2.dealing with natural disaster risks – institutions & products

8/9/2019 2.Dealing With Natural Disaster Risks – Institutions & Products

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World Bank Group World Bank Group

Dealing with Natural Disaster Risks –Dealing with Natural Disaster Risks –

Institutions & ProductsInstitutions & Products

Vijay KalavakondaVijay Kalavakonda

Insurance SpecialistInsurance Specialist

email:email: [email protected]@worldbank.org

World Bank Insurance racticeWorld Bank Insurance ractice

BONN, Germany !"#!$ %ay& "''$!"#!$ %ay& "''$

Workshop on Insurance and RiskAssessment

mailto:[email protected]





2

World Bank Group World Bank GroupKey Messages

In order to achieve sustainabledevelopment natural disaster risks shouldbe addressed in a proactive! rather thanreactive! way"

#liminating moral ha$ards which hasbecome detrimental in building capacity atthe country level to manage disaster risks"

%atastrophe risk management solutions atthe country level must be sought"

Need or building public'privatepartnerships"



3


%haracteristics o %atastrophe Risk

• Low frequency but high severity events.

• High exposures and vulnerabilities.

• Mismanagement of catastrophe risk can have

highly adverse social, economic and politicalimplications for the affected countries.

• an strain local governmental and insurance

sector financial resources and often requires

offshore risk transfer.• !ome risks can not be hedged.



4


• "ulnerability of the world#s poor to natural disastersshould underpin the $orld %ank#s work on risktransfer and risk financing.

• %y ensuring that sufficient liquidity exists after a

disaster, risk transfer&funding mechanisms can helpto speed economic recovery and reduce governmentfiscal exposure to natural disasters.

• atastrophe risk management can also assistcountries in the optimal allocation of risk in the

economy, thus contributing toward higher economicgrowth, better mitigation and more effective povertyalleviation.

(he Insurance and %ontractual )avings

(eam sees *)#+s %atastrophe Role as *ollows



5


(he Insurance and %ontractual )avings

(eam Deine+s %atastrophe Risk as *ollows,

!'(()* on+set events +

• )arthquake, yclone& Hurricane& yphoon.

!L-$ on+set events • /loods, (rought.



6


-ssessing the real cost o-ssessing the real cost o

naturalnatural disasters

hree part model0

. (irect property loss

. 1ndirect losses

. !econdary losses


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Insured and .ninsured /osses rom NaturalDisasters 0in .) 1illions2

3456 3455 3476 3475 3486 3485 3496 3495 3446 3445 :666

96

86

76

56

;6

<6

:6

36

6

#conomic losses 0:666 values2

o which insured losses 0:666 values2

(rend o economic losses(rend o insured losses

.)= 376 bn



8

World Bank Group World Bank Group>ulnerabilities to Natural Disasters

South Asia reported percentage reported GDP1 government - oss intensities -

countr! incidents assessed osses [$ mill.] revenues2

pct. GDP pct. revenues

"ndia 73 1#$2% &#'176 &4(7'85( &75'5(( 2$25% 12$15%

Pa)istan 22 ($(% &52'28( &#'15(A*ghanistan 2( ($(% &3'8#5

+angadesh 48 8$3% &2'87# &37'65( &4'36( 7$65% 66$(3%

Sri ,an)a # ($(% &11'625 &2'185

+hutan ( ($(% &43( &165

epa 15 26$7% &52 &6'25( &6#( ($84% 7$58%

187 7$7% &12'1(7 &51#'#8( &#2'(5( 3$58% 13$15%



#


()e bulk o* t)e gap is in developing()e bulk o* t)e gap is in developing

countries: !+,' - "''' analysiscountries: !+,' - "''' analysis

ountry (ype /' worst disasters #

lives lost

/' worst disasters

#insured losses

0eveloping:

-o$ o* disasters

-o$ o* ives ost

"nsured oss

1

1'2#6'2((

.S&4$6/iion

4

21'528

.S&6$#/iion

0eveloped:

-o$ o* disasters

-o$ o* ives ost

"nsured oss

2

14'525

.S&3$7+

36

#'46(

.S&113$7+



1(

World Bank Group World Bank GroupInsurance enetration tells )al* t)e storyInsurance enetration tells )al* t)e story

%ountry ?DP@%apita0.)=2

Non'/i&e InsurancePremium A o& ?DP

'!2 34,565 7.8

'.9. :;,<35 6.7

!weden 38,3<: 3.6

!pain :7,835 3.;

