Natural Disaster Risk Management

1. Natural Disaster Risk Management Arup Chatterjee Senior Financial Sector Specialist Asian Development Bank Let’s Listen to the Insurance Regulators and Experts Seminar organized by Association of Insurers and Reinsurers of Developing Countries, Association of Insurance Supervisory Authorities of Developing Countries, and Insurance Institute for Asia and Pacific Manila, 7 September 2012

2. Outline Disaster Risk Management in Developing Member Countries of Asia Role of Multilateral Agencies in Disaster Risk Financing An Overview of ADB's Disaster Risk Financing Activities Key Messages Q & A

8. Measuring disaster impacts against development investments On the disaster side Between 2005–2010 the economic costs of disasters exceeded $269 billion, averaging $53.8 billion a year. On the development side The most recent OECD figures indicate that total ODA assistance to ADB’s developing member countries for 2009 was $32 billion. Implication The combined contributions of all the region’s development partners does not keep up with the economic and social costs of disasters in Asia and the Pacific.

9. Disaster risk reduction is development Disaster risk management is not a separate development sector. DRM is a development approach and is part and parcel of development actions. Without a risk-sensitive approach, development cannot be sustainable.

10. shock recovery better-off HH Assets poorer HH poverty-trap threshold Time A Hurricane’s Impact on Asset Trajectory Source: Carter, Little, Mogues, and Negatu 2005

11. Basics of DRM The biggest financing challenge is availability of liquidity at the onset of a disaster 3

12. Rationale for DRM and DRF • Governments are responsible for large portfolios of public infrastructure assets subject to risk • Guarantee sufficient capital for emergency relief and assistance to affected households, businesses and communities • Analyze, measure and manage government's disaster contingent liability • comprehensive approach to embedded contingent risks from disasters • Avoid diverting funds from budgets or from already disbursed development loans to finance post-disaster expenses

13. Applying DRM Risk Assessment Risk Mitigation Ex ante Institution Building Emergency Preparedness Risk Financing Risk event Risk Operations Ex post Recovery Process Time Reconstruction Ex-ante • Development planning, programs and projects • Existing vulnerability of populations and their infrastructure Ex-post • Emergency response • Disaster recovery and reconstruction

14. Country Assets (people, housing, factories, schools…) Flood, Earthquake, Wind…. Risk Analysis Expected Annual Loss Loss Exceedance (PML’s) Risk Transfer Cost/Benefit Revise Strategy Reinsurance/Alternative Risk Financing Strategies Lower Risk Mitigation, Land use planning Achieve Risk Management Objectives? No No (Risk Transfer/Financing) (Risk Reduction) Yes Manage Position National Catastrophe Risk Management Building Capacities to Address Financial Implications of External Shocks and Climate Change Source: EQE

15. Outline Disaster Risk Management in Developing Member Countries of Asia Role of Multilateral Agencies in Disaster Risk Financing An Overview of ADB's Disaster Risk Financing Activities Key Messages Q & A

16. ADB’s Integrated Disaster Risk Management Approach Risk assessment Strengthened risk governance &capacity development Disaster Risk Reduction Climate Change Adaptation Increased Resilience throughIntegrated Disaster Risk Management Disaster Risk Financing Stakeholder engagement Technical Assistance • Expert consulting • Regional cooperation Knowledge Inputs • Guidance • Best practices • Lessons learned Financing • Loans • Grants • Guarantees Development investment Development planning Policy frameworks Country level IDRM model • Management of retained risks • Elimination of preventable risks • Transfer of disaster risks (amortization) National & local development systems Input streams

17. WB Disaster Risk Management Framework Manage the volatility of the costs Understand contingent liability

18. Key Components of a Results-Based Strategic Approach to DRM • Optimized for necessary scope and scale • Core results attributes – planning, budgeting, implementation, monitoring and evaluation • Focus on common results • Interdependency – top down, bottom up and linked • Horizontal and vertical linkage – across agencies in all sectors at all administrative levels Analysis-driven • Natural hazard (including climate change hazard), vulnerability and risk assessments Focused design • Selection of intervention type(s) – policy, investment, capacity • Selection of risk management option(s) - financial, economic, physical

