Download - December 19-20, 2006
World Bank World Bank GroupGroup
Hazards of Nature, Risks and Opportunities for Development in South Asian Countries
Regional Conference in New Delhi, India
All About Risk Financing: Theory and Practice
Eugene N. Gurenko, Ph.D., CPCU, ARe Lead Insurance Specialist
December 19-20, 2006
World Bank World Bank GroupGroup
Agenda
Catastrophe insurance in developing countries
Enabling the development of catastrophe insurance market
through public policies
The potential role of the World Bank
World Bank World Bank GroupGroup
Agenda
Catastrophe insurance in developing countries
Enabling the development of catastrophe insurance market
through public policies
The potential role of the World Bank
World Bank World Bank GroupGroup
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
Catastrophe insurance in developing countries
World Bank World Bank GroupGroup
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%
0
5
10
15
0 200 400 600 800 1,000 1,200GDP/ Capita $US
Prem
ium
/ Cap
ita $
US
Vietnam IndiaIndonesia
China
Philippines
Global Indicator
PERSONAL INSURANCE PREMIUM = 1.3*(GDP/1000)^2PERSONAL CAT INSURANCE PREMIUM = 0.1*PERSONAL INSURANCE PREMIUM
Catastrophe insurance in developing countries
World Bank World Bank GroupGroup
Insured and economic damages from natural disasters (%)
Over 25 years the share of economic loss covered by insurance in developed
Markets increased considerably while remaining stagnant in poorer countries.
Insured vs. economic losses in rich and poor countries
0,0%
10,0%
20,0%
30,0%
40,0%
50,0%
60,0%
Developing
Developed
Source: Munich Re NatCatService database, 2005
•More than 45% of
economic damages
covered by insurance
in rich countries
•Less than 3 percent
covered in developing
countries
6
Catastrophe insurance in developing countries
World Bank World Bank GroupGroup
Loss (USD, bn) Insured Loss (%) Uninsured Loss % GDP % Govt. revenues
Earthquake Turkey 22.0 5% 5% 21%Izmit (1999)
Hurricane Honduras 3.0 6% 34% 158%Mitch (1998)
Earthquake India 6.0 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)
Earthquake USA 43.0 47% 0.3% 2%Northridge (1992)
Winter Storm France 6.2 100% - -(1999)
Economic Loss from Uninsured Natural Disasters
Catastrophe insurance in developing countries
World Bank World Bank GroupGroup
Major sources of disaster finance
0
10000
20000
30000
40000
50000
60000
70000
80000
$ mm
1987-1989
average
1991 1993 1995 1997 1999 2001 2003
Financing of catastrophe losses in developing countries
Emergency relief aid Insured loss Retained loss
•On average, 92,6% of economic loss was retained by developing countries.
Sources: OECD, Munich Re
•Loss retention was on
average $31 bn per year
•Loss retention has been
highly variable – 50%
coefficient of variation
Catastrophe insurance in developing countries
World Bank World Bank GroupGroupIndia is Illustrative of the Trend
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
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.
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
World Bank World Bank GroupGroupGrowing Fiscal Costs of Natural Disasters
Margin Money/ CRF Expenditures Rs millions India
0
5000
10000
15000
20000
25000
74-79 79-84 84-89 90-95 95-00 00-05
World Bank World Bank GroupGroup
Agenda
Catastrophe insurance in developing countries
Enabling the development of catastrophe insurance market
through public policies
The potential role of the World Bank
World Bank World Bank GroupGroup
Country Assets (people, housing, factories, schools…)
Country Assets (people, housing, factories, schools…)
Risk AnalysisExpected Annual Loss
Loss Exceedance (PML’s)Risk Transfer Cost/Benefit
Risk AnalysisExpected Annual Loss
Loss Exceedance (PML’s)Risk Transfer Cost/Benefit
Risk Transfer and Financing Strategy
Reinsurance/Alternative Risk Financing Strategies
Risk Transfer and Financing Strategy
Reinsurance/Alternative Risk Financing Strategies
Manage PositionManage Position
NoNo
Yes
Lower RiskMitigation, Land use
planning
Lower RiskMitigation, Land use
planning
(Risk Transfer/Financing) (Risk Reduction)
Achieve Risk Management
Objectives?
