ASEANDISASTERRISKFINANCING &INSURANCEFORUM

ASEANDISASTERRISKFINANCING&INSURANCEFORUM
Session1

SovereignDisasterRiskFinancing
OlivierMahul ProgramCoordinator,DisasterRiskFinancing&Insurance,TheWorldBank November8 10,2011 November 8 10, 2011 Jakarta,Indonesia

ASEANDISASTERRISKFINANCING &INSURANCEFORUM

SovereignDisasterRiskFinancing
Overview: Financialstrategiestoincreasethe financialresponsecapacityofgovernmentsin p p y g theaftermathofnaturaldisasters,while protectingtheirlongtermfiscalbalances Primarybeneficiaries:National&local(e.g. provincial,municipal)governments

Sovereign Disaster i Risk Financing

ASEANDISASTERRISKFINANCING &INSURANCEFORUM

Sovereigndisasterriskfinancing&insurancestrategy
Fiscalriskassessment
Assessexplicit,implicitcontingentliabilitycaused bynaturaldisasters:emergencyandearly recoveryresponse,publicbuildingsand infrastructure,lowincomehousing,lossinfiscal i f l i h i l i fi l revenues,etc.

Fiscalriskmanagement
Managementofbudgetvolatility Managementofassetsatrisk

ASEANDISASTERRISKFINANCING &INSURANCEFORUM

Matchingpostdisasterfundingneeds

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Creatingsustainableandcosteffectivedisasterrisk financingstrategy
FinancingInstruments Expostfinancing Ex post financing Budgetcontingencies
Donorassistance Budgetreallocation g Post disasterloans Taxincrease

FinancingMix
Acomprehensiveand A comprehensive and sustainabledisasterrisk financingstrategy combinesbothexpost andexantemeasures d t
exante

Considerations
Fundingrequirementsaftera10,50,or Funding requirements after a 10 50 or 100yearevent Efficiencyofthebudgetprocessin postdisasterbudgetreallocationand emergencyexecution ti Currentmacroeconomicconditions (e.g.,statebudget,debtlevels) Potentialconflictswithothernational prioritiesintermsoffundallocation Costsandavailabilityofthevarious financialtools

Exantefinancing Ex ante financing Reservefund

Contingentfinancing Risk transfer (e.g., Risktransfer(e.g., insurance,catbonds)
expost

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Benefitsofexantefinancing
Complementsdisasterriskreduction
Financialprotectionagainstresidual risks

Increases financial resilience Increasesfinancialresilience

Securesimmediateliquidity Managespostdisastervolatilityofthebudget

Improves capacity to deal with natural disasters Improvescapacitytodealwithnaturaldisasters

Createsincentivesforriskassessment,preparedness,planning

Enhancesdisasterriskreduction:
Encouragespredisasterpreparednessandmitigation d d d

Lowerspostdisastercosts:
Minimizebudgetdisruption,securepostdisasterresponse capacity

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Costsandbenefitsoffinancialinstruments
Instrument
Donorsupport(relief) pp ( ) Donorsupport(recovery&reconstruction) Budgetcontingencies Reserves Budgetreallocations Contingentdebt(CatDDO) Domesticcredit(bondissue) Externalcredit(emergencyloans,bond External credit (emergency loans, bond issue) Parametricinsurance ART(Catbonds,weatherderivatives)

IndicativeCost (multiplier)
01 02 12 12 12 12 12 12 12 2&up 2&up

Timetodisburse (months)
16 49 09 01 01 01 39 36 36 12 12

Fundsavailable
Uncertain Uncertain Small Small Small Medium Medium Large L Large Large

ASEANDISASTERRISKFINANCING &INSURANCEFORUM

Threetieredrisklayeringapproach

Nosingleproductcanmitigatedisasterrisk; Layeredbottomupapproachbasedonprobability&severityof eventisrecommended; Determineoptimalmixofinstrumentsbasedondesiredcoverage, availablebudget,andcostefficiency.

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Examplesofsovereigndisasterriskfinancing strategies
Low Major Insurance Linked Securities Catastrophe Bond (CATBond) Recentlylaunchedamulticountry,multiperil catastrophebondplatformtopoolandtransfer riskstothecapitalmarkets.Mexicohasissueda USD290millionbondtoprotectagainst earthquakeandhurricanerisk. q

RiskTransf fer

ProbabilityofEvent

SeverityofImpa act

Weather Derivatives

Malawi Drought Hedge Caribbean Catastrophe RiskInsurance Facility Facility (CCRIF) CatastropheRisk Deferred DrawdownOption d O i (CATDDO)

Insuranceagainstweatherrelatedlosses,basedon anindex WBGprovidedMalawiitsfirsteverweatherrisk managementcontracttoprotectagainsttheriskof severedrought Parametricinsuranceagainstnaturaldisasters WBGAssisted16CaribbeanCountriesin establishingCCRIFagainsthurricanesand earthquakes

Insurance Pools

Ris sk Reten ntion

Contingent Loans High Minor

Providesimmediateliquidityfollowinganatural , g disaster,intheformofacontingentloanwith associatedriskframeworkreforms

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Colombia Implementinganintegrated C l bi I l i i d disasterriskfinancingstrategy

COMPES3318of2004
ARTICULO 220. REDUCCIN DE LA VULNERABILIDAD FISCAL DEL ESTADO FRENTE A DESASTRES. El Ministerio de Hacienda y Crdito Pblico disear una estrategia para el aseguramiento ante riesgos de desastres de origen natural y/o antrpico no intencional. Dicha estrategia estar orientada a la reduccin de la vulnerabilidad fiscal del Estado. Pargrafo. El Ministerio de Hacienda y Crdito Pblico podr, con cargo a los recursos del Presupuesto General de la Nacin gestionar adquirir y/o celebrar con entidades gestionar, nacionales y/o extranjeras los instrumentos y/o contratos que permitan el aseguramiento y/o cubrimiento de dichos eventos.

KeyactivitiesundertakenbyGoC withWBtechnicalassistance y y
1. 2. 3. 4. Assessmentofcontingentliabilityofthestateduetonaturaldisasters (publicassets,lowincomehousing) Financialprotectionofthestatebudgetagainstnaturaldisasters(CAT DDO,parametricrisktransferinstruments) DDO parametric risk transfer instruments) Coverageofpublicassets(groupinsurance,insurancepool) Coverageofprivateassets

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CostaRica Catastropheriskinsuranceprogram forpublicassets

Establishmentofacatastropheinsurance programforpublicassetsto: Protectpublicassetsagainstcatastrophic events Enablethegovernmenttoaccesscoverageat alowercostthanifindividualmanagersof publicassetsobtaincoveragethemselves EstablishaPPPbetweenthegovernmentand g thedomesticinsuranceindustrytopromote domesticpropertyinsurancemarketgrowth
Catastrophe Risk Facility

International Reinsurance R i Government Guarantee Reserves

Public insurer INS

Private insurers

Public assets (e.g., buildings)

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Postdisasterbudgetexecutionisasimportant asexantebudgetplanning Legalaspects

Legal framework for emergency Legalframeworkforemergency Appropriationandexecution Controls and safeguards Controlsandsafeguards

Operationalaspects
Coordination for intervention Coordinationforintervention Budgettransferandexecution Fiduciary controls Fiduciarycontrols Procurement