December 5, 2007

1. WMO Expert Meeting on Weather Risk ManagementGeneva, SwitzerlandSouth-eastern Europe Disaster Risk Management ProjectEugene N. Gurenko, Ph.D., CPCU, ARe Lead Insurance Specialist December 5, 2007

2. Contents • The rationale for the SEEDRM project • The project structure • Risk transfer solutions for governments, homeowners and SMEs • Next steps

3. Contents • The rationale for the SEEDRM project • The project structure • Risk transfer solutions for governments, homeowners and SMEs • Next steps

4. Temperature changes in Europe around 2100 (A1B scenario) Source: D. Jacob, Max Planck Institute; http://www.climate-water-adaptation-berlin2007.org/documents/jacob.pdf A1B scenario is the third worst socio-economic scenario of the six developed by the IPCC Temperatures will be increasing leading to a hotter drier climate

5. Precipitation changes in Europe around 2100 (A1B scenario) Source: D. Jacob, Max Planck Institute; http://www.climate-water-adaptation-berlin2007.org/documents/jacob.pdf A1B scenario is the third worst socio-economic scenario of the six developed by the IPCC Reduced precipitation patterns but more precipitation extremes

6. Recurrence of flood events in Europe, 1998-2005 Source: EEA, based on data from Dartmouth Flood Observatory http://reports.eea.europa.eu/technical_report_2007_2/en

7. SEE economic vulnerability to the risk of earthquake

8. SEE governments are fiscally unprepared to deal with catastrophic losses

9. Need for an instrument to provide liquidity early on until other sources of funds can be accessed Liquidity gaps often emerge in the early days after a disaster

10. Contents • The rationale for the SEEDRM project • The project structure • Risk transfer solutions for governments, homeowners and SMEs • Next steps

11. SEERMP Objective: • To reduce vulnerability of SEE countries to natural disasters by building the capacity and promoting a coordinated approach in disaster risk mitigation, risk transfer, preparedness and response. Rationale for regional cooperation • Many hazards are common to a number of neighboring countries • Information sharing will allow for greater reduction of hazard risk at the national and regional level • Individual countries may not be able to cope with a major disaster on their own • Stand-by, fully equipped emergency response units and relief materials are expensive • Countries are small in size and hazards risk insurance may not be optimal at the country level

12. Key Areas of the Initiative • Hydrological and meteorological forecasting and flood early warning; • Financing of disaster losses and creation of regional risk transfer mechanisms. • Strengthening regional capacities in disaster risk reduction and response

13. Hydrological and Meteorological Forecasting, Data Sharing and Early Warning System • Initiative has been agreed during the ICEED meeting in Dubrovnik in May 2006 • Strong partnership with WMO • Objective of this initiative is to promote a coordinated approach and data sharing in Hydromet services in South Eastern Europe • Feasibility assessment has been completed and was discussed in a regional meeting on October 24-25, 2007 in Zagreb • Coverage: Moldova, Romania, Bulgaria, Serbia, Montenegro, Croatia, Albania, Macedonia, Bosnia & Herzegovina

14. Flood Forecasting and Early Warning System on Sava River • Initiative was agreed during Podgorica the meeting of the Directors of Hydromet services for Sava river basin countries in April 2007. • Objectives are to build capacity and to re-establish data sharing and collaboration on flood forecasting and early warning system on the Sava river. • Feasibility Assessment has been completed and discussed in a regional meeting in Zagreb on October 24-25, 2007.

15. Risk transfer component • Creation of a regional catastrophe insurance pool that would offer affordably-priced catastrophe insurance coverage to homeowners and SMEs in SEE countries. • Development of standardized tradable weather risk hedging instruments to protect businesses against loss of revenue due to adverse weather conditions. • Structuring and issuance of a catastrophe risk bond for governments of the region. • Contingent loan facilities for natural disasters – “A Cat DDO”

16. Schematic allocation of sovereign catastrophe risk by sources of risk financing and available World Bank instruments Available World Bank instruments 200+ year event or in excess of 5% of fiscal revenue Emergency reconstruction loans Donor aid 100-200 year event or in excess of 5% of fiscal revenue Catastrophe bonds for sovereigns Catastrophe bonds 30-100 year event or in excess of 5% of fiscal revenue Catastrophe risk insurance pools Reinsurance 30 year event or up to 5% of fiscal revenue Disaster Draw-Down Option loans Risk financing 20 year event or up to 3% of fiscal revenue Risk retention

17. Disaster Risk Reduction and Response • Objective is to promote and implement investment priorities for strengthening the capacity and promote a coordinated approach to disaster preparedness and response • Will be built on existing agreements: Civil-Military Emergency Planning Council and the Disaster Preparedness Initiative of the Stability Pact • Vulnerability Assessment is completed • More detailed assessment of disaster response is needed.

