Natural Disaster Risk Management

Arup ChatterjeeSenior Financial Sector Specialist

Asian Development Bank

Let’s Listen to the Insurance Regulators and Experts

Seminar organized by Association of Insurers and Reinsurers of Developing Countries, Association of Insurance Supervisory Authorities of Developing Countries, and Insurance Institute for Asia and PacificManila, 7 September 2012

Outline

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Disaster Risk Management in Developing Member Countries of Asia

Role of Multilateral Agencies in Disaster Risk Financing

An Overview of ADB's Disaster Risk Financing Activities

Key Messages

Q & A

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Measuring disaster impacts against development investments

On the disaster sideBetween 2005–2010 the economic costs of disasters exceeded $269

billion, averaging $53.8 billion a year.

On the development sideThe most recent OECD figures indicate that total ODA assistance to

ADB’s developing member countries for 2009 was $32 billion.

ImplicationThe combined contributions of all the region’s development partners

does not keep up with the economic and social costs of disasters in Asia and the Pacific.

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Disaster risk reduction is development

• Disaster risk management is not a separate development sector.

• DRM is a development approach and is part and parcel of development actions.

• Without a risk-sensitive approach, development cannot be sustainable.

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A Hurricane’s Impact on Asset Trajectory

shock recovery

better-off HH

poorer HH

poverty-trap

threshold

Time

Ass

ets

Source: Carter, Little, Mogues, and Negatu 200510

Basics of DRM

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Risk = Hazard x Exposure xSensitivity

Capacity

where represents Vulnerability

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Losses = Risk factor

Recovery = Finance factor

Extent of damage > Available Finance

The biggest financing challenge is availability of liquidity at the onset of a disaster

Rationale for DRM and DRF

• Governments are responsible for large portfolios of public infrastructure assets subject to risk

• Guarantee sufficient capital for emergency relief and assistance to affected households, businesses and communities

• Analyze, measure and manage government's disaster contingent liability– comprehensive approach to embedded contingent risks from

disasters

• Avoid diverting funds from budgets or from already disbursed development loans to finance post-disaster expenses

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Applying DRM

Ex-ante– Development planning,

programs and projects– Existing vulnerability of

populations and their infrastructure

Ex-post– Emergency response– Disaster recovery and

reconstruction

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Risk Assessment

Risk Mitigation

Emergency Preparedness

Institution Building

Risk Financing

Risk Operations

Recovery Process

Reconstruction

Ex ante

Risk event

Ex post

Time

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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

Revise StrategyReinsurance/Alternative

Risk Financing Strategies

Revise StrategyReinsurance/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: EQEBuilding Capacities to Address Financial Implications of External Shocks and Climate Change

Outline

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Disaster Risk Management in Developing Member Countries of Asia

Role of Multilateral Agencies in Disaster Risk Financing

An Overview of ADB's Disaster Risk Financing Activities

Key Messages

Q & A

- Management of retained risks- Elimination of preventable risks

ADB’s Integrated Disaster Risk Management Approach

- Transfer of disaster risks (amortization)

Country level IDRM model

National & local development systems

Input streams

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WB Disaster Risk Management

Framework

Understand contingent liability

Manage the volatility of the costs

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Key Components of a Results-Based Strategic Approach to DRM

Analysis-driven– Natural hazard (including

climate change hazard), vulnerability and risk assessments

Focused design– Selection of intervention

type(s) – policy, investment, capacity

– Selection of risk management option(s) - financial, economic, physical

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Optimized for necessary scope and scale

• Core results attributes – planning, budgeting, implementation, monitoring and evaluation

• Focus on common results• Interdependency – top down,

bottom up and linked• Horizontal and vertical linkage

– across agencies in all sectors at all administrative levels

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What could the DRF solutions look like?