Achieve Risk Management
Objectives?
Flood, Earthquake, Wind….Flood, Earthquake, Wind….
National Catastrophe Risk Management
Source: EQE
World Bank World Bank GroupGroup
Low cost of IBRD capital
Public policies
Public risk awareness, education campaigns
Sovereign catastrophe risk coverage (Mexico bond, Caribbean Cat Facility, GCIF)
Making insurance compulsory or semi-compulsory (Turkey/Romania/Columbia/France);
Creation of national pools;
Drawing a clear line between public and private liabilities (Spain)
Enabling public policies for catastrophe insurance
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
Enabling the development of catastrophe insurance market through public policies
World Bank World Bank GroupGroup
First step: Recognize catastrophe risk exposure in the national budget
National Budget
DisasterBudget
Calamity Calamity TrustTrust
$$
$$
World Bank World Bank GroupGroup
However, self-insurance funds like Fonden are typically underfunded
National Budget
FondenBudgeted
Fonden Fonden TrustTrust
$$
$$
How one can create a larger Fonden Trust w/o asking for more budget?
Re-insurers
Investors
InsuranceInsurance
Premium Additional Capital
World Bank World Bank GroupGroup
Mexico: Catastrophe Risk Transfer in a Nutshell
Annual Expected Loss Probabilities
Zone A Zone B Zone C
0.63% 0.96% 0.30%
The FONDEN through an international public bid process, hired Swiss Re Capital Markets, Swiss
Reinsurance Company and Deutsche Bank Securities.
+
Needed a Financial Needed a Financial Entity with experience Entity with experience
and proved results and proved results
+
Insured InvestorsSPVProtection
Funds = Bonds
PremiumReturn + Premium
Collateral Account
ReturnFunds
Funds + Return + Premium
“Insurance Company”
Insured InvestorsSPVProtection
Funds = Bonds
PremiumReturn + Premium
Collateral Account
ReturnFunds
Funds + Return + Premium
“Insurance Company”
Cat-Bond ConceptCat-Bond Concept
Insurance ConceptInsurance Concept
World Bank World Bank GroupGroup
2000/1 2002 2003 2005
Claims Paying
Capacity
$ 600 mm $ 900 mm $ 800 mm $ 1.6 billion
Policy #
(% of TH)
0.6 mm 2.48 mm 1.9 mm 2.5 mm
Surplus $ 0 mm $ 2 mm $ 10 mm $ 250 mm
Costs of
reinsurance
ROL %
6.13 5.51 5.14 4.2
Premium
Rate (average)
$ 13 $ 15 $ 17 $ 47
Benefits of country risk pooling: Turkish Catastrophe Insurance Pool
Enabling the development of catastrophe insurance market through public policies
World Bank World Bank GroupGroup
Claims Paying Capacity
Reserves
Risk
Transfer
Countries
Disaster contingent payments
Premiums
Premiums
Global Insurance PoolCapital
Contributions
Donors
Capital
Global
Reinsurance
&
Capital
Markets
Donors
A Global Cat Insurance Facility (GCIF): A Feasibility Study
Shareholders
Premium Subsidies
Enabling the development of catastrophe insurance market through public policies
World Bank World Bank GroupGroup
Benefits of global risk pooling: Global Catastrophe Insurance Facility
•27 countries
•2 perils
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Countries Regions Portfolio
Pre
miu
m/I
ns
ure
d L
imit
Enabling the development of catastrophe insurance market through public policies
World Bank World Bank GroupGroup
Agenda
Catastrophe insurance in developing countries
Enabling the development of catastrophe insurance market
through public policies
The role of the World Bank
World Bank World Bank GroupGroup
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.
The potential role of the World Bank