Transcript Catastrophe Risk Financing

Pacific Catastrophe Risk Financing Initiative
Options for Regional Risk Financing
AUSAID Workshop
Canberra, Australia
March 4, 2009
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Pacific Catastrophe Risk Financing Initiative
A World Bank Initiative at the request
of the Pacific Island Countries
In collaboration with the Global Facility for Disaster Reduction and
Recovery (GFDRR), Asian Development Bank (ADB), Pacific Islands
Applied Geoscience Commission (SOPAC), and the Pacific Island
Forum Secretariat
Technical risk modeling work conducted by AIR Worldwide
South Pacific Island Countries are highly exposed to
natural disasters
Actual reported losses in worst year, 1960-2007
Samoa
100% of GDP and
42% of population affected
Fiji
12% of GDP and
11% of population affected
Tonga
30% of GDP and
42% of population affected
Vanuatu
86% of GDP and
16% of population affected
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Disaster Risk Management Framework
Emergency
Preparedness
Institutional Capacity
Building
•Emergency Response Planning
•Exercises
•Public Awareness
•Communication and Management
Information Systems
•Technical Emergency Response
Capacity
• Decentralized Emergency
Management System
•Community Participation
•Legislative Framework
•Training, Education and Knowledge
Sharing
Risk
Assessment
Catastrophe Risk
Financing
Risk Mitigation
Investments
•Reserve Funds
•Contingent Debt Facility
•Insurance
•Catastrophe Bonds
•Catastrophe Insurance Pools
•Warning and Monitoring Systems
•Hazard Mapping and Land use
mapping
•Code Refinement and
Enforcement
•Hazard Specific Risk Mitigation
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Country-specific catastrophe risk assessment models have been
developed for the first time for the South Pacific Island Countries
Selected Pacific Island States
– Fiji
– Tonga
– Samoa
– Papua New Guinea
– Solomon Islands
– Vanuatu
– Cook Islands
– Tuvalu
Catastrophe risk model
HAZARD
Event
Generation
Intensity
Calculation
VULNERABILITY
Damage
Estimation
LOSSES
Loss
Calculations
Exposure
Information
Policy
Conditions
EXPOSURE
Lifeline
Information
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Specific perils
– Earthquake (including groundshaking hazard and earthquakegenerated tsunami hazard)
– Tropical cyclone (including wind,
storm surge and precipitation).
Country catastrophe risk profile brochures
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Pacific Island Countries have a large contingent liability due to
natural disasters
Direct loss estimates, PML (250 years), by country
Tuvalu
Cook Islands
Vanuatu
Vanuatu
Tonga
Solomon
PNG
Samoa
Fiji
0
100
200
300
400
500
600
700
800
US$ million
TC
EQ
Combi ned peri l s
Emergency loss estimates, PML (250 years), by country
Tuva l u
Cook Is l a nds
Va nua tu
Tonga
Sol omon
PNG
Sa moa
Fi ji
0%
TC
EQ
5%
Combi ned peri l s
10%
15%
20%
25%
30%
35%
40%
45%
% of Tota l Government Expendi tures
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EQ: earthquake-generated ground shaking hazard and earthquake generated tsunami hazard; TC: tropical cyclone.
Post-disaster financing creates large contingent liability
for Donors
1000
US$ million
800
600
400
200
0
0
25
50
75
100
125
150
175
200
225
250
Return period (years)
EQ
TC
Combined EQ+TC
Catastrophe Risk Profile of the Portfolio of 8 Pacific Island Countries –
Estimated Direct Economic Losses by Return Period
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Countries have access to various financial instruments to
finance natural disasters
Relief phase
(1-3 months)
Recovery phase
(3 to 9 months)
Ex-post financing
Budget contingencies
Donor assistance (relief)
Budget reallocation
Domestic credit
External credit
Donor ass. (reconstruction)
Tax increase
Ex-ante financing
Reserve fund
Contingent debt
Parametric insurance
Traditional insurance
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Reconstruction phase
(over 9 months)
Sovereign catastrophe risk financing framework
High
severity
International
Donor Assistance
Insurance Linked
Securities
Risk
Transfer
Insurance/Reinsurance
Contingent credit
Low
severity
Reserves
Low frequency
High frequency
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Risk
Retention
Sovereign Catastrophe Risk Financing
The Case of Vanuatu
Hypothetical National Financial Strategy for Earthquakes and Tropical Cyclones
RP (years) Exhaust. Point
US$ million
526 years
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Coverage
US$ million
Est. annual cost
US$ million
Catastrophe Risk Insurance
7.5
9
0.5
years
5
Contingent credit
3
2.5
0.8
2.5
1.8
years
3
National reserves
1 year
For information only
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Pacific
Catastrophe
Risk Fund
Providing Insurance Coverage Against Short Term
Government Budget Shortfalls After a Disaster
• Problem
– After a catastrophe event governments need money quickly to
provide emergency relief and early rehabilitation and keep services
running
– Aid may arrive slowly
– Aid is usually earmarked to specific projects
• Proposed Solutions
–
–
–
–
–
An instrument to provide immediate post-disaster budget support
Coverage against major perils: Earthquake and Tropical Cyclone
Parametric insurance allowing for rapid payment
Pacific wide to allow benefits of diversification
Protected by international reinsurance and capital markets to give
stability
– Backed by donor contribution to guarantee sustainability