19. What could the DRF solutions look like? • Disaster liquidity / reserves • Contingent credit or insurance based solutions • Using parametric, index or modeled loss triggers • Public infrastructure asset coverage • Transport, power, water • Stengthening of safety nets • Microinsurance • Facilitate mitigation and adaptation • Climate Funds, Carbon Finance • Microfinance • Carbon Finance

20. Disaster Risk Finance Solutions Source: Adapted from the World Bank

21. Three-tiered risk layering approach Source: Adapted from the World Bank Building Capacities to Address Financial Implications of External Shocks and Climate Change

22. Risk Modeling Vulnerability Risk (i.e. probable loss) Vulnerability functions (of house to wind) Hazard (i.e. hurricane wind) Exposure (i.e. houses) Disaster Impact Analysis - Scenario or Stochastic -

23. Designing Effective Risk Management Programs for Sovereign Clients • Risk Identification and Measurement • Extensive use of stochastic catastrophe risk models employing the latest scientific research on natural hazards and utilizing stock inventory and vulnerability data (EQECAT, RMS, AIR) • Loss control programs • Loss prevention programs/national mitigation efforts/enforcement of building codes, construction supervision • Risk transfer/risk financing • Reinsurance • Government • Insurance Industry

24. Costs and benefits of financial instruments Source: Ghesquiere and Mahul (2010)

25. Matching the Funding Needs The challenge is how to utilize a wide range of instruments to address the costs of disasters and be sure that they are available if and when needed. Source: Adapted from the World Bank

26. Key Challenges • Low country incomes • Limited finance and related market tools for mitigation and adaptation • Degradation of environment due to growing demands of rapidly growing population • High degree of uncertainty with regard to expected economic losses • Poor statistics • Catastrophe Risk Financing Instruments: scepticism on reliability of weather data • Extent of devastation and loss normally underestimated • Losses arising from business interruption and bankruptcies often unclear and undisclosed • Corruption and poor governance

27. Key Challenges • Inability to put in place pre-requisites for an efficient catastrophe risk financing instrument – e.g. enforced building codes • Undeveloped insurance sector • General inadequacy in local insurance laws with respect to post-disaster damages • Excessive reliance on the government as the reinsurer of last resort • Lack of risk awareness at the government level and among public • Perceived low probability of disasters: hence insurance is of low priority among would be consumers of insurance products • Lack of understanding of insurance by locals; low awareness of insurance benefits vis-a-vis costs (premiums) • Lack of local technical knowledge and experience • Build complex insurance models and carry out loss assessments • Adapt to climate change effects

28. Role of Multilateral Agencies • Reducing vulnerability of the poor to natural disasters • Quantifying the uncertainty • Independent estimates of countries’ economic exposures and vulnerability to natural disasters • Enabling risk reduction by providing governments with access to hazard maps and information on hazard impacts on populations, land area, ports and airports • Estimating the economic benefits from different risk transfer/ risk hedging arrangements • Selecting best risk transfer and financing programs • Reduce government exposure to natural disasters • Optimal allocation of risk in the economy • Ensuring sufficient liquidity exists after a disaster • Speeding economic recovery • Build capacity, fill knowledge and funding gaps, and integrate private sector expertise and resources • Better mitigation and more effective poverty alleviation

29. Outline Disaster Risk Management in Developing Member Countries of Asia Role of Multilateral Agencies in Disaster Risk Financing An Overview of ADB's Disaster Risk Financing Activities Key Messages Q & A

30. Strategy 2020 of ADB • Vision: “An Asia and Pacific Free of Poverty” • Three complementary strategic agendas • Inclusive growth • putting in place sound policies and institutions to improve the poor’s access to credit/ insurance and basic productive assets • Strengthening social safety nets to prevent extreme deprivation • Environmentally sustainable growth • Regional integration To better mobilize resources - including region’s savings and inbound capital flows – and maximize returns

