The World Bank SEE Catastrophe Risk Insurance Facility TA SECO (P156455)

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized The World Bank RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF SEE CATASTROPHE RISK INSURANCE FACILITY TA SECO APPROVED ON SEPTEMBER 14, 2015 TO EUROPA REINSURANCE FACILITY, LTD. (EUROPA RE) REPORT NO.: RES29705 Public Disclosure Authorized FINANCE & MARKETS EUROPE AND CENTRAL ASIA Public Disclosure Authorized Regional Vice President: Country Director: Senior Global Practice Director: Practice Manager/Manager: Task Team Leader: Cyril E Muller Linda Van Gelder Ceyla Pazarbasioglu-Dutz Mario Guadamillas Eugene N. Gurenko

2 ABBREVIATIONS AND ACRONYMS

3 Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. BASIC DATA Product Information Project ID P Original EA Category Not Required (C) Approval Date Financing Instrument Investment Project Financing Current EA Category Not Required (C) Current Closing Date 14-Sep-2015 Organizations Borrower Europa Reinsurance Facility, Ltd. (Europa Re) Responsible Agency Europa Reinsurance Facility Project Development Objective (PDO) Original PDO The Project Development Objective (PDO) is two-fold: (i) to scale up access of homeowners, farmers, the enterprise sector and government agencies to affordable insurance covering losses to property and crops caused by climate change and geological hazards in Albania, FYR of Macedonia and Serbia, and (ii) expand the offering of innovative catastrophe insurance products developed under the SEE CRIF project to Bosnia and Herzegovina. Summary Status of Financing TF Approval Signing Effectiveness Closing Net Commitment Disbursed Undisbursed Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No

4 I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING SUMMARY This note provides a brief description of the Southeast Europe Catastrophe Insurance Technical Assistance Project funded by a SECO grant TF and the rationale for its restructuring and provision of additional financing from the same donor. The main objective of additional financing is to finance an increase in the capital reserve of Europa Re, a Swiss reinsurance company owned by the governments of Albania, FYR Macedonia and Serbia, which is also the project implementation agency. The proposed capital increase in the amount of USD 3.0 mm will bring the company s shareholders capital (also known as statutory capital) from CHF 8 mm to about CHF 10.6 mm after deduction of Bank s TF fees. The capital increase has been necessitated by the request from FINMA, the Swiss Financial Markets and Insurance Regulator, to have the company increase its minimum statutory capital by the end of 2017 to comply with the recent stricter minimum capital requirements (MCR) for all Swiss reinsurers. At the request of the donor, we are also seeking to extend the project closing date by 2 more years to enable the Bank to play its fiduciary and supervisory role over the SEE CRIF program and Europa Re till the developmental objectives set out by the donor have been fully met. PROJECT STATUS Southeast Europe Catastrophe Risk Insurance Facility (SEE CRIF) is an ongoing program of technical assistance to the countries of Southeast Europe in support of their efforts to reduce financial vulnerability to natural disasters through the development of catastrophe risk insurance markets in the countries of the region. The project is implemented by Europa Reinsurance Facility Ltd. (Europa Re), a regional Swiss licensed reinsurance company, owned by Albania, FYR Macedonia and Serbia. The main objective of the project is to improve access to affordable and reliable catastrophe insurance products for homeowners, SMEs, and farmers in Europa Re member states. Since the beginning of project implementation in 2010, Europa Re managed to achieve the following main results: (a) Established representative offices in all member states; (b) Fulfilled all legal, capital and operational requirements of FINMA, the Swiss Insurance Market Regulator, and received a Swiss reinsurer s license. (c) Created a variety of unique catastrophe insurance products which cover multiple climatic and geo-hazards. (d) Developed a unique probabilistic risk model for earthquake and flood used for the purposes of risk pricing and risk management. (e) Developed a highly advanced customized web-based policy production platform that enables insurers in member states to offer Europa Re insurance products to millions of consumers. (f) Developed a unique system of rapid claim assessment and settlement that can be used to deal with claims from highly catastrophic events. (g) Enrolled 10 private insurance companies into the program to act as official product distribution channels. (h) Trained over 300 insurance agents on the use of the web-based platform and Europa Re products. (i) Assisted insurance regulators in three countries to draft risk-based insurance regulations for catastrophe risk. (j) Carried out a regional public information campaign on the benefits of catastrophe insurance for the public. (k) Provided insurance coverage in excess of $40 million to local homeowners, farmers and municipalities.

