December 19-20, 2006

1. Hazards of Nature, Risks and Opportunities for Development in South Asian Countries Regional Conference in New Delhi, IndiaAll About Risk Financing: Theory and PracticeEugene N. Gurenko, Ph.D., CPCU, ARe Lead Insurance Specialist December 19-20, 2006

2. Agenda • Catastrophe insurance in developing countries • Enabling the development of catastrophe insurance market through public policies • The potential role of the World Bank

3. Agenda • Catastrophe insurance in developing countries • Enabling the development of catastrophe insurance market through public policies • The potential role of the World Bank

4. Catastrophe insurance in developing countries Catastrophe insurance in developing countries: the current status quo • Very low catastrophe insurance penetration • Growing government fiscal liabilities to natural disasters • Volatile, and often unaffordable, reinsurance premium

5. Catastrophe insurance in developing countries Catastrophe insurance penetration in developing countries (% dwellings covered) % homes covered • India – under 0.3% • Philippines – 0.3% • Iran – under 0.05% • Romania – under 4% • Bulgaria – under 3% • China – under 0.5% • Turkey – 18% Global Indicator Philippines China Indonesia India Vietnam PERSONALINSURANCE PREMIUM = 1.3*(GDP/1000)^2 PERSONAL CAT INSURANCE PREMIUM = 0.1*PERSONAL INSURANCE PREMIUM

6. Catastrophe insurance in developing countries Insured and economic damages from natural disasters (%) • More than 45% of • economic damages • covered by insurance • in rich countries • Less than 3 percent • covered in developing • countries Source: Munich Re NatCatService database, 2005 Over 25 years the share of economic loss covered by insurance in developed Markets increased considerably while remaining stagnant in poorer countries. 6

7. Catastrophe insurance in developing countries Economic Loss from Uninsured Natural Disasters • Loss (USD, bn)Insured Loss (%) Uninsured Loss • % GDP% Govt. revenues EarthquakeTurkey22.0 5% 5%21% Izmit (1999) HurricaneHonduras 3.0 6% 34%158% Mitch (1998) Earthquake India6.0 2% 1%7% Gujart/Bhuj (2001) Floods India 5.0 7% 0.8% 5.5% Mumbai (2005) Quake Pakistan 5.0 0% 5% 40% Kashmir (2005) EarthquakeUSA43.0 47% 0.3%2% Northridge (1992) Winter Storm France6.2 100% - - (1999)

8. Catastrophe insurance in developing countries Major sources of disaster finance • Loss retention was on • average $31 bn per year • Loss retention has been • highly variable – 50% • coefficient of variation Sources: OECD, Munich Re • On average, 92,6% of economic loss was retained by developing countries.

9. India is Illustrative of the Trend • 2005 events (USD,bn) • Orisa floods: 0.12 • AP floods: 0.4 • Mumbai flood: 5.0 • Gujarat flood: 0.4 • Kashmir EQ: 5 bn Source: SwissRe, 2006 Direct losses from natural catastrophes (USD bn): 1976-1981 - 2.9; 1981-1995 -13.4; 1996-2001 - 13.8; billion; 2005 alone over $7 billion.

10. Growing Fiscal Costs of Natural Disasters Margin Money/ CRF Expenditures Rs millions India

11. Agenda • Catastrophe insurance in developing countries • Enabling the development of catastrophe insurance market through public policies • The potential role of the World Bank

12. Country Assets(people, housing, factories, schools…) Flood, Earthquake, Wind…. Risk Analysis Expected Annual Loss Loss Exceedance (PML’s) Risk Transfer Cost/Benefit Risk Transfer and Financing 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 Source: EQE

13. Enabling the development of catastrophe insurance market through public policies Enabling public policies for catastrophe insurance • Making insurance compulsory or semi-compulsory (Turkey/Romania/Columbia/France); • Creation of national pools; • Drawing a clear line between public and private liabilities (Spain) Public risk awareness, education campaigns Public awareness campaign Primary insurance market Public policies Sovereign catastrophe risk coverage (Mexico bond, Caribbean Cat Facility, GCIF) Sovereign cat insurance Catastrophe reinsurance Making catastrophe reinsurance capacity more affordable for developing countries through (i) global mutualisation of risk; (ii) partial risk retention; (iii) premium subsidies to poorest nations; (iv) subsidies for market infrastructure and product development Low cost of IBRD capital

14. First step: Recognize catastrophe risk exposure in the national budget National Budget $ Disaster Budget Calamity Trust $

15. National Budget $ Fonden Budgeted Fonden Trust $ However, self-insurance funds like Fonden are typically underfunded Re-insurers Investors How one can create a larger Fonden Trust w/o asking for more budget? Additional Capital Premium Insurance

16. Cat-Bond Concept Insurance Concept Mexico: Catastrophe Risk Transfer in a Nutshell Needed a Financial Entity with experience and proved results + The FONDEN through an international public bid process, hired Swiss Re Capital Markets, Swiss Reinsurance Company and Deutsche Bank Securities. +

17. Enabling the development of catastrophe insurance market through public policies Benefits of country risk pooling: Turkish Catastrophe Insurance Pool

18. Enabling the development of catastrophe insurance market through public policies A Global Cat Insurance Facility (GCIF): A Feasibility Study Capital Contributions Global InsurancePool Disastercontingentpayments Shareholders Reserves Donors Capital Countries ClaimsPayingCapacity Global Reinsurance & Capital Markets Premiums Risk Transfer Premium Subsidies Premiums Donors

19. Enabling the development of catastrophe insurance market through public policies 4.50% 4.00% 3.50% 3.00% 2.50% Premium/Insured Limit 2.00% 1.50% 1.00% 0.50% 0.00% Countries Regions Portfolio Benefits of global risk pooling: Global Catastrophe Insurance Facility • 27 countries • 2 perils

20. Agenda • Catastrophe insurance in developing countries • Enabling the development of catastrophe insurance market through public policies • The role of the World Bank

21. The potential role of the World Bank World Bank’s role in catastrophe insurance • Assistance to countries in risk quantification. • Assistance in building the national institutions of catastrophe risk management – as an integral function of financial risk management. • Advisory services in developing innovative catastrophe risk transfer solutions: (i) national catastrophe pools; (ii) issuance of catastrophe bonds; (iii) access to global reinsurance capacity through global risk pooling; (iv) contingent capital facilities to reduce the costs of reinsurance.