How To Manage Disaster Risk

Transcription

1 Public Private Partnerships in Disaster Risk Management Reto Schnarwiler 22 February2007 Risk management needs of the public sector Governments are exposed to a variety of risks explicitly by default as (re-)insurer of last resort Typically, losses are financed post event (emergency funding) Most governments are aware of their most prevalent exposures Some governments apply a systematic risk management process: Identification Assessment Mitigation Adaptation Slide 2 Example: The risk landscape of Switzerland Probability over the next 25 years highly probable 30% to 100% probable 3% to 30% less probable 0.3% to 3 % improbable 0.03% to 0.3% Integration ghetto Organised crime Crisis in health system Extremism/ terrorism Chemical accident Shortage of strategic goods Flood Water shortage Dependency on addictive drugs Earthquake Diseases/ epidemics Dam collapse InformationLoss of cultivated land warfare and species Greenhouse Drought/ effect heat wave Loss of national cohesion Ageing Storm Use of weapons of mass destruction Energy shortage Adapted from: Risk Profile Switzerland, 1999 Slide 3 highly improbable 0.003% to 0.03% Nuclear accident very minor minor average major disastrous devastating Impact on Switzerland

2 Slide 4 Idea: A Chief Risk Officer for governments Objective Optimal allocation of resources for systematic risk identification, assessment, mitigation and adaptation Identification Assessment Mitigation Adaptation Tasks Work jointly with private sector to identify emerging risks Establish frequency/severity risk landscape based on best scientific knowledge Communicate risk landscape to policy makers and general public Steer mitigation efforts towards biggest risks (either frequency or severity) Manage a pool for mega risks which cannot be carried by (re)insurance industry alone The role of governments in the insurance industry 1. To enable market mechanisms 2. Supplement the private insurance industry and help expand the limits of insurability However, government interventions can lead to unexpected effects and may trigger further interventions instead of addressing the root causes Therefore, benefits of government intervention must clearly outweigh the costs of such intervention for societies 3. States must honour agreed insurance conditions (e.g. flood exclusion in New Orleans) 4. Potentially compensate victims for non-insurable items Slide 5 Public-private partnerships The role of governments or semi-governmental institutions: as insurers or reinsurers (operator/carrier) as (re-)insurance buyers as providers of financial support for insurance schemes (subsidies) as rule setters Slide 6

3 Slide 7 Economic benefits of insurance Risk-Transfer function Information & allocation functions Strengthen capital markets Reduces frictional costs; Facilitates consumption; Facilitates new products, new processes and innovation Improves allocation; Encourages prevention More long-term investment; More efficient capital markets Higher growth, higher wealth, more stability What is needed? Risk sharing Size of loss Governments Capital markets Global reinsurance Insurers Events minor medium large catastrophic Policyholders Slide 8 What is needed? A certain degree of compulsion will help to build up a large pool of policyholders to share risk efficiently to reap benefit from economies of scale to mitigate adverse selection Engage the different stakeholders Solutions that are consistent with professional risk management, actuarial and legal standards! Slide 9

4 Slide 10 Example 1: Mexican parametric solution Solution features Insured peril: Earthquake Aggregate insurance limit: USD 450 million. USD 290 million: Parametric reinsurance coverage USD 160 million: Parametric cat bond Payments to be used for immediate emergency relief after earthqu ake Time horizon: May 2006 May 2009 Involved parties Insured: Fund for Natural Disasters (FONDEN) of Mexico Reinsurer: Swiss Reinsurance Company Cat bond issuer: CAT-Mex Ltd Example 2: The Turkish Catastrophe Insurance Pool (TCIP) Solution features Insured Peril: Earthquake Insured assets: Private residential dwellings (including groundw ork, carrier system, stairs, lifts, roof structures and chimneys). Exceptions for inter alia buildings within the settlement area of villages. Limit of policy coverage: TLY (USD approx.). This limit is likely to be increased. Additional cover can be bought from private insurers. Time horizon: Inception in 2000 Funding: Compulsory premiums paid by homeowners Involved parties Insurance supplier: TCIP, a legal public entity Operational manager: Garanti Sigorta Distributors: 30 local insurance companies and their agencies on behalf of TCIP Slide 11 Reinsurers: Swiss Reinsurance company and other overseas reinsurers Example 3: Weather insurance in India Developed with support from the World Bank and government subsidies Protecting more than farmers against adverse weather conditions (lack of monsoon rainfall) Various crops covered Alternative to the traditional crop insurance Demand from corporate end-users Huge potential for rural microinsurance Swiss Re closed first deal in 2004 with Basix (microfinance institution) and has closed more than 25 deals since Slide 12

5 Public Private Partnerships in Disaster Risk Management Reto Schnarwiler 22 February2007 Insurance tends to be underutilised in emerging markets Average insurance penetration, defined as premiums as a percenta ge of GDP, was only 3.6% in emerging markets in 2005, compared to a global average of 7.5%. In industrial countries insurance premium per capita is 40 times higher than in emerging countries. This low level of insurance stands in stark contrast to the vulnerability of many emerging market countries to natural disasters. Insurance premiums in% of GDP Insurance premiums per capita Industrial markets In USD(2005) Emerging markets Industrial markets Asia Emerging markets Middle East Asia Africa Life Latin America Eastern Europe Non-life Eastern Europe Africa Latin America Middle East 8% 0% 2% 4% 6% 10% Slide 14 Sources: Swiss Re Economic Research & Consulting; based on FAO data Life insurance Non-life insurance Major cat events hitting emerging markets Event Victims % Economicloss Insured loss of pop USDm of GDP USDm of premiums* US storm Katrina % % ** 7% Northridge EQ % % % Indonesia tsunami % % % Pakistan, India EQ % % Honduras storm % % % Antigua & Barbuda storm % % Barbados storm % % % Guatemala EQ % % % Bangladesh storm % % Vanuatu storm % % * Non-life premiums ** excluding losses of USD 15.5bn incurred under the National Flood Insurance Program Ratios show victims/losses relative to population, GDP or non-life premiums of the most affected country Slide 15 Source: Swiss Re sigma catastrophe database

6 Slide 16 Research: Insurance in emerging markets sigma No 1/2007: Insurance in emerging markets: sound developments; greenfield for agricultural insurance Contact Information Reto Schnarwiler Head Public Sector Business Development Swiss Reinsurance Company Mythenquai 50/60 CH-8022 Zurich Switzerland Tel Fax Slide 17