GIZ CRI NTF and TWGs, May 20, 2019

Nat Re and PIRA initiatives on disaster risk assessment and modelling

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Outline

• Oasis platform of Oasis LMF, Nat Re, UP, PAGASA, KatRisk, and Willis Towers Watson

• What are catastrophe models?

• Data needs

• Usability by different stakeholders

• Issues in developing climate risk insurance solutions for the low-income sector and the most-at-risk

• How the government and GIZ RFPI can help address issues

The first open-source cat model for flood in PH

• Oasis Platform for Climate and Catastrophe Risk Assessment in Asia (“The Oasis Project”)• Will develop the first open-access catastrophe model for flood (for

property risks) in the Philippines (launching in June 2020) and build long-term capacity among stakeholders to help them understand, sustain, use, and develop catastrophe models

• First project of its kind with the Philippines and Bangladesh as pilot countries

• German government-funded project running from 2018 to 2020

• Being implemented by Oasis Loss Modelling Framework, Nat Re, PAGASA, University of the Philippines Geodetic Engineering Department, KatRisk, and Willis Towers Watson

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The Oasis Project

Main objectives of the Oasis Project

• Create greater awareness on:

• the use of catastrophe models (“cat models”) in the area of climate risk assessment

• the risks associated with climate events

• the importance of financial risk transfer mechanisms such as insurance

• Facilitate the development of risk transfer products, helping narrow the gap between insured and uninsured losses

• Extend the use of cat risk modeling beyond the insurance industry for risk-informed decision-making

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What are catastrophe or cat models?

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• Catastrophe models are computer software that calculate the likelihoodand severity of losses that a portfolio may sustain due to a catastrophe event such as an earthquake, typhoon or flood.

• Differ in the kind of peril and in the location (e.g. cat models for earthquake and for typhoon in the Philippines)

Input and output of a cat model

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Cat Modeling

Geographical Location

Street Address, City, Postal

Code,

Province, CRESTA, Lat-Long

Risk Characteristics

Occupancy, Construction,

Year Built, Number of

Storeys

Insured Values

Buildings, Contents, Business

Interruption

Location

RiskInfo

InsuredValue

$Monetary loss data of expected

physical damage to structure given that a peril occurs with a

certain intensity

INPUTSOUTPUT

How are cat models used

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(Re)insurers

Government

Academe / Non-Profit

Development Sectors

Underwriting and Risk SelectionPricingPortfolio Management and MonitoringCapital and RBC CalculationsRisk Transfer / Reinsurance Structure

Risk IdentificationRisk Reduction and MitigationFinancial ProtectionDisaster Risk ManagementInfrastructure Planning

Augment Existing ResearchClimate Change Impacts and EffectsLoss Scenario Analysis

Users of Cat Models

Data needed to develop the cat model for flood*

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Hazard

• Precipitation gauge

• Radar precipitation

• Temperature and wind speed

• Discharge gauge

• Digital terrain model

• Flood defenses

• Flood hazard maps

• Historical flood outlines

Vulnerability and exposure

• Building stocks

• Exposure estimates

• Population densities

• Building characteristics

• Vulnerability surveys and curves

Loss

• Loss statistics by event, historical losses

• Detailed loss data

• Insurance portfolios with loss data

*Different sets of hazard data is needed for the development of other peril cat models

Granularity of data for cat model and applicability of the Oasis platform

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•We will use city-level data (of select pilot cities) from PAGASA, UP, and other data providers when applicable• Otherwise, we will use less granular local data from other agencies or global data

Applicability of the Oasis platform- Applicable for homeowners insurers, commercial insurers, industrial insurers, reinsurers and brokers for modelling the risk from natural disasters to any type of insurance policy, such as homeowners policies, commercial policies, large industrial policies, entire insurance portfolios and rolling up reinsurance policies.- Not designed for use directly by householders, SMEs or bodies such as trade associations to purchase insurance, or to get price estimates for their insurance policies

Issues in developing CRI products

Issues in product development

• Affordability

• Products that provide resilience against catastrophes may be too expensive for low-income groups

• Products catering to low-income groups are mostly funded by government but this may not always be budgeted

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of CRIs for low-income groups and most-at-risk

• Technical capabilities of insurers especially underwriters

• There is limited quality data, risk models and expertise for the development of actuarially sound and marketable products

• Because there is a significant risk in insuring these groups, insurers need enough technical capabilities to calculate the effect of taking on these risks

• These risks are not the typical types of risks that underwriters see on a day to day basis. Underwriters should have the knowledge to evaluate these risks.

