Transcript No Slide Title

Financing the Risks of Natural Disasters:
A New Perspective on Country Risk Management
World Bank Group
Introduction to the World Bank Insurance Practice:
Key Lessons Learned and the Road Ahead
Eugene N. Gurenko
Senior Insurance Specialist
World Bank Insurance Practice
email: [email protected]
Washington DC
June 2-3, 2003
From Ex-Post Financing to
Ex-Ante Risk Management
Ex-Post Financing

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

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Emergency reconstruction
loans (over $38 billion over
the last 20 years);
Required no clear risk
management plan on the
part of countries;
Always late and never
enough (liquidity aspects)!
Leads to no visible
improvements in countries’
vulnerabilities;
Perpetuates wrong
incentives on the part of
vulnerable countries
World Bank Group
Ex-Ante Risk Financing and Risk
Transfer
 Contingent capital facilities to
national risk pools and
governments and financing of
reinsurance premium (<$200
million over the last 3 years)
 Reduces government fiscal
exposures;
 Enables to access liquidity
immediately in aftermath of natural
disasters;
 Requires major improvement in
country risk management and
reduces countries’ vulnerabilities in
the long-run and contributes to
long-term economic growth
2
Insured vs. Total Economic Loss in
Major Natural Catastrophes
World Bank Group
5,000
Total Economic
100%
Loss (US$MM)
4,571
2,000
21,591
10,024
5,000
3,700
1,660
136
2,000
36,406
4,535
80%
100%
60%
47%
40%
40%
20%
0.3%
2%
4%
5%
5%
6%
6%
7%
8%
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Source: Swiss Re CatNet database, AXCO database
Fiscal and Economic Effects of Disasters
Uninsured Economic Loss as % of GDP and Government Revenues
World Bank Group
180%
152%
158%
100%
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60%
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4
Key Indicators of Countries’ Fiscal
and Economic Vulnerability
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World Bank Group
Catastrophe Risk Exposures
Insurance penetration
Size of the economy
Geographical diversification/concentration
of economy
Size of government revenue (tax base)
5
Residential Catastrophe Coverage in
Turkey: Before and After TCIP
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
World Bank Group
Catastrophe
Coverage
2000
2003
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Why National Catastrophe Insurance
Pools is a Potential Way Forward?
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World Bank Group
Low catastrophe insurance penetration.
Local reinsurance and insurance markets
have limited risk bearing capacity making
the government a reinsurer of last resort.
Satisfy the need for immediate post event
liquidity.
Develop risk awareness and encourage
better mitigation.
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Macro Lessons
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World Bank Group
Public private partnerships in the area of
catastrophe risk management are the only
effective way forward.
The World Bank can add value by facilitating the
development of catastrophe risk markets around
the globe.
Creation of specialized catastrophe insurance
programs considerably helps to boost insurance
penetration and reduce government exposure to
catastrophe risk.
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Micro Lessons
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World Bank Group
Importance of good governance and management.
Government commitment to provide a solid
foundation for catastrophe risk management and set
the incentives right for mitigation are key.
Involvement of the private insurance industry and
support of the program by the agent force is key
Support of global reinsurers is essential.
Building and protecting the pool’s surplus through
prudent underwriting, pricing, asset management
and reinsurance.
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Micro Lessons
(continue)
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World Bank Group
Leaving no safety valves for politicians may be
detrimental to the future of a program.
A retail approach to the distribution of the
policies may be difficult to implement and
perhaps some sort of risk socialization through a
special mandatory property tax or surcharge may
be justified.
Housing exposure accounts only for a fraction of
country’s economic exposure, with public sector
infrastructure being mostly at risk.
Risk transfer has to be supplemented with risk
financing.
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Our Current Vision of Catastrophe Risk
Management at the Country Level
World Bank Group
Risk Financing
Risk Transfer
Risk Reduction
Institutional Incentives
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Our Operational Approach to
Catastrophe Risk Management
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World Bank Group
(i) Conduct a thorough assessment of country
risk exposures;
(ii) Recommend feasible approaches to finance
them;
(iii) Identify the role to be played by the World
Bank vs. that of the private insurance or
reinsurance markets;
(iv) Design lending programs and advisory
services aimed at building domestic catastrophe
risk management capabilities both in government
and at the level of domestic insurance industries.
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Our Products
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World Bank Group
(i) contingent capital facilities in support of
national catastrophe reinsurance programs;
(ii) loans to finance reinsurance premium;
(iii) ex-ante (pre-disaster) liquidity facilities in
support of government reconstruction efforts;
(iv) technical assistance loans to finance risk
management and financial design and feasibility
studies;
(v) sectoral risk management studies (at no cost
to the borrower), if included in the CAS;
(vi) catastrophe risk management services to
governments on a stand-alone basis separate
from lending.
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Countries with Disaster Risk Management
World Bank Financed Activities
World Bank Group
Country
Status
Turkey
Ongoing risk financing and TA
Romania
Insurance component under
preparation
Iran
Ongoing financing of TA for risk
management
Columbia
Insurance lending program under
preparation
India
Risk management study is complete
Philippines
Risk management study under
preparation
Cambodia
Risk management study
Mexico
TA and lending under preparation
Caribbean countries
Risk management study
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What Are We Trying to Achieve?
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World Bank Group
(i) increase insurance penetration for
natural hazards in the client countries;
(ii) reduce government catastrophe risk
exposures;
(iii) make catastrophe insurance
management an integral part of overall
government risk management practices.
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Means to Achieve Our Goals
World Bank Group
 (i) to have thorough risk assessments done in each
disaster prone client country and advise the
government on available options for risk financing
and risk transfer;
 (ii) ensure that CAS explicitly account for catastrophe
risk management;
 (iii) support the development of country detailed risk
models and hazard maps that can be made available
to domestic insurers and reinsurers for risk pricing
purposes;
 (iv) design of new lending products with built-in
catastrophe insurance options (loss triggered debt
forgiveness or loan restructuring, for instance);
 (v) build effective partnerships with international
reinsurance community in addressing the risk of
natural disasters in developing countries.
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Key Constraints to Expand Disaster
Risk Management Practice
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World Bank Group
We are restricted in our ability to assist
exposed countries by the Bank lending
practices (as most of risk management
work piggybacks on disaster
reconstruction loans);
By the rarity of natural disasters (no EQ –
no risk management work!). Although
there has been lots of improvement on
that count!
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Conclusions

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World Bank Group
(i) Development of ex-ante catastrophe risk
management capabilities at the country level is
gradually becoming an integral part of the World
Bank country economic work but there is still a
lot of work ahead;
(ii) Disaster prone countries are becoming more
active in utilizing the expertise of the Bank and
global reinsurance markets in building national
effective risk management programs (although
there is still a long way to go!;
(iii) Global reinsurers should be more pro-active
in assisting the Bank efforts to develop
catastrophe insurance market in developing
countries.
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