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

vkalavak@worldbank.org

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

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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

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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

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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?

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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

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Source: World Bank (2010)

VIETNAM – Estimated Natural Disasters Losses funded out-of Contingent Budget

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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)

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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

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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.

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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

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Creating a cost-effective and sustainable Disaster Risk Financing Strategy

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Matching the post-disaster funding needs

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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

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Three-Tier Disaster Risk Layering

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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

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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

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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

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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

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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

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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

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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)

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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

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