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Characteristics of Catastrophe Risk • Low frequency but high severity events. • High exposures and vulnerabilities. • Mismanagement of catastrophe risk can have highly adverse social, economic and political implications for the affected countries. • Can strain local governmental and insurance sector financial resources and often requires offshore risk transfer. • Some risks can not be hedged. The Insurance and Contractual Savings Team sees FSE’s Catastrophe Role as Follows • Vulnerability of the world’s poor to natural disasters should underpin the World Bank’s work on risk transfer and risk financing. • By ensuring that sufficient liquidity exists after a disaster, risk transfer/funding mechanisms can help to speed economic recovery and reduce government fiscal exposure to natural disasters. • Catastrophe risk management can also assist countries in the optimal allocation of risk in the economy, thus contributing toward higher economic growth, better mitigation and more effective poverty alleviation. Development and Concentration are two key loss determinants Est. Losses as percent of GDP Country Type Concentrated Developed Hanshin Earthquake, Japan, 1995: 2.5 Developing Mamara Earthquake, Turkey 1999: 5.0 Hurricane Mitch, Honduras, 1998: 20.0 Source: IIASA, Options, Fall/ Winter, 1999 Diversified Hurricane Andrew, USA, 1992: 0.5 Floods, China,1998: 0.7 Floods, Poland, 1998: 3.0 Assessing the Real Cost • Little work done - reinsurers, Litan, IISA/WB • Three part model: . Direct property loss . Indirect losses . Secondary losses Insured and Uninsured Losses from Natural Disasters (in US Billions) US$ 160 bn 80 70 60 50 40 30 20 10 0 1950 1955 1960 1965 1970 Economic losses (2000 values) of which insured losses (2000 values) Trend of economic losses Trend of insured losses 1975 1980 1985 1990 1995 2000 The bulk of the gap is in developing countries: 1970 – 2000 analysis Country Type 40 worst disasters lives lost 40 worst disasters insured losses Developing: No. of disasters 1 4 No. of lives lost 1,296,200 21,528 Insured loss US$4.6billion US$6.9billion Developed: No. of disasters 2 36 No. of lives lost 14,525 9,460 Insured loss US$3.7B US$113.7B Insurance Penetration tells half the story Country GDP/ Capita USA UK Sweden Spain Mexico Argentina Philippines Zambia 26,030 19,720 28,271 14,810 3,512 8,584 1,197 325 Non Life Insurance Premiums % GDP 4.8** 3.4 2.3 2.9 0.8 1.2 0.8 0.6 Why Market Failure? • Loss of credibility - motor insurance syndrome • Lack of history of insurance • Agency costs • Reinsurer/ broker rents • Moral hazard - government subsidies • Religion? • Uninsurability at acceptable prices The other half - clients with least insurance capacity are often the most exposed and vulnerable Index of Vulnerability to Natural Disasters: Vanuatu 727.17 Bangladesh 539.16 Trinidad & Tobago 523.13 India 510.67 The Bahamas 491.28 Mauritania 487.55 Antigua & Barbuda 430.77 Botswana 418.03 The World Bank has helped to fill the gap: 1980-2001 more than $30 billion 19 13 7 156 ($5.3 b) Africa 60 28 Latin America and Caribbean 88 ($8.1 b) 10 44 54 ($5.3 b) South Asia 43 12 East Asia and Pacific 55 ($5.5 b) 25 10 35 ($1.8 b) Middle East and North Africa 20 13 33 ($3.0 b) Europe and Central Asia 0 20 Urban&T ransport 40 60 80 All other sectors 100 120 140 160 180 But may have also added to the problem ‘..the World Bank, must increasingly incorporate natural disasters and natural hazards into the projects and programs they fund. Some of their projects are not only silent on the issues of disaster vulnerability but may actually serve to increase exposure and vulnerability.’ Source: Berke and Beatley, ‘After The Hurricane’, John Hopkins, 1997 FSE has developed a rigorous country risk management approach – a new product - 1 • Independent Estimates of Countries’ Economic Exposures and Vulnerability to Natural Disasters; • Quantification of Economic Benefits from Different Risk Transfer/Risk Hedging Arrangements; • Selection of Best Risk Transfer and Financing Programs • Review of premium rates and assistance in the design of risk transfer instruments National Catastrophe Risk Management 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 No (Risk Transfer/Financing) Achieve Risk Management Objectives? Yes Manage Position Source: EQE Lower Risk Mitigation, Land use planning No (Risk Reduction) This involves a lot of technology • 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 FSE has developed a rigorous country risk management approach – a new product - 2 • Determination of expected survivability of insurance/reinsurance pools for given levels of exposure and capitalization • Provision of risk funding facilities • Design of Legal and Institutional Frameworks for Risk Management And we are developing a generic financing model Capital markets International R/I WB Budget Country or Regional R/I Cat. Pool Private Market Industry and the wealthy Proxy Market – pure cat. Property owners and SMEs, Cash Farmers Gov’t Captives Infrastructure Welfare transfers The very poor When do the financial products work? • Relatively frequent, but not too frequent (Boston EQ - Tunisian drought Bangladesh Flood) - cognitive effects • The population has some experience of insurance – otherwise tax perception • The funding process will support mitigation efforts - political cycle • Reasonable data is available Even when the basics are in place there are challenges in building risk transfer systems • Lack of risk awareness at the government level and among population; • Undeveloped insurance sector; • Excessive reliance on the government as the reinsurer of last resort – moral hazard; • Low country incomes; • High degree of uncertainty with regard to expected economic losses. • Distribution costs. • Lack of public/ private trust. The catastrophe work program to date includes the Bank’s involvement in the design of the Turkish Catastrophe Insurance Pool, preparation of the Regional R/I Pool in the Caribbean and risk management studies of natural hazards in Honduras, India, Bangladesh, Pakistan and Sri Lanka. Feasibility studies on parametric weather insurance have been carried out in Nicaragua, Morocco, Mexico,Mongolia and Turkey and tangible results already achieved in Morocco and Mexico. Pre assessment work is underway in Romania, Bulgaria and Iran.