December 10, 2007

1. National round table on catastrophe risk management Sofia, BulgariaBulgarian Catastrophe Insurance Pool: From Concept to ImplementationEugene N. Gurenko, Ph.D., CPCU, ARe Lead Insurance Specialist December 10, 2007

2. Contents • World Bank role in building catastrophe risk transfer programs • Actuarial support project for the Bulgarian cat insurance pool • Next steps

3. Contents • World Bank role in building catastrophe risk transfer programs • Actuarial support project for the Bulgarian cat insurance pool • Next steps

4. World Bank role in catastrophe risk transfer programs World Bank experience in developing catastrophe risk financing programs • The World Bank has thus far helped countries create national risk transfer programs • The World Bank provided advisory and financial support to help create the Turkish Catastrophe Insurance Pool (TCIP). The TCIP provides catastrophe insurance coverage for residential property in Turkey • The World Bank collaborated with Mexico, providing advice and trust fund financing, in the design and issuance of a catastrophe bond • Colombian municipalities have established a contingent loan facility for disaster risk financing • There is ongoing work on the establishment of a Romanian Catastrophe Pool • Created a national livestock insurance program in Mongolia • The World Bank also has also assisted them in developing regional catastrophe risk pooling solutions • Responding to demand from the Caribbean countries, the World Bank helped establish the Caribbean Catastrophe Risk Insurance Facility (CCRIF). • Currently in the process of developing a regional catastrophe insurance facility for South-eastern Europe

5. World Bank role in catastrophe risk transfer programs World Bank convening power • Acts as an “honest broker” by initiating and supporting an ongoing dialogue on catastrophe risk transfer issues between government, domestic insurance industry and the global reinsurers and capital markets. • Convenes international donors to raise concessional funding (grants) for technical assistance work and, possibly, for partial capitalization of risk pooling programs. • Bank catastrophe insurance projects serve as focal points for bringing together the best domestic and international insurance and scientific expertise -“knowledge aggregation.”

6. World Bank role in catastrophe risk transfer programs The World Bank technical assistance products • Country catastrophe risk assessment studies. • Institutional design of catastrophe insurance programs. • Overall business concept (ownership, governance, management, distribution, underwriting, risk transfer, claims settlement). • Development of national regulatory framework. • Preparation of program operational guidelines. • Development of premium ratings guidelines. • Development of optimal risk financing strategy.

7. World Bank role in catastrophe risk transfer programs SEE economic vulnerability to the risk of earthquake

8. World Bank role in catastrophe risk transfer programs SEE governments are fiscally unprepared to deal with catastrophic losses Currently, the annual amount of the Bulgarian national relief fund is approximately USD32 million, or 0.6% of the republican budget. Over the last ten years, which have not witnessed any major catastrophic events, the fiscal burden of small and mid size events on the central budget was of the order of 2.5 percent.

9. World Bank role in catastrophe risk transfer programs Exceedance Probability of Earthquake Damage for Sofia • The building inventory exposure of Sofia is US$ 19.2 billion. The PML corresponding to a 150-year return period (0.0067%) is US$ 2.45 billion, of which 1.67 billion is damage to residential buildings. • The Average Annualized Loss (AAL), which is the integral of the loss exceedance curve in the range of exceedance probabilities of 0.05 to 0.00667 divided by 150, is US$ 29.4 million for Sofia. • Source: Enel.NewHydro, 2004

10. World Bank role in catastrophe risk transfer programs The World Bank risk financing 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 Financing of reinsurance premium 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

11. World Bank role in catastrophe risk transfer programs A typical risk financing arrangement between the World Bank and a catastrophe insurance facility Catastrophe insurance coverage against the risks of flood and quake for homeowners and SMEs Reinsurers Premium 2 Home owners Sum Insured Cat Risk Transfer Facility Premium 3 Protection Protection Special Purpose Vehicle Investors Country Libor+Spread Contingent Credit Facility Bond principal Spread IBRD IBRD provides a contingent capital facility to a country which is then extended to the Facility. Households buy a cat 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

12. Contents • World Bank role in building catastrophe risk transfer programs • Actuarial support project for the Bulgarian cat insurance pool • Next steps

13. Actuarial support for the Bulgarian cat pool Project objectives • Provide actuarial support to the Bulgarian Initiative for Catastrophe Risk Management (BICRM) with the view of facilitating the creation of a national catastrophe insurance pool. • Facilitate an informed public dialogue and provide informed policy advice to the Bulgarian government on the optimal design of the national catastrophe risk transfer system. The project has been made possible by the grant provided by ProVention consortium – a foundation whose aim is to reduce the risk and social, economic and environmental impacts of natural hazards on vulnerable populations in emerging market countries in order to alleviate poverty and contribute to sustainable development.

14. Actuarial support for the Bulgarian cat pool Expected project outcomes • Development of the Pool’s organizational and business model; • Preparation of the Pool’s 5-year strategy; • Design of the catastrophe insurance cover to be offered by the pool; • Development of a preliminary actuarial pricing model for earthquake risk (based on the available data) – including the determination of optimal insurable limits, deductibles and rates to be charged across different risk zones. • Increased awareness of government and the civil society about the benefits of catastrophe insurance.

15. Contents • World Bank role in building catastrophe risk transfer programs • Actuarial support project for the Bulgarian cat insurance pool • Next steps

16. Project Roadmap Next steps Develop institutional design of risk financing strategy • Business organization • Role of government and private sector Design catastrophe insurance products and determine premium rates • Determine perils covered • Obtain hazard risk data • Determine coverage parameters (deductibles, limits, scope of coverage) • Determine industry-wide costs of distribution and claim-settlement • Make penetration assumptions and develop country-wide model risk portfolio • Model premium rates by risk zone and types of construction insured Produce policy recommendations and develop rating guidelines