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Issues in product developmentof CRIs for low-income groups and most-at-risk

• Claims process

• Claims processes for CRI products should:

• Be quick to provide immediate liquidity

• Include the easy identification of policy holders in the event that required documents are completely lost and unrecoverable (possible when insuring low-income groups)

• Most insurance products (i.e. indemnity) have time-consuming claims processes that are costly for insurers and frustrating for the policy holders

• Parametric products are a good alternative but are difficult to design (need a significant amount of data, technical capability and resources)and the basis risk needs to be managed carefully.

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Issues in product developmentof CRIs for low-income groups and most-at-risk

• Legal and regulatory framework (e.g. capital requirements) may discourage insurers from prioritizing development of these products

• Simplifying terms

• CRI products shouldn’t have wordings that are too technical

• Current insurance products are filled with technical jargon and complex clauses that are difficult for the layman’s understanding

• Bundling with other products

• Products should be innovative and/or bundled with other risks/ products (credit life insurance, accident insurance, etc.)

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Issues in product developmentof CRIs for low-income groups and most-at-risk

• Distribution channels

• Insurers and/or government should think of ways to efficiently distribute products to these groups as this also entails costs to the insurers

• Can be through government, other intermediaries (e.g. NGOs, other financial services providers), or directly to individual policy holders through mobile apps, SMS, etc.

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Issues in distributionof CRIs for low-income groups and most-at-risk

• Technology operations

• Operating framework should be low-cost, automated, and standardized

• Challenges in increasing penetration and diversification

• Insurers face challenges in reaching out to these groups for reasons such as price, complexity, and location. This hampers achieving spread and portfolio diversification.

• Public procurement policies could prevent LGUs from acquiring insurance from private insurers

• Perception on CRI products

• Generally the public thinks short term or reactive when it comes to disaster resilience strategies

• The developed product should be perceived as complementary, if not superior, to other existing risk adaptation strategies

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Issues in distributionof CRIs for low-income groups and most-at-risk

• Simple and have transparent policy terms

• Convenient and accessible to purchase

• Quick and efficient in settlement

• Affordable

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To summarize, CRI products for low-income groups and most-at-risk should be…

What the government and GIZ RFPI can to do address these issues

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What the government can do

• Increase insurance awareness among government personnel and decision makers to encourage long-term thinking in disaster resilience efforts

• Increase awareness (e.g. through LGUs and other non-profit partners) on CRI products among low-income groups

• Provide incentives and subsidies to support affordability (e.g. using funds from LDRRMF to acquire insurance)

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What the government can do

• Lower taxes on non-life insurance products. Insurance industry and the House of Representatives have reached a compromise on Package 4 of the TRAIN Law; it is now with Senate.

• Provide a conducive regulatory environment for the development and distribution of CRI products

• IC circular 2018-07 enhances framework for insurers to use mobile-phone apps to sell products

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What the government can do

• Continue formal discussions between government and insurers to help encourage public-private partnerships and gain a better understanding of each group’s objectives, challenges in implementing initiatives, etc.

• Provide training for or best practices sharing with the industry

• Access to government data to support the proper design and pricing of CRI products.

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• Serve as a venue for discussions between government and insurers to encourage public-private partnerships and formulate strategies to propagate CRI products to low income groups

• Provide training or technical assistance for best practices sharing with the industry

• Help raise awareness on the Oasis project and the value of CRI products

What GIZ RFPI (NTF and TWGs) can do

Thank you

Allan Santos

President/CEO of Nat ReChairman of the PIRA Board of Directors

allan.santos@nat-re.comwww.nat-re.com