Disaster liquidity / reserves

– Contingent credit or insurance based solutions

– Using parametric, index or modeled loss triggers

Public infrastructure asset coverage

– Transport, power, water

Stengthening of safety nets

– Microinsurance

Facilitate mitigation and adaptation

– Climate Funds, Carbon Finance Microfinance

Carbon Finance

Disaster Risk Finance Solutions

Source: Adapted from the World Bank

High severity

Low severity

High frequency Low frequency

Reserves / Calamity Funds (potentially insurance backed)

Contingent credit

Insurance / Reinsurance

Catastrophe bonds & other Insurance Linked Securities

International Donor Assistance

Once in 3-5 years

Once in 10-15 years

Once in 15-20 years

Once in 75-100 years

Once in 25-50 years

Expected return period

Risk retention

Risk transfer

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Three-tiered risk layering approach

Source: Adapted from the World BankBuilding Capacities to Address Financial Implications of External Shocks and Climate Change 21

Risk Modeling

Risk(i.e. probable loss)

Hazard(i.e. hurricane wind)

Exposure(i.e. houses)

Vulnerability functions(of house to wind)

Vulnerability

Disaster Impact Analysis - Scenario or Stochastic -

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Designing Effective Risk Management Programs for Sovereign Clients

• Risk Identification and Measurement– Extensive use of stochastic catastrophe risk models employing the

latest scientific research on natural hazards and utilizing stock inventory and vulnerability data (EQECAT, RMS, AIR)

• Loss control programs– Loss prevention programs/national mitigation efforts/enforcement of

building codes, construction supervision

• Risk transfer/risk financing– Reinsurance– Government– Insurance Industry

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

Source: Ghesquiere and Mahul (2010)

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Matching the Funding Needs

The challenge is how to utilize a wide range of instruments to address the costs of disasters and be sure that they are available if and when needed.

The challenge is how to utilize a wide range of instruments to address the costs of disasters and be sure that they are available if and when needed.

Source: Adapted from the World Bank25

Key Challenges• Low country incomes

– Limited finance and related market tools for mitigation and adaptation

• Degradation of environment due to growing demands of rapidly growing population

• High degree of uncertainty with regard to expected economic losses– Poor statistics

• Catastrophe Risk Financing Instruments: scepticism on reliability of weather data

– Extent of devastation and loss normally underestimated

– Losses arising from business interruption and bankruptcies often unclear and undisclosed

• Corruption and poor governance

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Key Challenges• Inability to put in place pre-requisites for an efficient catastrophe risk

financing instrument – e.g. enforced building codes

• Undeveloped insurance sector– General inadequacy in local insurance laws with respect to post-disaster

damages

– Excessive reliance on the government as the reinsurer of last resort

• Lack of risk awareness at the government level and among public– Perceived low probability of disasters: hence insurance is of low priority

among would be consumers of insurance products

– Lack of understanding of insurance by locals; low awareness of insurance benefits vis-a-vis costs (premiums)

• Lack of local technical knowledge and experience Build complex insurance models and carry out loss assessments

Adapt to climate change effects27

Role of Multilateral Agencies• Reducing vulnerability of the poor to natural disasters

• Quantifying the uncertainty– Independent estimates of countries’ economic exposures and vulnerability to

natural disasters– Enabling risk reduction by providing governments with access to hazard maps

and information on hazard impacts on populations, land area, ports and airports

• Estimating the economic benefits from different risk transfer/ risk hedging arrangements

– Selecting best risk transfer and financing programs• Reduce government exposure to natural disasters• Optimal allocation of risk in the economy

– Ensuring sufficient liquidity exists after a disaster– Speeding economic recovery

• Build capacity, fill knowledge and funding gaps, and integrate private sector expertise and resources

– Better mitigation and more effective poverty alleviation28

Outline

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Disaster Risk Management in Developing Member Countries of Asia

Role of Multilateral Agencies in Disaster Risk Financing

An Overview of ADB's Disaster Risk Financing Activities

Key Messages

Q & A

Strategy 2020 of ADB

• Vision: “An Asia and Pacific Free of Poverty”

• Three complementary strategic agendas– Inclusive growth

• putting in place sound policies and institutions to improve the poor’s access to credit/ insurance and basic productive assets

• Strengthening social safety nets to prevent extreme deprivation– Environmentally sustainable growth– Regional integration