Mexico 6,=:3 5.8

2rgentina 8,=8= :.3

>hilipphines :,:;< 5.8

?ambia 63= 5.4



11


Bhy is the Borld 1ank Involved in 1uilding%atastrophe Risk (ranser )ystemsC

Mismanagement o catastrophe risk has numerous highlyadverse social economic iscal and political implicationsor the aected countries and insurance industry"

1y ensuring that suicient liEuidity eFists ater a disasterrisk transer mechanisms can help to speed economic

recovery and reduce government eFposure to naturaldisasters"

%atastrophe risk management can also assist countries inthe optimal allocation o risk in the economy thuscontributing toward higher economic growth better

mitigation and more eective poverty alleviation"




1ut public and social pressure has ledus to play a totally dierent role'

PRGMG(#R G* MGR-/ H--RD

2nd how is that



13


The World Bank has helped to fll the gap: !"#$%## more than &'# (illion

19

28

10

12

10

13

137

60

44

43

25

20

( 2( 4( 6( 8( 1(( 12( 14( 16( 18(

0urope and entra Asia

idde 0ast and -orth A*rica

0ast Asia and Paci*ic

South Asia

,atin America and ari//ean

A*rica

.r/anransport A other sectors

156

&5$3 /

88 &8$1 /

54 &5$3 /

55 &5$5 /

35 &1$8 /

33 &3$( /



14


1ut may have also added to theproblem

J""the Borld 1ank must increasinglyincorporate natural disasters and naturalha$ards into the proects and programsthey und" )ome o their proects are notonly silent on the issues o disastervulnerability but may actually serve toincrease eFposure and vulnerability"+

)ource, 1erke and 1eatley J-ter (he Hurricane+Lohn Hopkins 3448



15

World Bank Group World Bank GroupGther promoters o moral ha$ard

1ilateral donors

/ocal governments >ost disaster assistance which does not incentive

better risk management practitioners.

>roduct design which incentivises people to take

on additional risk @e.g. crop insuranceA.



16

World Bank Group World Bank Group*)# has developed products at'

Macro level – (ool kit0 based on rigorous country risk management

approach"

Micro level – *inancial Products, %ontingent credit acility

weather indeF insurance"

Innovation in distribution and delivery o inancialproducts"



17


*)# has developed a rigorous country riskmanagement approach

• 1ndependent )stimates of ountries# )conomic)xposures and "ulnerability to *atural (isastersB

• Cuantification of )conomic %enefits from (ifferentDisk ransfer&Disk Hedging 2rrangementsB

• !election of %est Disk ransfer and /inancing

>rograms

• Deview of premium rates and assistance in thedesign of risk transfer instruments



18


%ountry -ssets 0people housing actories schools2%ountry -ssets 0people housing actories schools2

Risk -nalysis

#Fpected -nnual /oss/oss #Fceedance 0PM/+s2Risk (ranser %ost@1eneit

Risk -nalysis

#Fpected -nnual /oss/oss #Fceedance 0PM/+s2Risk (ranser %ost@1eneit

Revise )trategyReinsurance@-lternative

Risk *inancing )trategies

Revise )trategyReinsurance@-lternativeRisk *inancing )trategies

Manage PositionManage Position

NoNo

es

/ower RiskMitigation /and use

planning

/ower RiskMitigation /and use

planning

0Risk (ranser@*inancing2 0Risk Reduction2

-chieveRisk Management

GbectivesC

-chieveRisk Management

GbectivesC

*lood #arthEuake Bind"*lood #arthEuake Bind"

-ationaorporate atastrophe

is) anagement

)ource, #O#



1#


(his involves a lot o technology

• Risk Identiication and Measurement )xtensive use of stochastic catastrophe risk models

employing the latest scientific research on natural haEards

and utiliEing stock inventory and vulnerability data @)C)2,

DM!, 21DA

• /oss control programs Loss prevention programs&national mitigation

efforts&enforcement of building codes, construction

supervision.

• Risk transer@risk inancing Deinsurance

Fovernment

1nsurance 1ndustry



2(


-nd we are developing a genericinancing model

Private ar)et

Pro9! ar)et

: pure cat$Gov;t

aptives

"n*rastructure

<e*are

trans*ers

he ver!

poor

Propert! o=ners

and S0s' ash

>armers

"ndustr! and

the =eath!

ountr! or egiona " at$ Poo

"nternationa "

apita mar)ets

+udget<+



21


Bhen do the inancial productsBhen do the inancial products

workCworkC

• Relatively reEuent but not too reEuent01oston #O ' (unisian drought '

1angladesh *lood2 ' cognitive eects• (he population has some eFperience o

insurance – otherwise taF perception

• (he unding process will supportmitigation eorts ' political cycle

• Reasonable data is available



22


#ven when the basics are in place there arechallenges in building risk transer systems

