Climate Change & Financial InstitutionsNational Development Banks and Financing Adaptation InvestmentsOctober 15, 2015

Challenges & Lessons Learned | October 15, 2015

The growing burden of uninsured lossesNatural catastrophe losses 1970 – 2014 (in 2014 USD)

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0

50

100

150

200

250

300

350

400

450

1970 1975 1980 1985 1990 1995 2000 2005 2010

Uninsured losses

Insured losses

10-year moving average insured losses

10-year moving average total economic losses

Source: Swiss Re Economic Research & Consulting and Cat Perils.

Challenges & Lessons Learned | October 15, 2015

Growing consensus on the macroeconomic impact of natural events

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"Natural Disasters Can Damage Sovereign Creditworthiness”Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness, September 2015

"Climate change is likely to be one of the global mega-trends impacting sovereign creditworthiness…. Government budgets could come under additional pressure as disaster recovery and emergency support for affected populations is likely to fall on the state in most cases."Climate Change is a Global Mega Trend for Sovereign Risk, May 2014

"Finance Ministries play a pivotal role in DRM strategies [by] ensuring proper fiscal management of disaster risks by anticipating potential budgetary impacts and planning ahead to ensure adequate financial capacity and rapid release of funds, thus enabling emergency response, reconstruction of public assets and infrastructure, and targeted financial assistance." Disaster Risk Assessment and Risk Financing - A G20/OECD Methodological Framework

Challenges & Lessons Learned | October 15, 2015

How to close the protection gap

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gap

4

Which risk?

Governments

Who carries the risk?

PoolingInsurance schemes and pools

to increase insurance penetration

MacroRisk transfer solutions

for (sub)sovereigns to cover their direct or indirect costs

MicroSimplified products distributed

via aggregators such as MFIs, NGOs, and corporates

Risk transfer solution

Businesses, homeowners,

farmers

Public physical assets

Emergency response costs

Foregone revenue

Uninsured private assets

Livelihood assistance

Pro

tecti

on

ga

p

Individuals

Challenges & Lessons Learned | October 15, 2015

Financing is a pillar of integrated disaster risk management

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Adaptation

Identification

Assessment

Prevention & mitigation

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2

3

What risks do we face?

•Systematic•Cross-sectoral

Can we quantify it?

• Frequency• Severity

How can we minimize it?

• Improve quality

• Build new protection

How can we manage the residual risk?

• Change behavior

• Pre-finance• Risk transfer

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Challenges & Lessons Learned | October 15, 2015

Economic Rationale

Reduce long term funding costs by transferring peak risks to insurance markets

Protect fiscal space for other uses as insurance is a non-debt instrument

Ability to target funding cost relative to coverage needed

Benefits to Pre-Event Financing

Market Rationale

Setting price benchmark on risk of an event

Opening market for corporations and individuals to hedge risk using similar instruments

Broadening insurance expertise by increasing relevance of local risk in global insurance sector

Challenges & Lessons Learned | October 15, 2015 7

Case study Mexico: MultiCat - Funding for immediate relief efforts after disasters

Solution features Insured perils: Earthquake and hurricane

Payments to be used for immediate emergency relief after a disaster

Parametric catastrophe bond: USD 315 m

Trigger type: Index

Earthquake: physical trigger (quake magnitude)

Hurricane: physical trigger (barometric pressure)

Time horizon: October 2012 – November 2015

Renewed cat bond launched through the World Bank’s MultiCatfacility and third cat bond for Mexico

Involved parties Insured: Fund for Natural Disasters (FONDEN) of Mexico

Reinsured: AGROASEMEX S.A.

Arranger: World Bank Treasury

Swiss Re: Co-lead manager and joint bookrunner

Challenges & Lessons Learned | October 15, 2015 8

Case study Uruguay: Largest Energy Risk Transfer to Protect Against Drought Risk

Solution features

Insured peril: Drought

Payments to be used to purchase energy from alternative sources when drought conditions cause lack of hydro power

Derivative contract: between UTE, Uruguayan state-owned hydro-electric power company, and World Bank Treasury. Risk is then placed in the market

Payment mechanics:

Trigger: Level of rainfall monitored at weather stations

Settlement: Market price of brent crude oil

Time horizon: January 2014– July 2015

Transaction Size: USD 450 m Largest of its kind in the weather risk management market

Involved parties

Client: UTE (Uruguayan state-owned power company)

Arranger: World Bank Treasury

Risk Takers: Swiss Re and Allianz

Challenges & Lessons Learned | October 15, 2015 9

Case study Caribbean:CCRIF Excess Rainfall Coverage

Solution features• In July 2014, the CCRIF added a third peril to their program by

offering excess rainfall insurance to their members• 12 countries purchased the coverage that triggers when the

modelled loss exceeds the defined country threshold • Loses are determined based on 2-3 day rainfall totals and the

country exposure values • Utilizes Kinetic Analysis Corporation’s (KAC) high resolution data

that is a compilation of satellite and ground observations • Deductible for the CCRIF is USD 7 m and Swiss Re provides

reinsurance with a limit of USD 35 m

Involved parties• Reinsurer: Swiss Re • Product designed by: CCRIF, KAC and Swiss Re• Calculation agent: KAC

Payouts to date• Anguilla: USD 493k (Oct 2014) and USD 559k (Nov 2014)• St Kitts and Nevis: USD1m (Nov 2014)• Barbados: USD1.2m (Nov 2014)

Challenges & Lessons Learned | October 15, 2015 10

Challenges & Lessons Learned | October 15, 2015

Legal notice

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