18. Contents • The rationale for the SEEDRM project • The project structure • Risk transfer solutions for governments, homeowners and SMEs • Next steps

19. Deferred Draw-Down Option Loan for Natural Disasters (DDO) • Will provide immediate liquidity to fill the budget gap in the aftermath of natural disasters. • Disburses under pre-defined conditions such as declaration of national emergency by government. • Certainty of disbursement. • Highly affordable pricing. • Prerequisites: • Sustainable debt level • Satisfactory macroeconomic framework • Satisfactory emergency budget appropriation legislation/system in place • Completion of a risk assessment program and preparation of a hazard risk mitigation strategy • Could be used to support gov’t recovery programs or gov’t backed insurance

20. Risk transfer solutions for governments Toward a multi-layered risk financing strategy for governmentsDisaster Deferred Draw Down Option (DDO) andacatastrophe bond combined 2 IBRD (TRE) Premium Protection Protection Special Purpose Vehicle 3 Investors SEE countries Libor+Spread Bond principal Spread IBRD (ECA) Contingent Capital Facility 1. 2. 3. IBRD (ECA) provides a contingent capital facility ( DDO) to SEE countries which can be drawn to address immediate government liquidity needs after a disaster. IBRD (TRE) offers SEE countries a catastrophe insurance bond. IBRD (TRE) transfers all the risk to capital markets by issuing a cat bond through an SPV. Commitment Fee 1

21. Sovereign Catastrophe Bonds: Illustrative Summary Governments of developing countries; Government-sponsored institutions Insured Covered Perils • May include Earthquake, Hurricane, Tropical wind and other catastrophe risks • Parametric insurance, with pre-defined amounts of coverage per country/peril Trigger Transaction Size • $ [ ] mm Limits of Coverage • The event limit will be selected based on projected post disaster fiscal liquidity needs Term • Up to three years when appropriate, to contribute toward better price stability

22. Risk transfer solutions for homeowners and SMEs Proposed South Eastern Europe Regional Catastrophe Insurance Facility Catastrophe insurance coverage against the risks of flood and quake for homeowners and SMEs Reinsurers Premium 2 SEE Home owners Sum Insured SERCIF Premium 3 Protection Protection Special Purpose Vehicle Investors SEE countries Libor+Spread Contingent Credit Facility Bond principal Spread IBRD IBRD provides a contingent capital facility to SEERCIF member countries which is then extended to the Facility. Alternatively, non-IBRD countries with investment grade ratings can extend their own sovereign guarantee to the facility structured similarly to IBRD’s credit line. The line can be drawn to pay facility’s claims. SEE households buy a SEERCIF insurance policy by paying an annual premium for its cover. The facility retains a part of risk relying on IBRD contingent capital to pay small claims. In the absence of claims it accumulates reserves. The facility transfers most of risk to reinsurance and capital markets either through a reinsurance contract or by issuing a cat bond. Contingent Capital Facility 1. 2. 3. Commitment Fee 1

23. Hedging weather exposure of businesses to weather in SEE SEE metservices Buyers of weather risk protection Sellers of weather risk protection Electronic portal Weather reference indices (temperature, precipitation, wind) Risk management advisor to SMEs

24. Contents • The rationale for the SEEDRM project • The project structure • Risk transfer solutions for governments, homeowners and SMEs • Next steps

25. Next steps • Develop weather data reporting protocols • Install the missing parts of essential weather data generating infrastructure (weather stations, radars, satellite imagery, etc.). • Develop weather data bases and access policies. • Carry out a feasibility study to determine the demand for weather risk hedging products based on the most common weather risk exposure of businesses in the region. • Develop reference weather risk indices. • Create an on-line risk underwriting platform. • Hire a weather risk hedging advisor for local SMEs • Carry out a marketing campaign. • Get it ALL DONE!