Resilience and the Economics of Risk. NACo s Resilient Counties Advisory Board February 2016

Transcription

1 Resilience and the Economics of Risk NACo s Resilient Counties Advisory Board February 2016

2 The growing burden of uninsured losses Natural catastrophe losses (in 2014 USD) Uninsured losses Insured losses 10-year moving average insured losses 10-year moving average total economic losses Source: Swiss Re Economic Research & Consulting and Cat Perils. 2

3 Growing Exposures: Climate change is not the main driver for rising natural catastrophe losses in recent decades Shanghai: 1990 to 2013 Source: Skyscapercity.com

4 FEMA Disaster Declarations Disasters Have Tripled Since in the 1970s Total Disasters 4

5 The proportion of economic losses absorbed by the USG: Is this sustainable? 5

6 In the US, the price tag is large and growing. Since 2005, the US taxpayer has spent over $300 billion on direct costs of extreme weather and fire alone. Firefighting expenses have tripled in 20 years. In 1991, firefighting made up 13% of the Forest Service budget. In 2013, it was 50% Natural catastrophes (earthquake and weather related) cause average economic losses of $ billion annually. (Hurricane Sandy = ~$70 billion) The US Government spent $96b in 2012 to pay for climate-related events If this so-called "Climate Disruption Budget" were included in the actual budget, it would be the largest non-defense discretionary budget item. The Government paid more for climate-related losses than it did for transportation or education.

7 Growing consensus on the macroeconomic impact of natural events "Natural disasters can damage sovereign creditworthiness Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness, September 2015 "Climate change is likely to be one of the global mega-trends impacting sovereign creditworthiness. Government budgets could come under additional pressure as disaster recovery and emergency support for affected populations is likely to fall on the state in most cases." Climate Change is a Global Mega Trend for Sovereign Risk, May 2014 "Major natural catastrophes have large and significant negative effects on economic activity... However, it is mainly the uninsured losses that drive the subsequent macroeconomic cost, whereas sufficiently insured events are inconsequential in terms of foregone output." Working Paper No. 394, December 2012 Insurance confers benefits both before and after disaster strikes. Beforehand, the underwriters [demand] better planning and higher-quality, more resilient building from property developers and city planners. Afterwards, insurance helps entire economies to recover more rapidly. The Economist, 13 June

8 Swiss Re Global Partnerships enables Swiss Re to address the protection gap Florida Hurricane risk First dedicated public sector team in the reinsurance industry Over 100 closed solutions since 2006 Manage insurance, reinsurance and capital markets and all perils (disasters, weather, pandemics, longevity, etc.) Global footprint Pioneer in emerging and industrialized markets Caribbean Hurricane, earthquake and excess rainfall risk Turkey Earthquake pool Bangladesh Meso flood insurance Beijing Agricultural risk Alabama Hurricane risk Pacific Islands Earthquake and tropical cyclone risk Mexico Earthquake/hurricane and livestock risk Uruguay Energy production shortfalls due to drought African Risk Capacity Government drought insurance pool (Mauritania, Senegal, Kenya, Niger Mozambique) India Weather insurance for farmers Vietnam Agriculture yield cover 8

9 Economics of Climate Adaptation Swiss Re Global Swiss Partnerships Re Global Partnerships Alex Kaplan February October

10 Climate adaptation is an urgent priority Decision makers ask What is the potential climate-related damage over the coming decades? How much of that damage can we avert, with what measures? What investments will be required to fund those measures and will the benefits of that investment outweigh the costs? 10

11 Result: Expected losses by scenarios and by hazard Example Florida Annual expected loss in 2008 and 2030 $ Billions, 2008 dollars Rain Storm surge Wind Scenarios 2008 Today s Climate 2030 Today s Climate 2030 Moderate change 2030 High change Percent of 3 Counties 1 GDP Moody s SOURCE: Swiss Re; team analysis 11