5 (l) Launched an online sales portal offering direct access to Europa Re catastrophe insurance products for local homeowners and SMEs. In addition, the program is in the process of launching several municipal and sovereign pilot insurance projects in Serbia and FYR Macedonia, and a micro insurance coverage program in Bosnia and Herzegovina. From the inception of the project, Europa Re operated not only as the project implementation agency for the SEE CRIF project, but also as the reinsurer of all pilot insurance schemes launched under the SEE CRIF program in SEE region. By providing designated reinsurance capacity to local insurance partners, the company has enabled them to transfer all catastrophe risk emanating from the sales of flood, earthquake and other weather risk insurance policies designed under the SEE CRIF program to the reliable reinsurance partner. Although, the company s risk-based solvency of 200 percent is well above the Swiss regulatory requirements, on July 12, 2017, FINMA requested that the company s statutory capital be increased by at least CHF 2.5 million before the year end to comply with the recent more stringent interpretation of minimum capital requirements by FINMA. If in the past, the regulatory capital requirements were focused on compliance with the risk-based solvency margin, as of 2017, FINMA also introduced an additional minimum capital requirement of CHF 10 million that must be met by all Swiss reinsurers regardless of their risk exposure and risk-based solvency margin. As Europa Re country shareholders could not accommodate this request on such a short notice, the Bank, on behalf of Europa Re approached SECO with a request for additional funding to finance the increase in the company s capital reserve (which is a part of statutory capital) to the level required by the Swiss insurance regulator. In its communication to the Bank dated September 5, 2017, SECO granted this request and agreed to provide the additional USD 3 mm in grant funding to the current project Trust Fund for the purposes of financing the company s capital reserve, which forms a part of the shareholders equity. Once disbursed, the funds will increase the value of shareholders equity without changing the distribution of shares among the current country shareholders. In the case of Europa Re s ordinarily dissolution, the funds will be distributed to the country shareholders proportionately to their current equity stakes in the company. However, in the case of company s non-compliance with the Bank anti-fraud and anticorruption guidelines, the funds will be returned to the Bank and subsequently to the donor as they would not have been used for a productive purpose. To this effect, we are requesting the approval for introducing the following amendments to the current TF Agreement with the donor: (a) increasing the amount of the current Trust Fund and the Grant by USD 3 million through an additional contribution of USD 3 million; (b) introducing a new project activity and disbursement category Funding for Europa Re Capital Reserve ; (c) extending (for the third time) of the project End Closing Date from June 30, 2018 till June 30, A more detailed description of each requested action and the rationale behind follows. The flow of funds and disbursement arrangement for the Capital Reserve Financing is provided in Annex I. The additional financing for Europa Re s capital reserve account will be used to provide reinsurance capacity for numerous pilot catastrophe insurance projects supported under the SEE CRIF project. These insurance pilots include a disaster insurance program for the Serbian municipalities (in partnership with PIMO the government disaster reconstruction agency); a municipal disaster insurance program in FYR Macedonia (with the support of the Government of FYR Macedonia); and a micro-insurance scheme for Bosnia and Herzegovina. The additional financing will have a highly positive impact on the

6 continued economic justification of the project as it will allow to further expand access to affordable insurance for new clients in the project member states. The proposed additional funding is fully in line with the project PDO as the increase in capital reserve will enable Europa Re to maintain its reinsurance license and continue providing reinsurance capacity to local insurers selling catastrophe insurance products to the public. In the absence of such reinsurance capacity, local insurers will cease their participation in the program and stop the sales of all products covering catastrophe risks. As the donor explicitly requested the extension of the TF closing date by two more years to enable the Bank to continue exercise its fiduciary and technical supervision role over the project implementation and the company s business strategy, we are also requesting the extension of the project End Closing Date from June 30, 2018 till June 30, The extension will enable the Bank, through close technical supervision of the project and conditionalities in the grant agreement, to ensure that Europa Re s mandate to develop catastrophe risk insurance markets in the countries of SEE is adhered till the end of 2020, which will enable the SEE CRIF program to consolidate its achievements and ensure long-term sustainability. Specifically, it is envisaged that the additional capital reserve financing combined with a 2-year extension of the TF will ensure the availability of affordable reinsurance capacity for the SEE CRIF insurance pilot projects from the company on the priority basis. The restructuring involves the extension of the existing RETF s closing date and the signing of the new RETF GA for the additional financing. The approximate allocation of this additional funding is presented in Table 1 below. Table 1. Allocation of TF Proceeds by Project Activity New # Components/Activities Current Total additions 1 Compensation of Board directors and admin staff Country risk assessments Web-based underwriting systems Auditing Services Training Technical services Financing of country membership contributions to statutory capital Total The extension of the project End Closing Date by two years will require additional project supervision costs of $60,000, which will be financed by a supervision surcharge on the amount of forex reserve (around USD 720,000) currently remaining under the TF, which will be reclaimed for project implementation purposes in the early 2018.

