World Bank Group 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 Group 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 Group 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 Group 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 Group 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% Vietnam India Indonesia China Philippines Global Indicator PERSONAL INSURANCE PREMIUM = 1.3*(GDP/1000)^2 PERSONAL CAT INSURANCE PREMIUM = 0.1*PERSONAL INSURANCE PREMIUM Catastrophe insurance in developing countries

World Bank Group 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. 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 Group Loss (USD, bn)Insured Loss (%) Uninsured Loss % GDP % Govt. revenues Earthquake Turkey % 5% 21% Izmit (1999) Hurricane Honduras 3.0 6%34% 158% Mitch (1998) Earthquake India 6.0 2% 1% 7% Gujart/Bhuj (2001) Floods India5.0 7%0.8% 5.5% Mumbai (2005) Quake Pakistan5.0 0%5% 40% Kashmir (2005) Earthquake USA %0.3% 2% Northridge (1992) Winter Storm France % - - (1999) Economic Loss from Uninsured Natural Disasters Catastrophe insurance in developing countries

World Bank Group Major sources of disaster finance 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 Group India is Illustrative of the Trend Direct losses from natural catastrophes (USD bn): ; ; ; billion; 2005 alone over $7 billion 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 Group Growing Fiscal Costs of Natural Disasters Margin Money/ CRF Expenditures Rs millions India

World Bank Group 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 Group Country Assets (people, housing, factories, schools…) Risk Analysis Expected Annual Loss Loss Exceedance (PML’s) Risk Transfer Cost/Benefit Risk Analysis Expected 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 Position No Yes Lower Risk Mitigation, Land use planning Lower Risk Mitigation, Land use planning (Risk Transfer/Financing) (Risk Reduction) Achieve Risk Management Objectives? Flood, Earthquake, Wind…. National Catastrophe Risk Management Source: EQE

World Bank Group 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/Fran ce); 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 Group First step: Recognize catastrophe risk exposure in the national budget National Budget Disaster BudgetCalamityTrust $ $

World Bank Group However, self-insurance funds like Fonden are typically underfunded National Budget Fonden BudgetedFondenTrust $ $ How one can create a larger Fonden Trust w/o asking for more budget? Re-insurers Investors Insurance Premium Additional Capital

World Bank Group Mexico: Catastrophe Risk Transfer in a Nutshell Annual Expected Loss Probabilities Zone AZone BZone 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 Entity with experience and proved results + Cat-Bond Concept Insurance Concept

World Bank Group 2000/ Claims Paying Capacity $ 600 mm$ 900 mm$ 800 mm$ 1.6 billion Policy # (% of TH) 0.6 mm 2.48 mm1.9 mm2.5 mm Surplus$ 0 mm$ 2 mm$ 10 mm$ 250 mm Costs of reinsurance ROL % 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 Group Claims Paying Capacity Reserves Risk Transfer Countries Disaster contingent payments Premiums Global Insurance Pool Capital 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 Group 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% CountriesRegionsPortfolio Premium/Insured Limit Enabling the development of catastrophe insurance market through public policies

World Bank Group Agenda  Catastrophe insurance in developing countries  Enabling the development of catastrophe insurance market through public policies  The role of the World Bank

World Bank Group 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