To better mobilize resources - including region’s savings and inbound capital flows – and maximize returns

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Southeast Asia Disaster Profile

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ADB Application of Disaster Funds

APDRF Fund Utilization by Region

1987–2011

DRM Funds by Country

1987–2011

DRM Funds by Type1987–2011

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ADB’s DRF Activities in South East Asia

• Southeast Asian countries extraordinarily exposed to human and economic shocks from natural disasters

• Since 1987, ADB has provided over $2.3b for 145 hazard and DRM activities – 62% for DRR actions

• Region is largest recipient of APDRF funds

• Disaster Response Facility under the Asian Development Fund to be established

• support the poorest countries respond to natural calamities on a pilot basis

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Addressing the Region’s DRR Priorities

Institutionalizing DRM

Community-

Based DRM

Achieving

Gender

Equality

Private Sector

Participatio

n

Disaster Risk Finance

Water-Related

Disasters

DRR-CCA Linkages

Regional DRR Cooperation

Urban Disaster

Risk

Disaster Recovery

Capacity

FinancePolicy

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ADB DRF Initiatives in Southeast Asia

• Regional Level Initiatives* IDRM Trust Fund* ASEAN-UNISDR Technical Cooperation* Regional Economic Integration* ASEAN-ADB Memorandum of Understanding

• Country Initiatives* Philippines* Indonesia* Viet Nam

• Other Initiatives* ADB Disaster Stand-by Credit* Microinsurance

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Regional Initiatives

• IDRM Trust Fund* Pending support from CIDA* IDRM solutions for ASEAN region

• ASEAN-UNISDR Technical Cooperation* Regional mapping and stocktaking via web-based portal project

• Regional Economic Integration* Office of Regional Economic Integration considering:

– DRM data enhancement, strengthening insurance regulatory regimes, microinsurance, development of cat bonds and contingent credit products

• ASEAN-ADB MOU* A channel for DRF cooperation

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Country Initiatives• Philippines and Indonesia

* JFPR TAs for Urban-based DRF programs ($2m) (2011-14)

– DRF pilots in two cities in each country

– Risk profiling > city selection > DRF options > implementation

* DRF Framework for the Philippines (2011-12)

– Collaborate with World Bank to spearhead DRF Technical Working Group

• Viet Nam (2011-14)* JFPR TA for DRF-CCA program

development ($1m)– DRF pilots in two cities– Risk profiling > city selection > DRF

options > implementation– Special focus on DRF/CCA

application

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Phases Key activities

Phase 1 Risk profiling and city selection

Phase 2 Study of potential DRF options

Phase 3 Evaluation/selection of DRF options

Phase 4 Implementation of DRF scheme

* Philippine Earthquake Pool (2011-12)

– ADB acts as catalyst to support private sector pool development

Other Initiatives

• ADB Contingent Credit Program* Emergency stand-by credit is a basic DRF tool* Opportunity costs need to be avoided* Two-tier facility allows new borrowing or reallocation of

undisbursed loan balances

• Microinsurance* ADB active in the Philippines supporting (GIZ, MIPSS)

Microinsurance Innovation Project for Social Security– Developing policy framework at national level– Developing new regulatory framework– Developing financial literacy for microinsurance

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Outline

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Disaster Risk Management in Developing Member Countries of Asia

Role of Multilateral Agencies in Disaster Risk Financing

An Overview of ADB's Disaster Risk Financing Activities

Key Messages

Q & A

Key Messages

• Strong and continuous political commitment is essential

• Foundation for a unified country plan integrating DRR, DRF, and CCA is central– Local ownership – Value proposition for all the parties (client/donor/industry/ NGOs)

• A “bottoms- up” high quality risk analysis is essential for decision making and risk capital financing

• Risk assessment technology and financial market development create new options for government risk management

• Disaster management (ex-ante+ex-post) as crucial element of sustainable development– Risk reduction initiatives should be integrated into disaster

response and recovery measures 40

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Arup ChatterjeeSenior Financial Sector SpecialistOffice of Regional Economic IntegrationAsian Development BankManila, PhilippinesEmail: achatterjee@adb.org