31. Southeast Asia Disaster Profile

32. ADB Application of Disaster Funds DRM Funds by Country 1987–2011 DRM Funds by Type 1987–2011 APDRF Fund Utilization by Region 1987–2011

33. ADB’s DRF Activities in South East Asia • Southeast Asian countries extraordinarily exposed to human and economic shocks from natural disasters • Since 1987, ADB has provided over $2.3b for 145 hazard and DRM activities – 62% for DRR actions • Region is largest recipient of APDRF funds • Disaster Response Facility under the Asian Development Fund to be established • support the poorest countries respond to natural calamities on a pilot basis

34. Addressing the Region’s DRR Priorities Policy Finance Capacity Institutionalizing DRM Regional DRR Cooperation Community-Based DRM Achieving Gender Equality Governance and Participation Addressing Critical Hazard Challenges DRR-CCA Linkages Private Sector Participation Water-Related Disasters Disaster Risk Finance Urban Disaster Risk Financing Capacity Development Disaster Recovery

35. ADB DRF Initiatives in Southeast Asia • Regional Level Initiatives • IDRM Trust Fund • ASEAN-UNISDR Technical Cooperation • Regional Economic Integration • ASEAN-ADB Memorandum of Understanding • Country Initiatives • Philippines • Indonesia • Viet Nam • Other Initiatives • ADB Disaster Stand-by Credit • Microinsurance

36. Regional Initiatives • IDRM Trust Fund • Pending support from CIDA • IDRM solutions for ASEAN region • ASEAN-UNISDR Technical Cooperation • Regional mapping and stocktaking via web-based portal project • Regional Economic Integration • Office of Regional Economic Integration considering: • DRM data enhancement, strengthening insurance regulatory regimes, microinsurance, development of cat bonds and contingent credit products • ASEAN-ADB MOU • A channel for DRF cooperation

37. Country Initiatives • Philippines and Indonesia • JFPR TAs for Urban-based DRF programs ($2m) (2011-14) • DRF pilots in two cities in each country • Risk profiling > city selection > DRF options > implementation • DRF Framework for the Philippines (2011-12) • Collaborate with World Bank to spearhead DRF Technical Working Group • Viet Nam (2011-14) • JFPR TA for DRF-CCA program development ($1m) • DRF pilots in two cities • Risk profiling > city selection > DRF options > implementation • Special focus on DRF/CCA application • Philippine Earthquake Pool (2011-12) • ADB acts as catalyst to support private sector pool development

38. Other Initiatives • ADB Contingent Credit Program • Emergency stand-by credit is a basic DRF tool • Opportunity costs need to be avoided • Two-tier facility allows new borrowing or reallocation of undisbursed loan balances • Microinsurance • ADB active in the Philippines supporting (GIZ, MIPSS) Microinsurance Innovation Project for Social Security • Developing policy framework at national level • Developing new regulatory framework • Developing financial literacy for microinsurance

39. Outline Disaster Risk Management in Developing Member Countries of Asia Role of Multilateral Agencies in Disaster Risk Financing An Overview of ADB's Disaster Risk Financing Activities Key Messages Q & A

40. Key Messages • Strong and continuous political commitment is essential • Foundation for a unified country plan integrating DRR, DRF, and CCA is central • Local ownership • Value proposition for all the parties (client/donor/industry/ NGOs) • A “bottoms- up” high quality risk analysis is essential for decision making and risk capital financing • Risk assessment technology and financial market development create new options for government risk management • Disaster management (ex-ante+ex-post) as crucial element of sustainable development • Risk reduction initiatives should be integrated into disaster response and recovery measures

41. Arup Chatterjee Senior Financial Sector Specialist Office of Regional Economic Integration Asian Development Bank Manila, Philippines Email: achatterjee@adb.org