral Account

ReturnFunds

Funds + Return + Premium

“Insurance Company”

Cat-Bond ConceptCat-Bond Concept

Insurance ConceptInsurance Concept


2000/1 2002 2003 2005

Claims Paying

Capacity

$ 600 mm $ 900 mm $ 800 mm $ 1.6 billion

Policy #

(% of TH)

0.6 mm 2.48 mm 1.9 mm 2.5 mm

Surplus $ 0 mm $ 2 mm $ 10 mm $ 250 mm

Costs of

reinsurance

ROL %

6.13 5.51 5.14 4.2

Premium

Rate (average)

$ 13 $ 15 $ 17 $ 47

Benefits of country risk pooling: Turkish Catastrophe Insurance Pool


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The benefits that would accrue to both public and the private stakeholders from the implementation of this conceptual approach, can be well illustrated by two examples. One is the example of the Turkish catastrophe insurance Pool (which will be discussed in detail by Ahmet Genc and the other is from the technical research the Bank has recently conducted on the benefits of global pooling. What emerges from this examples is the fact that creation of country based risk pooling mechanisms (with strong elements of mutuality) can help reduce insurance rates, stabilize rates, increase considerably insurance penetration in the country and at the same time generate additional business for the global reinsurance and capital market that was not there before.


Claims Paying Capacity

Reserves

Risk

Transfer

Countries

Disaster contingent payments

Premiums

Premiums

Global Insurance PoolCapital

Contributions

Donors

Capital

Global

Reinsurance

&

Capital

Markets

Donors

A Global Cat Insurance Facility (GCIF): A Feasibility Study

Shareholders

Premium Subsidies



Benefits of global risk pooling: Global Catastrophe Insurance Facility

•27 countries

•2 perils

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

Countries Regions Portfolio

Pre

miu

m/I

ns

ure

d L

imit



Agenda




The role of the World Bank


World Bank’s role in catastrophe insurance

Assistance to countries in risk quantification.

Assistance in building the national institutions of catastrophe

risk management – as an integral function of financial risk

management.

Advisory services in developing innovative catastrophe risk

transfer solutions: (i) national catastrophe pools; (ii) issuance

of catastrophe bonds; (iii) access to global reinsurance

capacity through global risk pooling; (iv) contingent capital

facilities to reduce the costs of reinsurance.


december 19-20, 2006

Documents

agendacatastrophe insurance

insurance specialistdecember

level of insurance penetration

personal cat insurance

developing countries15wb82643

specific countries

capitaln premium

potential role