Disaster Risk Financing & Insurance in the DRM Framework

1. Disaster Risk Financing & Insurance in the DRM Framework World Bank Disaster Risk Financing UN-ECA/AU: June 25, 2012

2. Incidence and impact of disasters are increasing Damages and losses are increasing. Natural disaster fatalities totaled about over 3.3M between 1970-2010 • The average annual number of disasters has almost doubled since the 1980s.

3. Board strategic guidance to WBG’s DRM framework Post-Crisis Directions (2012): Preparing for Crises • Global approaches to post disaster needs assessments • Coordinated emergency surge capabilities for rapid response • Risk sharing mechanisms • Designing innovative finance and insurance products

4. Most natural disaster losses are borne by households and governments

5. Financial protection is a valuable tool for managing the impacts of extreme events THE WORLD BANK

6. Disaster Risk Financing and Insurance Program • Mainstream disaster risk financing and insurance in national DRM strategies • Knowledge management and capacity building • Product Development • Technical assistance and operations Partnerships Academic partners: Wharton School, NTU Singapore, etc. Practioners: Willis Research Network, Geneva Association, brokers, reinsurers Regional development banks: IADB, ADB

7. Sovereign Disaster Risk Financing

8. Main messages • Sovereign disaster risk financing strategies • Increase financial response capacity of governments in the aftermath of • natural disasters, while protecting long-term fiscal balances • Decrease financial vulnerability, and therefore macroeconomic risk • Create financial incentives for governments to further mitigate risks • World Bank recommends using a “bottom up” layered risk approach, from low risk (recurrent, low severity events) to high risk layers (infrequent, catastrophic events) • Effective, sustainable strategies combine ex-ante and ex-post sources • World Bank offers a variety of products and services to help governments increase financial resilience to natural disasters

9. Sovereign Disaster Risk Financing Strategies Understand Contingent Liability Assess explicit, implicit exposure Manage the Volatility of the Cost Strategies to both transfer and retain risk

10. Benefits of ex-ante financing • Complements disaster risk reduction – • financial protection against residual risks • Enhances disaster risk reduction – • encourages pre-disaster preparedness and mitigation • Increases financial resilience – • Creates immediate liquidity post-disaster • volatility of the cost is managed • Improves capacity to deal with natural disasters – • forces risk assessment, preparedness, planning • Lowers post-disaster costs – • e.g. by minimizing budget disruption

11. World Bank disaster risk financing instruments Probability of Event Severity of Impact Facilitates issuance of multi region, multi-peril cat bonds Insurance- linked Securities MultiCat Program Low Major Insures against weather-related losses, based on an index Weather Derivatives Risk Transfer Regional facility pooling risks to cover against natural disasters (Earthquake & hurricane – 16 Caribbean countries) Insurance Pools CCRIF Provides immediate liquidity following a natural disaster Cat DDO Contingent Loans Risk Retention Minor High

12. Case study: Costa Rica

13. Case study: Costa Rica

14. Africa

15. Case study: Malawi

16. Case study: Malawi

17. Risk pooling at the regional, sovereign and domestic market level • Pooling risks can: • increase options for financing • increase availability of affordable insurance • reduce the amount and cost of capital required to support risk

18. Risk pooling • Pooling risks can: • increase options for financing - CCRIF Anguilla Catastrophe Swaps Reinsurance Antigua & Barbuda Premium Premium Insurance payout Insurance payout Insurance premium . . . Growth Trinidad & Tobago Insurance payout Reserves Initial donor contribution Turks & Caicos Islands CCRIF retains risk from participating countries through its own reserves and transfers the risk that exceeds its own capacity to reinsurance markets.

19. Property Catastrophe Risk Insurance Markets GFDRR is able to help developing countries reduce their vulnerability to natural disasters and adapt to climate change, thanks to the continued support of its partners: ACP Secretariat, Australia, Bangladesh, Belgium, Brazil, Canada, Colombia, China, Denmark, Egypt, European Union, Finland, France, Germany, Haiti, India, Ireland, Italy, Japan, Luxembourg, Malawi, Mexico, The Netherlands, New Zealand, Norway, Portugal, Saudi Arabia, Senegal, Spain, South Africa, South Korea, Sweden, Switzerland, Turkey, United Kingdom, United States, Vietnam, Yemen, IFRC, UNDP, UN/International Strategy for Disaster Reduction, and The World Bank.

20. Main Messages Why engage in the development of property catastrophe risk insurance markets? • To reduce pressure on the fiscal budget post disaster by: • reducing the need for government post-disaster aid to individuals/SMEs • transferring some of the cost of rebuilding of government assets to the private sector • To promote risk-mitigation action and risk-averse behavior from exposed individuals and SMEs • PCRI markets are underdeveloped in Africa

21. Main Messages How does the Bank engage in the development of property catastrophe risk insurance markets? Technical assistance, contingent financing and other loans and grants for: • The formation of PCRI pools and programs through Public Private Partnerships (PPPs) • The creation of regulatory environments favourable to sustainable domestic PCRI market growth

22. Agricultural Insurance GFDRR is able to help developing countries reduce their vulnerability to natural disasters and adapt to climate change, thanks to the continued support of its partners: ACP Secretariat, Australia, Bangladesh, Belgium, Brazil, Canada, Colombia, China, Denmark, Egypt, European Union, Finland, France, Germany, Haiti, India, Ireland, Italy, Japan, Luxembourg, Malawi, Mexico, The Netherlands, New Zealand, Norway, Portugal, Saudi Arabia, Senegal, Spain, South Africa, South Korea, Sweden, Switzerland, Turkey, United Kingdom, United States, Vietnam, Yemen, IFRC, UNDP, UN/International Strategy for Disaster Reduction, and The World Bank.

