Transcript Financing natural disaster risk in developing countries

Financing natural disaster risk in
developing countries:
the case of Honduras
Munich Re-Germanwatch Briefing 2004
Insuring the Uninsurable:
Climate Change and Insurance
Reinhard Mechler
IIASA
May 10, 2004
Overview
1.
2.
3.
4.
General remarks: risk financing for developing countries
Honduras: effects after Hurricane Mitch
Implications for climate change work
Conclusions
Loss financing in developing countries
“Insurer of last resort”
Public sector
Private Sector
Infrastructure
Housing, machinery etc.
“Reinsurer of
last resort”
MFIs
Lending Portfolio
Reserve
fund
Market for risk
transfer
Private sector: Low uptake of commercial
insurance in lower-income countries
 Often not available
 Need insurance culture and institutions
 Expensive
 Government has to provide
Ratio of insured losses to total losses according
to country income groups for period 1985-1999
financing post-disaster
30%
29%
25%
20%
15%
10%
9%
5%
2%
1%
0%
>9,361 3,031-9,360 761-3,030
GDP [USD]
Source: Munich Re 2000
<760
Role of infrastructure
 High poverty- and growth relevance (clean water,
roads, schools etc.)
 Bottlenecks in developing countries
 Adverse selection and moral hazard can be dealt with
Issues in disaster management and loss financing
• Disaster management (used to be) retroactive (ex-post)
– Losses financed to large extent by international donors and MFIs
– Financing gaps and time lags for developing countries
– Little incentives for investments into ex –ante risk management
International aid and development funding agencies, besides sharing
consternation at delays, disruptions, and increased costs, have the strong view that
wisely planned hazard and vulnerability reduction efforts and funding before a
catastrophe pay excellent dividends in reducing economic impacts. Mitigation
expenditures are a very small fraction of the funds spent on reconstruction in the
aftermath of catastrophes (Pollner 2000: 44)
• Objectives:
– More emphasis on loss reduction (mitigation)
– Reduction of vulnerability
– Risk financing solutions
• Disaster management (ex-ante+ex-post) as crucial element of sustainable
development
Risk financing (Risk transfer)
• Benefits
–
–
–
–
Quick compensation:
Smaller financing gap
Covariant risk transferred inter-regionally or internationally
Incentives for loss reduction
• Costs
– Premia/costs considerable, usually larger than expected annual loss,
creating opportunity costs
– Costs annually
– Costs today, benefits in future
Current activities in Honduras
•
Workshop held in March for finance ministery, next
meeting in May, strategy paper
•
Steps underway
1. Risk assessment, financial vulnerability
2. Analysis of current insurance arrangements in Honduras
3. Analysis of protection of uncovered liabilities:
E(X)=10 million US$/year
4. Pool for support of poor and affected?
Contingent credit arrangements?
Honduras after Hurricane Mitch 1998
GDP in Honduras
GDP
GDP projected, BAU
5,800
Million constant 1997 USD
5,300
4,800
4,300
3,800
3,300
2002
2001
2000
1999
1998
1997
1996
1994
1993
1992
1991
2,800
1990
Source: World Bank 2002, 2003
Time lag:
Transportation bottlenecks after Mitch
[travel time to markets]
Before
After
Source: World Bank 1999
Financing drives recovery
Aid
Aid and borrowing
(% GNP)
Net financial flows, IDA
18
15
12
9
6
3
1996
1997
1998
1999
2000
Low domestic savings, reliance on aid and borrowing
Sources: World Bank 2002
Storm and flood hazard
Honduras Storm and Flood Exposure
1
0.99
0.98
0.97
0.96
0.95
0.94
0.93
0.92
0.91
0.9
0
10
20
% Capital Stock Destroyed
30
40
Obligations of government
1. Reconstruction of public assets: roads, bridges, schools,
hospitals: Exposed and uninsured public assets: 1.6 billion USD
(=12.3% of total capital stock) according to bottom-up WB analysis
2001
2. Help private households and businesses with rebuilding
3. Provide relief to the poor
Total assets/capital stock for 2004: 13.9 billion USD
Risk assessment
Storm/flood/landslide
Probability
10%
2%
1%
0.5%
0.2%
Expected loss
Earthquake
World Bank
Probability
10%
2%
1.0%
0.5%
0.33%
0.25%
0.2%
0.10%
Expected loss
Return period (years)
10
50
100
200
500
Return period (years)
10
50
100
200
300
400
500
1000
Combined expected loss
all types of hazards
World Bank
Assets: 1600 Mill USD
Loss (%) Infrastr. loss (Mill. USD)
2.4%
39
4.6%
76
11.6%
189
17%
278
28.5%
465
0.5%
8.6
IIASA/Swiss Re
Assets: 2600 Mill USD
Loss (%)
Infrastr. loss (Mill. USD)
0.8%
21
5%
130
12%
312
31%
806
0.4%
11.2
World Bank
Assets: 1600 Mill USD
Loss (%) Infrastr. loss (Mill. USD)
0.7%
11
1.6%
26
3.2%
53
3.8%
62
5.6%
92
0.04%
0.66
IIASA/Swiss Re
Assets: 2600 Mill USD
Loss (%)
Infrastr. loss (Mill. USD)
0.1%
3
0.8%
21
1.4%
36
4.0%
104
0.06%
1.6
0.58%
9.3
0.49%
12.7
Hurricane Mitch 1998: 2,000 million USD in direct losses of total assets (private and public),
18% of capital stock > 100 year event
Expected annual loss
• Annualized costs to be expected over longer-term horizon,
however: disasters are NOT annual, average events
• Basis for calculation of risk financing arrangements:
premium = expected losses + risk premium
(loading factor for rare events
+ transaction costs
+ profit margin (eg of insurers))
Assessing financial vulnerability in Honduras
Storm and flood risk
One proposed risk financing structure for
Honduras
Source: Pollner 2000
Trade-off stability growth
-could be solved by MFI interventionEl Salvador/No Insurance
3
2.8
2.6
Return
2.4
2.2
2
1.8
1.6
1.4
1.2
El Salvador/Insurance
1
1
2
3
4
5
6
7
8
9
10
11
7
8
9
10
11
3
Year
2.8
2.6
Return
2.4
2.2
2
1.8
1.6
1.4
1.2
1
1
2
3
4
5
6
Year
Implications for climate change community
• Climate change impacts no topic in Honduras, adaptation to
current risk (=no regret option)
• Country risk and financial vulnerability assessment done
– however uncertainties have to be understood, can be baseline
for CC scenarios
• MFI willing to support: stimulation of pro-active behavior and
mitigation (=adaptation/loss reduction)
• Not only (re-)insurance, but mix of instruments
• Pools, reserve funds
• Contingent credit
• Cat bonds
• Potential Climate fund could build on these efforts!
Thank you!