Pacific Catastrophe Risk Financing Initiative Options for Regional Risk Financing AUSAID Workshop Canberra, Australia March 4,

Pacific Catastrophe Risk Financing Initiative A World Bank Initiative at the request of the Pacific Island Countries In collaboration with the Global Facility for Disaster Reduction and Recovery (GFDRR), Asian Development Bank (ADB), Pacific Islands Applied Geoscience Commission (SOPAC), and the Pacific Island Forum Secretariat Technical risk modeling work conducted by AIR Worldwide

South Pacific Island Countries are highly exposed to natural disasters Samoa 100% of GDP and 42% of population affected Tonga 30% of GDP and 42% of population affected Vanuatu 86% of GDP and 16% of population affected Fiji 12% of GDP and 11% of population affected Actual reported losses in worst year,

Disaster Risk Management Framework Risk Assessment Institutional Capacity Building Decentralized Emergency Management System Community Participation Legislative Framework Training, Education and Knowledge Sharing Emergency Preparedness Emergency Response Planning Exercises Public Awareness Communication and Management Information Systems Technical Emergency Response Capacity Risk Mitigation Investments Warning and Monitoring Systems Hazard Mapping and Land use mapping Code Refinement and Enforcement Hazard Specific Risk Mitigation Catastrophe Risk Financing Reserve Funds Contingent Debt Facility Insurance Catastrophe Bonds Catastrophe Insurance Pools 4

Country-specific catastrophe risk assessment models have been developed for the first time for the South Pacific Island Countries Selected Pacific Island States –Fiji –Tonga –Samoa –Papua New Guinea –Solomon Islands –Vanuatu –Cook Islands –Tuvalu Specific perils –Earthquake (including ground- shaking hazard and earthquake- generated tsunami hazard) –Tropical cyclone (including wind, storm surge and precipitation). Catastrophe risk model 5

Country catastrophe risk profile brochures 6

Pacific Island Countries have a large contingent liability due to natural disasters Direct loss estimates, PML (250 years), by country EQ: earthquake-generated ground shaking hazard and earthquake generated tsunami hazard; TC: tropical cyclone. Emergency loss estimates, PML (250 years), by country 7

Post-disaster financing creates large contingent liability for Donors Catastrophe Risk Profile of the Portfolio of 8 Pacific Island Countries – Estimated Direct Economic Losses by Return Period 8

Countries have access to various financial instruments to finance natural disasters 9

Sovereign catastrophe risk financing framework Reserves Insurance/Reinsurance Insurance Linked Securities Contingent credit International Donor Assistance Risk Retention Risk Transfer Low frequencyHigh frequency High severity Low severity 10

Sovereign Catastrophe Risk Financing The Case of Vanuatu For information only Hypothetical National Financial Strategy for Earthquakes and Tropical Cyclones Pacific Catastrophe Risk Fund 11

Providing Insurance Coverage Against Short Term Government Budget Shortfalls After a Disaster Problem –After a catastrophe event governments need money quickly to provide emergency relief and early rehabilitation and keep services running –Aid may arrive slowly –Aid is usually earmarked to specific projects Proposed Solutions –An instrument to provide immediate post-disaster budget support –Coverage against major perils: Earthquake and Tropical Cyclone –Parametric insurance allowing for rapid payment –Pacific wide to allow benefits of diversification –Protected by international reinsurance and capital markets to give stability –Backed by donor contribution to guarantee sustainability 12

Country-specific risk assessment allows for individual risk- based premiums Return period 1-in-150 years 1-in-10 years) Parametric Insurance Coverage Prototype insurance coverage For Information only 13

By acting collectively, Pacific countries can take advantage of the regional risk diversification benefits By pooling their catastrophe risks, South Pacific countries can reduce their capital requirements by 50% The regional risk diversification benefits can reduce the estimated technical premium rates by 45% on average Note 1. Technical premium rates estimated for a hypothetical insurance portfolio, which offers parametric coverage for combined perils (earthquakes and topical cyclones) with return periods between 10 yrs and 150 yrs. Note 2. Estimated technical premium rates may differ from commercial premium rates due to market conditions. 14

Options for Catastrophe Risk Financing Donor Catastrophe Risk Fund –Financed and managed by donors –Limits ownership of the Pacific Island Countries –Perpetuates post-disaster financial assistance Regional catastrophe insurance portfolio –Placed on the private cat reinsurance markets –Takes advantage of regional risk diversification –Over-relies on catastrophe reinsurance Pacific Catastrophe Risk Fund –Public-private partnership for the financing of natural disasters 15

Regional joint reserve mechanism Participating countries build up collective reserves Risk fund owned and managed by the participating countries Countries can retain some risks and pass excess risks to the reinsurance market when it is most efficient Lower and more stable premium rates over time Initial reserves are needed to start up Pacific Catastrophe Risk Fund Estimated technical premium rate for different levels of initial reserves Hypothetical scenario based on an insurance portfolio of 8 countries 16

Hypothetical Catastrophe Insurance Portfolio Risk Profile Catastrophe Insurance Portfolio profile – Probability Density Function 17 Retention LOL=46% Reinsurance LOL=12% Reinsurance LOL=2%

Caribbean Catastrophe Risk Insurance Facility 16 Caribbean countries covered against hurricane and earthquake risks 18

Provides tools to assess donors contingent liability related to natural disasters Communicates the price of risk to the countries Sensitizes countries about the economic and fiscal impact of natural disasters as part of their DRM dialogue with donors Provides financial incentives for countries to engage in DRM (e.g., compliance with building codes) Promote alternative financing solutions through market- based instruments Enhance the recovery and reconstruction efforts Complements other DRM activities Benefits of Catastrophe Risk Financing for Donors

Potential Roles for Donors in Catastrophe Risk Financing Convening power –Knowledge of countries –Long term dialogue Provider of public goods –Catastrophe risk models –National and regional database Provider of technical assistance –Design of cat risk financing strategy Financier –Funding for project preparation/implementation –Start-up reserves –Premium subsidies 20

Next Steps Stakeholder consultation for selected 8 countries –Country visits to discuss catastrophe risk financing strategies –Regional meeting TA for regional catastrophe risk financing options –Assist countries in quantifying post-disaster short term budget gaps –Develop customized country catastrophe risk financing strategies –Facilitate institutional capacity building –Assist countries in implementing selected financial options Completion and refinement of Pacific catastrophe risk assessment –Refine existing models –Expand models to other Pacific Islands –Creation of a regional GIS exposure database (financed and led by ADB) 21

Nigel Roberts Country Director, Pacific Islands, PNG and Timor Leste Olivier Mahul Iain Shuker Contacts 22