7 The company has adopted the internal Operational Manual which is fully aligned with the World Bank anti-fraud and anticorruption guidelines and safeguard policies, and has been approved by the Bank FM Specialist. Since the inception, the project has received satisfactory FM and Procurement ratings and is considered Low Risk. All annual audits have been completed in time and recorded no signs of accounting irregularities or fraud. Since the inception, the company has been fully in compliance with the Swiss Code of Obligations and Swiss Insurance Law and regulations, and has demonstrated an exemplary corporate governance and compliance record. The project is fully on track with the disbursements of the funds, and currently is expected to be fully disbursed by the end of The project has all the audits current. No changes in fiduciary, safeguard, or other aspects of project implementation since appraisal of the ongoing project are envisaged. None of the modified or new activities raise the environmental category of the project or trigger any new safeguard policies. II. DESCRIPTION OF PROPOSED CHANGES The proposed changes to the TF are as follows: 1. Capital Reserve Financing. Increase the overall amount of the TF by USD 3 million to finance a new TF activity/component and disbursement category Capital Reserve Financing for Europa Re. The funding will be disbursed into the capital reserve account of the company and will be confirmed by an official letter of receipt from the company and the subsequent annual audit. The additional funding will enable Europa Re to maintain its reinsurance license and continue providing reinsurance capacity to local insurers offering SEE CRIF catastrophe insurance products to the public. This change will be consummated through the amendment of both the Administrative and Grant Agreements. 2. Extension of the project End Closing Date. The project End Disbursement Date will be extended by two years from June 30, 2018 till June 30, 2020 to enable the Bank to exercise, on behalf of the donor, its fiduciary and project supervision role over the project implementation and ensure adherence of Europa Re s business strategy to the developmental objectives of SEE CRIF project beyond June 30, 2018 the current project closing date. This change will be consummated by amending the Administrative and Grant Agreements. Financing Plan. The overall cumulative amount of grant after the second replenishment was USD With the new contribution by the donor, the overall grant amount is expected to reach USD million. Note to Task Teams: The following sections are system generated and can only be edited online in the Portal. I. SUMMARY OF CHANGES Changed Not Changed Change in Components and Cost

8 OPS_DETAILEDCHANGES_COMPONENTS_TABLE OPS_DETAILEDCHANGES_LOANCLOSING_TABLE The World Bank Change in Loan Closing Date(s) Additional Financing Proposed Change in Disbursements Arrangements Change in Disbursement Estimates Change in Implementation Schedule Change in Implementing Agency Change in Project's Development Objectives Change in Results Framework Cancellations Proposed Reallocation between Disbursement Categories Change in Overall Risk Rating Change in Safeguard Policies Triggered Change of EA category Change in Legal Covenants Change in Institutional Arrangements Change in Financial Management Change in Procurement Other Change(s) IV. DETAILED CHANGE(S) COMPONENTS Current Component Name Current Cost (US$M) Action 0.00 New Proposed Component Name Financing of Europa Re capital reserve Proposed Cost (US$M) TOTAL

9 LOAN CLOSING DATE(S) TF Status Original Closing Revised Closing(s) Proposed Closing Proposed Deadline for Withdrawal Applications OPS_DETAILEDCHANGES_ADDITIONAL_FINANCING_TABLE ADDITIONAL FINANCING Source Currency Amount USD Equivalent Swiss State Secretariat for Economic Affairs(SECO) USD 3,000, ,000, Existing Net Commitment USD Amount 0.00 Total 3,000, OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed ,512, ,326, , ,609, Annex I: Flow of Funds and Disbursement Arrangements: 1. Disbursement Method: Payments will be made by the Bank directly to Europa Re capital reserve account through the Direct Payment method.

10 2. Funds Flow Arrangements: The funds will be deposited into the capital account of Europa Re in Post Finance Bank Switzerland. The receipt of the funds by Europa Re will be certified by the issuance of a formal notification letter to the Bank within 10 business days from the receipt of the funds. The company will then provide the Bank with the audited financial statements for 2018 confirming the increase in the capital reserve account within 10 days from their release by the independent auditor.