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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.

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slide1

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.
slide2

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.
slide3

Country Type

Concentrated

Diversified

Developed

Hanshin Earthquake, Japan, 1995:2.5

Hurricane Andrew,

USA, 1992:0.5

Developing

Mamara Earthquake,

Turkey 1999:5.0

Hurricane Mitch,

Honduras, 1998:20.0

Floods,

China,1998:0.7

Floods,

Poland, 1998:3.0

Development and Concentration are two key loss determinants

Est. Losses as percent of GDP

Source: IIASA, Options, Fall/ Winter, 1999

slide4

Assessing the Real Cost

  • Little work done - reinsurers, Litan, IISA/WB
  • Three part model:
  • . Direct property loss
  • . Indirect losses
  • . Secondary losses
slide5

80

70

60

50

40

30

20

10

0

US$ 160 bn

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Economic losses (2000 values)

of which insured losses (2000 values)

Trend of economic losses

Trend of insured losses

Insured and Uninsured Losses from Natural Disasters (in US Billions)

slide6

Country Type

40 worst disasters - lives lost

40 worst disasters -insured losses

Developing:

No. of disasters

No. of lives lost

Insured loss

1

1,296,200

US$4.6billion

  • 21,528
  • US$6.9billion

Developed:

No. of disasters

No. of lives lost

Insured loss

2

14,525

US$3.7B

36

9,460

US$113.7B

The bulk of the gap is in developing countries: 1970 – 2000 analysis

slide8

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
slide9

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

but may have also added to the problem
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

slide12

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
slide13

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

Lower Risk

Mitigation, Land use planning

Achieve Risk Management Objectives?

No

No

(Risk Transfer/Financing)

(Risk Reduction)

Yes

Manage Position

National Catastrophe Risk Management

Source: EQE

slide14

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
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
slide16

And we are developing a generic financing model

Capital markets

International R/I

Budget

WB

Country or Regional R/I Cat. Pool

Proxy Market – pure cat.

Gov’t Captives

Welfare transfers

Private Market

Property owners and SMEs, Cash Farmers

Infrastructure

Industry and the wealthy

The very poor

slide17

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
slide18

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.
slide19

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.