instruments for disaster risk financing
TRANSCRIPT
Instruments for Disaster Risk Financing
Abhas K. Jha
Program Leader,
Disaster Risk Management
East Asia and the Pacific
The World Bank.Manila, January 25, 2011
Three Objectives Today
1. Demonstrate the rising impact of disasters in developing countries
2. Provide an overview of the markets for disaster risk financing.
3. Provide some examples of World Bank disaster risk financing instruments.
Main Messages
• Disaster risks, economic and insured and non-Insured Losses are increasing
• Governments 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.
1. The Impacts of Disasters
Natural Events Becoming More Extreme
Source: Munich Re
Climate Change and DRM
• Humans are affecting climate• Models 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.D
ecre
asin
g C
onfid
ence
Climate change and insurance• “Stationarity is dead‟
–“Climate is what you expect, weather is what you get” no longer applies
• Agriculture becomes riskier
• •Roles for insurance:
–Protect against catastrophic events
–Signal risk through price
–Provide cash to adapt (after event)
–Promote new (adaptive) technology
01020
3040506070
8090
100
1980 1985 1990 1995 2000 2005
Probable Maximum Loss
Transfer
Retention
• Reserves/Calamity funds
• Contingent lines of credit• Loans (Standard or Emergency)• Budget reallocations
• Catastrophe Bonds• Parametric Insurance• Traditional insurance
Liquidity gaps often emerge in the early days after a disaster
Need for an instrument to provide liquidity early on until other sources of funds can be accessed
-30
-20
-10
0
10
20
30
40
50
1 2 3 4 5 6 7 8 9 10 11 12
Months after a disaster
Fin
anci
al r
eso
urc
es a
vaila
ble
min
us
exp
end
itu
re n
eed
s
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 ?
2. The Market for Disaster Risk Finance
The Standard Risk Assessment Model
Hazard probability
Exposure Vulnerability
people, assets social/econ/physconditions
geophysicaldrivers
Developing Countries Have an Insurance Gap
Insured UninsuredPeril / Event Country Loss ($bn) Loss (% Loss) Loss % GDP % Govt. Revenues
•Earthquake - Izmit (1999) Turkey 22.0 5 5 21•Hurricane - Mitch (1998) Honduras 3.0 6 34 158•Floods - (1997) Poland 3.5 6 3 11•Earthquake - Gujarat/Bhuj (2001) India 0.6 2 1 7•Earthquake – Northridge (1992) USA 43.0 47 0.3 2•Winter Storm – (1999) France 6.2 100 – –
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• The 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 2006
Benefits: Rate on Line Volatility
Source : reinsurance brokerage firm Guy Carpenter Rate On Line Index
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0
50
100
150
200
250
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450
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• A viable alternative and complement to insurance for dealing with disaster relief– Cat Bonds have shown resilience and diversification value throughout the
crisis– Cat Bond issuance has restarted in 2010
Total Non-Life Bonds Outstanding, By Year (As of End 2010) Cumulative Performance from January 2002
Source: BloombergSource: Goldman Sachs and Swiss Re
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
YTD
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
Outstanding Issued
Apr-01 Sep-02 Jan-04 May-05 Oct-06 Feb-08 Jul-09 Nov-100
50
100
150
200
250
Citigroup High Yield
S&P 500
Swiss Re Cat Bond
Benefits: Update on cat bond markets
The Weather Market• First weather derivative
transaction in U.S. 1997– Deregulation of the energy
industry• Market has rapidly grown,
well over $100b transacted to date (PWC Survey 2008)– Non-energy applications– New participants– Global development– Broader product offering
• Key Players: – (Re)insurers– Banks– Hedge Funds
Market wants to diversify and grow their portfolios, wants new
risks
3. World Bank Disaster Risk Financing Instruments
Caribbean Catastrophe Risk Insurance Facility
16 Caribbean countries covered against hurricane and earthquake risks
18
19
Benefits of Pooling in the Pacific
0200400600800
1,0001,2001,4001,6001,8002,0002,200
Tropical cyclone Earthquake Combined perils
US$ m
illion
Aggregate individual reserve requirements Regional reserve requirements
By pooling their catastrophe risks, South Pacific countries can reduce their capital requirements by
50%The regional risk diversification benefits can reduce the estimated technical premium rates by 45% on average
Note 1. Technical premium rates estimated for a hypothetical insurance portfolio, which offers parametric coverage for combined perils (earthquakes and topical cyclones) with return periods between 10 yrs and 150 yrs.Note 2. Estimated technical premium rates may differ from commercial premium rates due to market conditions.
0%
2%
4%
6%
8%
10%
12%
Fiji Samoa PNG Solomon Tonga Vanuatu Cook Tuvalu
Estimated pure pure premium rate
Estimated technical premium rate with regional diversification
Estimated technical premium rate without regional diversification
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Turkey Cat Insurance Pool
• Overall protection against losses up to $1 billion in the first 5 years
• Reinsurance program of A+ quality with dozens of international reinsurers of $750 mm.
• World Bank up to $17 million on the first loss basis and on 40/60 basis proportional basis with reinsurers or TCIP, up to $163 million.
• TCIP’s own surplus funds - $120 mm
• If claims exceed TCIP’s available financial resources, GoT acts as reinsurer of last resort
TCIP Claim Paying Capacity
TCIP
Reinsurance
Reinsurance
World Bank
Reinsurance
World Bank
$1 bn
>$1 bnTurkish Government
Private reinsurance is by far the largest source of TCIP’s claims paying capacity
Multi-Country Cat BondStructure and Cash Flows
Countries
Donors
MCCBRe-insurers & Capital
Market Investors
Collateral Trust
AAA Assets
Disaster Contingent payments
Premiums Coupons
Principal
SubsidiesCoupons
Two possible approaches to insurance the WB now
supportsParametric – based on objective weather or related metric
Low cost, objective, but–Basis risk–Need tamper proof measurement infrastructure
Index – based on area yields (e.g. cereals) or animal census data.
Less basis risk, but
–Still need to measure area losses (sampling/ census)–Claims payment can be delayed
Boosting Demand for Index Insurance
• There are currently at least 36 pilot projects introducing index insurance in developing countries.
• Take-up is low– Higher payout ratios– Liquidity constraints– Trust– Attention (“Last mile issues”)
World Bank Risk Financing Initiatives
Chile and Mexico: Global Catastrophe Mutual Bond Risk Modeling
India Crop Insurance: Developing Market-based Products
Nepal: Agricultural Insurance Feasibility Study
Cook Islands, Fiji, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.Pacific Catastrophe Risk Pool Feasibility Study
Ethiopia: Weather Risk Management Framework using Weather-Based Indices
Bangladesh: Agricultural Risk Insurance Feasibility Study
China Catastrophe Risks Assessment and the Development of Disaster Risk Management strategies
Costa Rica Public Asset Catastrophe Risk Insurance Facility Feasibility Study
Swaziland Capacity Needs Assessment for Disaster Risk Management
Caribbean Risk AtlasCAPRA Central America Probabilistic Risk Assessment for Central American Countries
Europe and Central Asia Regional – Disaster Risk Mitigation and Adaptation
Thank you!
ajha(at)worldbank.org
202-458-1050