AON Re Hazards Conference

Transcription

1 AON Re Hazards Conference The World Bank and Public Private Partnerships for Hazard Risk Management in EAP Rodney Lester World Bank August 22, 2005

2 World Bank clients are disproportionately affected by natural disasters- despite some positive trends Developing Countries Small States Low Income Others a. Average Years Between Reoccurrences of Large Disasters b. Average Damage from Large Disasters (% GDP) a/ Sample includes 31 small states, 59 low-income countries, and 56 other developing countries

3 And, within client countries the poor tend to do worse after disasters Mitch Case study Pre-Mitch Asset Quartiles Pre-Mitch Productive Assets (US$) Annual Household Income 2000/01 (US$) Loss of Productive Assets % Households with Losses: % of Pre-Mitch Assets Lost: Households that Lost Productive Assets Income Shock (US$): Housing Loss (US$): Aid received (US$): All Households I II III IV 23, ,998 13,718 76,821 2, ,127 1,716 5, Median Asset Growth (%) (pre-mitch to 2001):

4 Economists Viewpoint a shocks and volatility issue Financial crisis Terms of trade shocks Natural disasters Donor shock

5 In the interim numerous global and regional activities are currently underway Global Index Insurance Facility (ARD/ HRM team/ifc/ Donors), Small Islands insurance initiative (MIGA, OPCS, FSE) Caribbean Hurricane Pool (LCSFU, FSE) CHaRM lending product (FSE, INF, OPCS, Finance Complex), involving ERLs and a possible innovative use of the DDO instrument Climate Change initiative (which is now incorporating finance issues) Gleneagles follow up Mainstreaming of HRM into CAS process (INF) Revision of OP 8.50 (OPCS) contingent investment loans Pacific Islands Risk Management AAA (multi sectorial )

6 Country Operations with insurance component Columbia earthquake (Cities program) Turkey earthquake (TCIP) Romania earthquake (pre appraisal) Iran housing (EQ pre appraisal) Ukraine Crop Insurance India AICI actuarial pricing Mexico Sovereign Cat Bonds (FIRST) Mongolia livestock catastrophe insurance

7 East Asia features heavily in Hotspots Report - Economic Loss Risks as a Proportion of GDP per Unit Area

8 East Asia is well represented in those countries most exposed to multiple hazards

9 The Pacific Islands face their own challenges

10 And economic loss potential is significant

11 Despite the disaster potential there are significant roadblocks to mainstreaming comprehensive risk management High political discount rates Moral hazard ex post donor instruments modify behaviour Donors (and hence countries) do not recognize in CAS, PRSPs Technology and modalities still being developed need for one universal approach Low level and fragmented public sector involvement Lack of awareness of potential of ex ante market instruments Lack of coordination between and within donors, regional organizations and country bureacracies Lack of trust Corruption

12 Most IFI ND instruments are still ex post World Bank Nature Loans and Grants Mitigation Focus Yes ADB Loan Not for small states IADB Loan Yes for reconstruction Speed Months to release; 2/3 years 5 mths;2/3 years; <1 year small states Rapid approval;2/3 years Carib. DB Loans and Grants No IMF Loans No 2/3 months disbursement

13 But, interim operating recommendations open the door for ex ante instruments Use consultative groups after credible damage and needs assessment Need for strong local leadership and community involvement Need experienced staff and clear written guidelines for post disaster work New ex post loans work better than diverted credits Limit number of implementing agencies People need income after a disaster can be more effective than counselling Need to have quick release funding for critical post disaster requirements

14 The ruling Pacific Islands approach also neglects financial instruments

15 And what Bank risk management operations there are in EAP do not have financial components, Mongolia excepted US$millions 1985/ / / Cambodia China E. Timor 8 Indonesia Philippines Samoa Vietnam Papua Solomin Is Korea 50 Loa 42 Vanuatu 199

16 There is a lack of coordination even under partial models Country institutional development varies considerably between countries China and Philippines most advanced Regional SOPAC (CHARM), PDC, ADPC, ADRC, MRC,ADB Global WB,WFP, UNDMT,UNDP, Red Cross/ Crescent Coordination mechanisms? ECLAC example standardise risk analysis, and work with reinsurers to agree exceedance curves Develop common meta model and language IFIs shuld focus on inclusion in PRSP, CAS - need to get regional and country economists involved, which means an acceptable linkage model

17 Governement cannot always be the default risk funder Average annual loss summary State Andhra Pradesh All perils $US mill Gujarat 64.9 Probable Maximum Loss Summary (US$ Million ) State Peril Combined assets Andhra Pradesh All Perils 921 Gujarat All Perils 1,009 Maharasthra 2.8 Orissa 43.2 Maharasthra Earthquake 59 Orissa All Perils 479

18 There is now a meta model that could integrate all of this

19 And the basic risk assessment tool - the loss exceedance probability curve is the key link to market instruments Uncertainty in Probability Probability p(l) that losses will exceed L Uncertainty in Loss 95% Mean 5% Loss, L (in dollars)

20 Howard Kunreuther and RMS have been working on the mitigation/ reinsurance link model city approach 0% Mitigation w/o Reinsurance w/ Reinsurance w/o Cat Bond w/ Cat Bond w/o Cat Bond w/ Cat Bond Insolvency Prob 3.19% 2.87% 2.44% 2.22% Expected Profit $1,680 $898 $1,604 $822 Worst Case Loss ($114,660) ($96,173) ($112,468) ($93,981) 100% Mitigation w/o Reinsurance w/ Reinsurance w/o Cat Bond w/ Cat Bond w/o Cat Bond w/ Cat Bond Insolvency Prob 1.98% 1.89% 1.98% 1.76% Expected Profit $954 $473 $905 $424 Worst Case Loss ($71,449) ($58,254) ($69,990) ($56,794)

21 And the World Bank is working on instruments Contingent Hazard Recovery & Management Loan (CHaRM) Adjustment characteristics Rapidly disbursing Conditionalities based on risk management capacity being built Response capacity in place Post disaster national accounting system in place Risk management institution in place and active Deferred front end fee Low commitment fee Link to risk management TA Long repayment and grace periods Can supplement reinsurance/ CAT bond structures

22 And modalities the PPP model IFIs, donors Government Private Reinsurance/ Cat Bond Markets Risk Management Agency Cat. Pool IFIs, donors Response Capacity, Mitigation Incentives Post-disaster Subsidized Loan and Grant Facility Insurers, Property Lenders Lifeline infrastructure, the poor and disadvantaged Formal housing owners, small business

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