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Country-specific risk assessment allows for individual riskbased premiums
Return period
1-in-150 years
Parametric
Insurance
Coverage
1-in-10 years)
Prototype insurance
coverage
Estimated Pure Premium Rates
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Cook
Fiji
For Information only
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PNG
Samoa
Solomon
Tropical Cyclone
Tonga
Earthquake
Tuvalu
Vanuatu
By acting collectively, Pacific countries can take advantage of the
regional risk diversification benefits
US$ million
By pooling their catastrophe risks, South Pacific
countries can reduce their capital requirements by 50%
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
The regional risk diversification benefits can reduce the
estimated technical premium rates by 45% on average
12%
10%
Tropical cyclone
Earthquake
Combined perils
Aggregate individual reserve requirements
Regional reserve requirements
8%
6%
4%
2%
0%
Fiji
Samoa
PNG
Solomon
Tonga
Vanuatu
Cook
Tuvalu
Estimated pure pure premium rate
Estimated technical premium rate with regional diversification
Estimated technical premium rate without regional diversification
Note 1. Technical premium rates estimated for a hypothetical insurance portfolio,
which offers parametric coverage for combined perils (earthquakes and topical
cyclones) with return periods between 10 yrs and 150 yrs.
Note 2. Estimated technical premium rates may differ from commercial premium
rates due to market conditions.
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Options for Catastrophe Risk Financing
• Donor Catastrophe Risk Fund
– Financed and managed by donors
– Limits ownership of the Pacific Island Countries
– Perpetuates post-disaster financial assistance
• Regional catastrophe insurance portfolio
– Placed on the private cat reinsurance markets
– Takes advantage of regional risk diversification
– Over-relies on catastrophe reinsurance
• Pacific Catastrophe Risk Fund
– Public-private partnership for the financing of natural disasters
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Pacific Catastrophe Risk Fund
• Regional joint reserve
mechanism
• Participating countries build
up collective reserves
• Risk fund owned and
managed by the
participating countries
• Countries can retain some
risks and pass excess risks
to the reinsurance market
when it is most efficient
• Lower and more stable
premium rates over time
• Initial reserves are needed
to start up
Reinsurance/ART
(Purchased on international
financial markets)
Country 1
Country 2
Country 3
Premium
Insurance
Premium
Initial donor
contribution
Growth
Country 4
Country 5
Payout
Insurance
Payout
Initial donor
contribution
Reserves
Initial donor
contribution
Country 6
Country 7
Estimated technical premium rate for different levels of initial reserves
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
Fiji
Samoa
PNG
US$10 million reserve
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Solomon
Tonga
US$25 million reserve
Hypothetical scenario based on an
insurance portfolio of 8 countries
Vanuatu
Cook
US$40 million reserve
Tuvalu
Hypothetical Catastrophe Insurance Portfolio Risk Profile
Retention
LOL=46%
Catastrophe Insurance Portfolio profile – Probability Density Function
60%
50%
40%
30%
20%
10%
0%
-
5
10
15
20
25
30
US$ million
Reinsurance
LOL=12%
Reinsurance
LOL=2%
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35
40
Caribbean Catastrophe Risk Insurance Facility
16 Caribbean countries covered against hurricane and earthquake risks
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Benefits of Catastrophe Risk Financing for Donors
• Provides tools to assess donors’ contingent liability
related to natural disasters
• Communicates the price of risk to the countries
• Sensitizes countries about the economic and fiscal
impact of natural disasters as part of their DRM dialogue
with donors
• Provides financial incentives for countries to engage in
DRM (e.g., compliance with building codes)
• Promote alternative financing solutions through marketbased instruments
• Enhance the recovery and reconstruction efforts
• Complements other DRM activities
Potential Roles for Donors in Catastrophe Risk Financing
• Convening power
– Knowledge of countries
– Long term dialogue
• Provider of public goods
– Catastrophe risk models
– National and regional database
• Provider of technical assistance
– Design of cat risk financing strategy
• Financier
– Funding for project preparation/implementation
– Start-up reserves
– Premium subsidies
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Next Steps
• Stakeholder consultation for selected 8 countries
– Country visits to discuss catastrophe risk financing strategies
– Regional meeting
• TA for regional catastrophe risk financing options
– Assist countries in quantifying post-disaster short term budget
gaps
– Develop customized country catastrophe risk financing
strategies
– Facilitate institutional capacity building
– Assist countries in implementing selected financial options
• Completion and refinement of Pacific catastrophe risk
assessment
– Refine existing models
– Expand models to other Pacific Islands
– Creation of a regional GIS exposure database (financed and led
by ADB)
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Contacts
Nigel Roberts
Country Director, Pacific Islands, PNG and Timor Leste
Olivier Mahul
Email: [email protected]
Iain Shuker
Email: [email protected]
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