23. The agricultural sector is vital for Africa economies, and majority of livelihoods Sources: World Bank 2011; Statistics Division FAO 2010.

24. Agricultural sector is underserviced by insurers in developing countries Source: Mahul & Stutley 2010.

25. Main Messages Why engage in the development of agricultural insurance (AI) programs? • To provide agricultural producers with a risk management tool that can also: • Help increase agricultural production; • Provide incentives for improvement of production methods. • To reduce contingent liability of the government. • To promote solutions that address market failures in the provision of AI.

26. Agricultural Sector is particularly exposed to adverse natural events • Agricultural development in Africa is key to relieving poverty: agriculture is still the main economic base for the continent’s poor and accounts for around a third of GDP. • GDP growth in agriculture is 2X as effective in reducing poverty as non-agricultural GDP growth. • Agricultural producers are highly exposed to weather risks, pests, and disease. Agricultural insurance (AI), can contribute to enhancing the productivity of agriculture through assisting farmers in investing in more productive, but more risky, agricultural activities.

27. Main Messages How does the Bank engage in the development of AI programs? • Technical assistance and contingent financing for: • Feasibility studies on AI; • Design and implementation of innovative AI pilots and programs; • Advising on development of an appropriate regulatory framework for AI. • Promotion of Public-Private Partnerships (PPP) that utilize: • Effective risk layering; • Insurance pools to build domestic insurers’ capacity.

28. Interest in index insurance has grown significantly in recent years • Well-developed aggregate index insurance markets in some countries • Parametric index insurance pilots have proved challenging to scale up.

29. Financial management of agricultural production risks • The World Bank promotes a proactive, strategic approach to the financial management of agricultural production risks. • Financial risk management model deals with residual risks that cannot be mitigated.

30. Agricultural Risk Financing Top layer of risk: Includes low frequency, high severity risks. These catastrophic risks are not well documented. Innovate financial products, backed by governments, may offer risk transfer options. Mezzanine layer of risk: Includes less frequent, more severe risks that affect many farmers/herders at the same time. The private insurance industry has demonstrated its ability to cover these losses. Bottom layer of risk: Includes high frequency, low consequence events that affect farmers, from a variety of mostly independent risks. These should be retained by the farmers/herders.

31. Case study: Index-based livestock insurance in Mongolia

32. AI Take-Aways • WB supports market-enhancing AI programs, while taking into account the government’s social objectives. • Government support through development of risk market infrastructure and targeted premium subsidization. • Choice of indemnity-based and/or index-based insurance products depends on specific context and objectives. • Mongolian and other examples illustrate that engagement in AI is a long-term process that requires: • Government ownership in client country; • Development of technical tools that facilitate policy dialogue and regulatory revision for AI; • Significant investment in capacity building and education; • Development of a risk financing strategy for the program.

33. Despite a number of pilots in Africa, index insurance has not yet scaled-up • Area-yield based indices for Senegalese farmers • Recently launched by the national agricultural insurer, limited outreach reported as of 2010 • Weather-based indices for agricultural borrowers in Malawi • Scheme operational for a number of years, has struggled to grow client base • The normalised dry vegetation index (NDVI) for Kenyan herders • Pilot underway in Northern Kenya

34. The HARITA scheme has shown promise in Ethiopia • Launched in 2009 with 200 farmers, HARITA has scaled up to serve over 13,000 in 2011 • Promotes an integrated approach to strengthening food and income security (climate change focus). • Builds on Ethiopia’s Productive Safety Net Program – PSNP participants have option to pay for insurance with work. • Expanding as R4 for Rural Resilience: Risk reduction, risk reserves, risk transfer, and prudent risk-taking. • Planning for expansion to Senegal • Implemented by: Oxfam America, WFP, and many others.

35. In conclusion, product suitability must be carefully evaluated before investment! • How should yield data, weather data, satellite data, etc. be optimally used in agricultural insurance ? • What should be used behind the scenes and what should affect claim payments to farmers? • What is the level of basis risk for different index designs? • How can risk market infrastructure for agricultural insurance in developing countries be best designed? • Could standardize products, issue longer term contracts, and separate the roles of product design and delivery. • Consumer protection legislation for indexed insurance products • Creation of technical support units to provide objective, technical support to states. • How do the benefits from support to agricultural insurance compare with the benefits from other interventions ?

36. Governments and donors can play a number of roles… • Coordination in index design/data collection • Agricultural insurance indices are club goods • Lack of coordination ⇒ underinvestment in good indices • Risk financing • In the early years of a new microinsurance program it may not be efficient for private sector to bear medium layers of risk: • Financial regulation ensures that insurer/reinsurer must charge high premium if cannot quantify the risk • Technical support and consumer protection • Consumer protection for consumer derivatives is complex but critical • Monitoring and evaluation • Communication/marketing or compulsion • Financial support • Subsidise premiums or data collection/index design