1. LEADERS 2006 International Course on Development and Disasters November 20 – December 01, 2006. Ocho Rios, Jamaica. RISK TRANSFER and FINANCING Presenter: Aston Brown – Assistant Vice President, Systems Planning and Development (National Water Commission)

2. Objectives Upon completion of this unit, the participant will be able to: Identify components of risk transfer and financing; and Explore options for risk transfer in the given scenario highlighting constraints and consequences.

3. Definition of Risk Transfer Risk transfer refers to instruments that share/hedge economic risks before losses occur. Components of Risk Transfer and Financing The main components include:- 1. Insurance (Budget self-insurance, Market insurance and re-insurance); and 2. Risk Financing (Public asset coverage financing, catastrophe bonds, disaster assistance funds).

4. Budget Self-Insurance Property owners allocate a modest yearly budget for improved maintenance and selected retrofit investments, which have the effect of reducing future expected losses in the event of a disaster Market Insurance Market insurance stabilizes loss payments through pre-payment in the form of regular premium payments.

5. Public Asset Coverage Financing Governments carry a large and highly dependent portfolio of infrastructure assets. Some of these are critical for restoring economic growth. Most public assets are not covered by insurance.

6. Catastrophic Bonds A catastrophe bond (cat bond) Investor receives an above-market return when a specific catastrophe does not occur. Investor shares the insurer’s or government’s losses by sacrificing interest or principal following the event (Linnerooth-Bayer et al. 2003). Linnerooth-Bayer, J., Mace, M., and Verheyen, R. (2003). “Insurance-Related Actions and Risk Assessment in the Context of the UNFCCC”, Background paper for UNFCCC workshops – commissioned by the UNFCCC Secretariat. Pp 1-49.

7. Potential of Risk Transfer and Financing The potential of insurance and these alternative instruments for transferring the risk of disasters to investors across the globe. The worldwide losses from extreme disasters are only a small percentage of the world capital market. This highlights the scope and potential of trans- border risk transfer.

8. Risk Transfer and Insurance in Low-Income Countries

9. Challenges of Adopting Risk Transfer and Financing Risk transfer is costly Government may have access to less costly means The premiums for insurance are hardly affordable for most of the citizens at the risk in the developing world Most private insurance arrangements incur an expected net financial loss.

10. THE END THANK YOU!