World Bank Group Introduction to the World Bank Insurance Practice: Key Lessons Learned and the Road Ahead Eugene N. Gurenko Senior Insurance Specialist World Bank Insurance Practice Washington DC June 2-3, 2003 Financing the Risks of Natural Disasters: A New Perspective on Country Risk Management

World Bank Group 2 From Ex-Post Financing to Ex-Ante Risk Management Ex-Post Financing n Emergency reconstruction loans (over $38 billion over the last 20 years); n Required no clear risk management plan on the part of countries; n Always late and never enough (liquidity aspects)! n Leads to no visible improvements in countries’ vulnerabilities; n Perpetuates wrong incentives on the part of vulnerable countries Ex-Ante Risk Financing and Risk Transfer n Contingent capital facilities to national risk pools and governments and financing of reinsurance premium (<$200 million over the last 3 years) n Reduces government fiscal exposures; n Enables to access liquidity immediately in aftermath of natural disasters; n Requires major improvement in country risk management and reduces countries’ vulnerabilities in the long-run and contributes to long-term economic growth

World Bank Group 3 Insured vs. Total Economic Loss in Major Natural Catastrophes 5,0004,5712,00021,59110,0245,0003,7001,660 Source: Swiss Re CatNet database, AXCO database 1362,00036,4064,535 Total Economic Loss (US$MM)

World Bank Group 4 Fiscal and Economic Effects of Disasters Uninsured Economic Loss as % of GDP and Government Revenues Uninsured Economic Loss as

World Bank Group 5 Key Indicators of Countries’ Fiscal and Economic Vulnerability n Catastrophe Risk Exposures n Insurance penetration n Size of the economy n Geographical diversification/concentration of economy n Size of government revenue (tax base)

World Bank Group 6 Residential Catastrophe Coverage in Turkey: Before and After TCIP

World Bank Group 7 Why National Catastrophe Insurance Pools is a Potential Way Forward? n Low catastrophe insurance penetration. n Local reinsurance and insurance markets have limited risk bearing capacity making the government a reinsurer of last resort. n Satisfy the need for immediate post event liquidity. n Develop risk awareness and encourage better mitigation.

World Bank Group 8 Macro Lessons o Public private partnerships in the area of catastrophe risk management are the only effective way forward. o The World Bank can add value by facilitating the development of catastrophe risk markets around the globe. o Creation of specialized catastrophe insurance programs considerably helps to boost insurance penetration and reduce government exposure to catastrophe risk.

World Bank Group 9 Micro Lessons o Importance of good governance and management. o Government commitment to provide a solid foundation for catastrophe risk management and set the incentives right for mitigation are key. o Involvement of the private insurance industry and support of the program by the agent force is key o Support of global reinsurers is essential. o Building and protecting the pool’s surplus through prudent underwriting, pricing, asset management and reinsurance.

World Bank Group 10 Micro Lessons (continue) o Leaving no safety valves for politicians may be detrimental to the future of a program. o A retail approach to the distribution of the policies may be difficult to implement and perhaps some sort of risk socialization through a special mandatory property tax or surcharge may be justified. o Housing exposure accounts only for a fraction of country’s economic exposure, with public sector infrastructure being mostly at risk. o Risk transfer has to be supplemented with risk financing.

World Bank Group 11 Our Current Vision of Catastrophe Risk Management at the Country Level Risk Reduction Risk Transfer Risk Financing Institutional Incentives

World Bank Group 12 Our Operational Approach to Catastrophe Risk Management  (i) Conduct a thorough assessment of country risk exposures;  (ii) Recommend feasible approaches to finance them;  (iii) Identify the role to be played by the World Bank vs. that of the private insurance or reinsurance markets;  (iv) Design lending programs and advisory services aimed at building domestic catastrophe risk management capabilities both in government and at the level of domestic insurance industries.

World Bank Group 13 Our Products n (i) contingent capital facilities in support of national catastrophe reinsurance programs; n (ii) loans to finance reinsurance premium; n (iii) ex-ante (pre-disaster) liquidity facilities in support of government reconstruction efforts; n (iv) technical assistance loans to finance risk management and financial design and feasibility studies; n (v) sectoral risk management studies (at no cost to the borrower), if included in the CAS; n (vi) catastrophe risk management services to governments on a stand-alone basis separate from lending.

World Bank Group 14 Countries with Disaster Risk Management World Bank Financed Activities CountryStatus TurkeyOngoing risk financing and TA RomaniaInsurance component under preparation IranOngoing financing of TA for risk management ColumbiaInsurance lending program under preparation IndiaRisk management study is complete PhilippinesRisk management study under preparation CambodiaRisk management study MexicoTA and lending under preparation Caribbean countriesRisk management study

World Bank Group 15 What Are We Trying to Achieve? n (i) increase insurance penetration for natural hazards in the client countries; n (ii) reduce government catastrophe risk exposures; n (iii) make catastrophe insurance management an integral part of overall government risk management practices.

World Bank Group 16 Means to Achieve Our Goals  (i) to have thorough risk assessments done in each disaster prone client country and advise the government on available options for risk financing and risk transfer;  (ii) ensure that CAS explicitly account for catastrophe risk management;  (iii) support the development of country detailed risk models and hazard maps that can be made available to domestic insurers and reinsurers for risk pricing purposes;  (iv) design of new lending products with built-in catastrophe insurance options (loss triggered debt forgiveness or loan restructuring, for instance);  (v) build effective partnerships with international reinsurance community in addressing the risk of natural disasters in developing countries.

World Bank Group 17 Key Constraints to Expand Disaster Risk Management Practice  We are restricted in our ability to assist exposed countries by the Bank lending practices (as most of risk management work piggybacks on disaster reconstruction loans);  By the rarity of natural disasters (no EQ – no risk management work!). Although there has been lots of improvement on that count!

World Bank Group 18 Conclusions n (i) Development of ex-ante catastrophe risk management capabilities at the country level is gradually becoming an integral part of the World Bank country economic work but there is still a lot of work ahead; n (ii) Disaster prone countries are becoming more active in utilizing the expertise of the Bank and global reinsurance markets in building national effective risk management programs (although there is still a long way to go!; n (iii) Global reinsurers should be more pro-active in assisting the Bank efforts to develop catastrophe insurance market in developing countries.