• /ack o risk awareness at the governmentlevel and among population

• .ndeveloped insurance sector

• #Fcessive reliance on the government as thereinsurer o last resort – moral ha$ard

• /ow country incomes

• High degree o uncertainty with regard toeFpected economic losses"

• Distribution costs"

• /ack o public@ private trust"



23

World Bank Group World Bank GroupGur (rack Record and %urrent Bork Program

(urkish %atastrophe Insurance Pool – :"5 million policies0assisted to the ?o( with the institutional design dratingo legal ramework and inancing o (- and risk inancing2

)outh -sia Risk Management 0India )ri /anka1angladesh2 – completed institutional design o a risk

transer program is about to begin Preparation o a cat insurance programs in Iran Preparation o cat insurance program in Romania Restructuring o the eFisting government risk inancing

program in MeFico

Proect preparation work in the Philippines (- or risk assessment in the %aribbean



24


Borld 1ank /ending Productsand -dvisory -ssistance

Disk /inancing %ontingent capital in

support o

government liEuidityneeds in the atermatho natural disasters

*inancing o

reinsurance premium %apital support onational cat pools riskinancing programs

2 and 2dvisory !ervices

Design o legal andinstitutionalrameworks or riskinancing

-ssistance andlending or risk

mitigation Independent risk

assessments




P-R( ' II



26

World Bank Group World Bank GroupMyths

>ulnerability to disasters is more o asmall state+s problem 0meaning diversiiedeconomies have a natural hedge2"

Insurance is a panacea a2 to manage riskdue to natural disasters and b2 or the lowincome households and poor to manageincome volatility due to disasters"

.nlimited insurance@reinsurance capacityavailable"

> l bilit t di t i



27


>ulnerability to disasters isNG( limited to small state+s

"nde9 o* ?unera/iit! to -atura Disasters@?anuatu 727$17

+angadesh 53#$16

rinidad o/ago 523$13

"ndia 51($67

he +ahamas 4#1$28

auritania 487$55

Antigua +ar/uda 43($77

+ots=ana 418$(3

Government o* ur)e! =as *orced to raise ta9es *oo=ing the armara0B' aso the stoc) mar)et =itnessed having trading *oo=ing the 0B$

Government o* "ndia imposed a 2% surcharge on direct ta9es *oo=ing the

GuCarat 0B' =hich netted ess 5% o* estimated tota osses$

>isca indicators are much /etter measure than decine in GDPs$

I i l



28


)egree o* +ncertainty

Certain HighlyUncertain

LIFE CYCLE

DEATH

PROP

ERTY

HEALTH

DISABILITY

MASS,

CO-VARIANTDISABILITY

Small

VeryLarge

Relatie-oss./ost

Is insurance a panacea or lowincome households and the poor

I i l



2#


Is insurance a panacea or lowincome households and the poor

-griculture sector constitutes between :6'<6A o ?DP and provides employment to;6'56A o working population"

/and holding patterns averages between 3to 5 hectares"

*ailure o agriculture production aectsthe livelihood both the rural arm and non'

arm sector" (ill date NG >I-1/# %RGP and@or R.R-/

IN).R-N%# scheme operating"

I i @ i



3(


Is insurance@ reinsurancecapacity an issueC

/ack o reinsurance capacity in the%aribbean+s ollowing Hurricane -ndrew in344:"

/ack o appetite or risk o small states" /ack o terrorism cover ollowing

)eptember 33th"

Drainage o reinsurance capacity ollowing)eptember 33th more than replacement"

)hit in product Proportional to #Fcess o/oss by traditional reinsurers"

I* t)e events o* past are any indication#



31


Historical #Fcess o /ossReinsurance Rates or G#%)

0middle layer o reinsurance2

5

:

3

6

7

=

4

<

:;;5 :;;3 :;;7 :;;4 :;;8 3555 3553 3557



32


/atest (rends in the ?lobal ReinsuranceIndustry

Poor investment returns low interest rates andrecent heavy losses led to :6'<6A increases orpersonal lines in :66: and additional 36'35A in

:66<" Inlow o new capital insuicient to replace lost

capital *light to Euality

-ctive reduction o investment risk eFposure Increased interest in -R( products that make

more More eicient use o limited capacity



33

World Bank Group World Bank Group%onclusions

- combination o actors point to the needor creating a comprehensive catastropherisk management program"

Borld 1ank can oer capital and technicalsupport to the governments in support otheir comprehensive risk managementprograms in the orm o contingent liEuidityacilities or with"

%reation o well capitali$ed regionalcatastrophe reinsurance pool"

2.dealing with natural disaster risks – institutions & products

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