Pacific Disaster Risk Financing and Insurance Program Increasing the financial resilience of small island states against natural disasters

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2 Pacific Disaster Risk Financing and Insurance Program Increasing the financial resilience of small island states against natural disasters Olivier Mahul Program Manager, Disaster Risk Financing and Insurance Program World Bank 5 th CR+I Seminar Sendai, Japan October 28 29, 2013

3 World Bank Disaster Risk Management Framework 2

4 World Bank Disaster Risk Financing & Insurance Program Increasing the financial and fiscal resilience of developing countries against natural disasters Financial risk analytics and product development Advisory services and operations Knowledge management and advocacy

5 PCRAFI Background Pacific disaster risk assessment Probabilistic assessment of major perils Pacific Risk Information System Risk based framework to direct resources of countries and development partners Pacific disaster risk financing solutions Fiscal risk exposure Public financial management of disasters Pacific catastrophe risk insurance pilot 4

6 Financial policy options for disaster risk financing and insurance Assess and quantify financial risks related to natural disasters Define and measure contingent liabilities related to natural disasters Pre Disaster Assess Risks Reduce public contingent liability Integrate risk information into public investments Promote insurance of public assets Promote domestic private catastrophe risk insurance markets Reduce Financial Risk Secure Funding Integrate disaster risk into fiscal risk management and public financial management Improve post disaster budget response capacity Leverage market based risk transfer solutions Enhance post disaster financial assistance Execute and Monitor Funding Post Disaster Establish effective administrative systems for post disaster approval, transfer and monitoring of funds

7 Assess Risks Reduce Financial Risk Execute and Monitor Funding Secure Funding Assess and quantify disaster risks to understand potential budget impacts for informed financial decision making Assess and quantify disaster risks Conduct comprehensive risk assessment to identify risks and understand potential damages and loss; Quantify risks to understand potential financial costs Assess and define contingent liabilities associated with natural disasters Establish potential expenditure on emergency response Set policies on post disaster financial assistance to sub national entities, individuals and businesses; Formalize the process of identifying and declaring disasters Quantify contingent liabilities arising from disasters

8 Hazard Exposure/Vulnerability Pacific Risk Information System Risk Disaster Risk Financing Rapid Damage Estimation Urban/Sector Planning

9 Pacific islands economies amongst most affected by disasters in the world 10% Average Annual Loss from Disasters/GDP 9% 8% 7% 6% 5% 4% 3% 2% based on reported disaster damages Natural Hazards UnNatural Disasters (World Bank 2010) based on modeled annual losses from cyclones, earthquakes and tsunamis (PCRAFI 2011) 1% 0%

10 Secure Funding Reduce Financial Risk Assess Risks Execute and Monitor Funding Secure Funding Secure funding to ensure effective financing sources are available for unavoidable disaster related outlays; Integrate disaster risk in fiscal risk management and public financial management Short term management of budget volatility Long term management of public debt Improve post disaster budget response capacity Ex ante mechanisms to retain or transfer risk Ex post measures to reallocate or raise funds Leverage market based risk transfer solutions Leverage private risk capital from reinsurance markets and/or financial markets Enhance post disaster public financial assistance Post disaster public grants and loans; tax policies

11 Integrated sovereign disaster risk financing strategy Financing of immediate needs post disaster

12 Season 1 (Jan Oct 2013) Pacific Catastrophe Risk Insurance Pilot Project development objective To ascertain the viability of market based sovereign catastrophe risk transfer instruments to reduce the financial vulnerability to natural disasters of Pacific island countries. Questions to answer 1. Pacific cat risk models accepted for financial transactions? 2. Reinsurers willing to underwrite Pacific cat risks through parametric indices? 3. Post loss event calculation process timely, transparent and effective? 4. Pacific island countries willing to contribute toward the payment of the premium?

13 Parametric catastrophe risk insurance policy Parametric financial product; payout based on technical input parameters of the peril covered Provides additional budget flexibility in case of a major tropical cyclone and/or earthquake. Covers disruption to the provision of central government services from major natural disasters The policy is NOT designed to cover the government against all disaster losses. Provides immediate liquidity post disaster Enhanced if it is part of an integrated national disaster risk financing strategy

14 Season 1 Operational structure Country specific catastrophe risk coverage policies RMI Samoa Solomon Islands Tonga Vanuatu Cat swaps Advisory Services (risk modeling, product design, post disaster loss assessment) WB/IDA Cat swaps Reinsurance companies Sompo Japan (Lead reinsurer) Mitsui Sumitomo Tokio Marine Swiss Re Technical assistance Capacity building Premium subsidies Pacific Disaster Risk Financing and Insurance Multi Donor Trust Fund Technical assistance, capacity building and premium subsidies Technical assistance from SPC/SOPAC Relations with WB are driven by Grant Agreements Expenditures financed follow the procedures established in the operations manual Reports to donor partners on use of funds Donor partners (Japan MoF)

15 Season 1 Individual catastrophe risk coverage Aggregate coverage limit US$m % gvt budget expenditure (2010) % of contingency budget Vanuatu 7 4% 127% Tonga 9 9% 160% RMI 11 10% 203% Solomon Islands 7 3% 132% Samoa 11 5% 210% Note: Coverage limit includes tropical cyclone coverage limit and earthquake coverage limit. Contingency budget estimated at 3 percent of government budget. 60% 50% 40% 30% 20% 10% Hypothetical payout (as % of contingency budget) of historical disaster events 0% Vanuatu 2002 EQ Solomon Island 2007 EQ Samoa 2009 EQ Tonga 2001 TC

16 Season 1 Aggregate portfolio of country catastrophe risk coverage Portfolio risk profile much less risky than individual country risk profiles 35 Risk Pooling Benefits 30 Competitive and transparent bidding process with reinsurers US$ Millions % reduction for 250 year loss 10 Attractive pricing 5 Individual Country 250 Year Probable Maximum Loss Aggregate 250 Year Probable Maximum Loss of Pacific Portfolio

17 Execute and monitor funding Assess Risks Reduce Financial Risk Secure Funding Execute and monitor resources to ensure effective execution of public funds directed to disaster response, recovery and reconstruction Execute and Monitor Funding Effective execution of financial resources and monitoring the spending of funds Loss reporting Post disaster fiduciary controls Procurement arrangements Approval and transfer of funds Targeting of funds

18 Reduce financial risk Assess Risks Reduce Financial Risk Deploy and Monitor Funding Secure Funding Reduce disaster losses and risks to the government budget and the wider economy. Reduce public contingent liability Insure key public assets against natural disasters Integrate risk information into public investments Promote domestic insurance markets Property catastrophe risk insurance Agricultural insurance

19 PCRAFI Advisory services and capacity building Three tiered risk layering approach Gap Analysis Trust Fund Operations Manual Current disaster risk financing instruments Steering Committee Private Sector Capacity Building Regional captive insurer Disaster Risk Financing Course

20 Season 2 (Nov 2013 Oct 2014) Pacific catastrophe risk insurance pilot Cook Islands to join the other five PICs in the pilot program Aggregate portfolio to increase by almost 50 percent

21 Lessons learned so far Lesson 1. Pacific catastrophe risk models accepted by international reinsurers Lesson 2. International reinsurance markets willing to underwrite (parametric) Pacific catastrophe risks at competitive price Lesson 3. Regional pooling mechanism generate major premium savings for the participating PICs Lesson 4. PICs are committed toward the sustainability of Pacific catastrophe risk insurance program but request donor support Lesson 5. Further institutional capacity building on disaster risk financing and insurance is essential

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