12 Locally specific adaptation cost / benefit curve Cost/benefit Beach Nourishment (50 ft) Beach Nourishment (100 ft) Measures below this line have net economic benefits Example Florida Roof truss, new ~40% of total expected loss can be averted costeffectively Roof deck attachment, new Roof Masonry, Levee & Floodwall Elevation, retrofit Roof cover, cover, new Sandbags new retrofit Replacement undergrounding, trans. Opening Opening protection, protection, new Roof shape retrofit Targeted undergrounding, new trans. Averted loss $ Billions Calculated in 2008 dollars for the average climate scenario Temp. floodwalls Vegetation Mgmt Elevation new homes Targeting hardening, dist. Roof truss, retrofit Substation Backup generators Local levees Targeted hardening, transmission Deductibles - residential Deductibles - commercial Engineering based FRT penetration $30 billion Annual expected loss Top layer risk transfer Elevation, prioritized retrofit Replacement undergrounding, dist. Targeted undergrounding, distribution Road elevation 12

13 Closing the gap 13 13

14 How to close the protection gap Which risk? Who carries the risk? Risk transfer solution Protection gap Public physical assets Emergency response costs gap Foregone revenue Uninsured private assets Governments Businesses, homeowners, farmers Macro Risk transfer solutions for (sub)sovereigns to cover their direct or indirect costs Pooling Insurance schemes and pools to increase insurance penetration Livelihood assistance Individuals Micro Simplified products distributed via aggregators such as MFIs, NGOs, and corporates 14 14

15 Financing is a pillar of integrated disaster risk management Identification What risks do we face? Systematic Crosssectoral 2 Assessment Can we quantify it? Frequency Severity Prevention & mitigation How can we minimize it? Improve quality Build new protection Adaptation How can we manage the residual risk? Change behavior Pre-finance Risk transfer 15

16 Disaster Risk Financing: Case Studies 16 16

17 Case study Caribbean: Caribbean Catastrophe Risk Insurance Facility (CCRIF) Solution features The CCRIF offers parametric hurricane and earthquake insurance policies to 16 CARICOM governments The policies provide immediate liquidity to participating governments when affected by events with a probability of 1 in 15 years or over Member governments choose how much coverage they need up to an aggregate limit of USD 100 m The mechanism will be triggered by the intensity of the event (modelled loss triggers) The facility responded to events and made payments: Involved parties Reinsurers: Swiss Re and other overseas reinsurers Reinsurance program placed by Guy Carpenter Derivative placed by World Bank Treasury Payouts to date 2010: Haiti USD7.7m (earthquake), Barbados USD 8.5m (hurricane), St. Lucia USD 3.2m (hurricane), St. Vincent & The Grenadines USD 1.1 (hurricane), Anguilla USD 4.2m (hurricane). 2008: Turks & Caicos USD 6.3m (hurricane) 2007: St. Lucia USD 418k (hurricane), Dominica USD 528k (hurricane). 17

18 Case study Mexico: MultiCat - Funding for immediate relief efforts after disasters Solution features Insured perils: Earthquake and hurricane Payments to be used for immediate emergency relief after a disaster Parametric catastrophe bond: USD 315 m Trigger type: Index Earthquake: physical trigger (quake magnitude) Hurricane: physical trigger (barometric pressure) Time horizon: October 2012 November 2015 Renewed cat bond launched through the World Bank s MultiCat facility and third cat bond for Mexico Involved parties Insured: Fund for Natural Disasters (FONDEN) of Mexico Reinsured: AGROASEMEX S.A. Arranger: World Bank Treasury Swiss Re: Co-lead manager and joint bookrunner 18

19 Case study: Broward County, FL Custom multi-year structured cover Solution features Insured peril: Named Windstorm and associated flood Multi-year structured cover: USD 100m Covering indemnified losses from NWS to soften impact to the County 3 year coverage with unlimited reinstatements Term Aggregate Deductible Fixed premium over term No claims bonus Time horizon: February 2015 February 2018 Customized multi-year structured risk transfer for major school district Involved parties Insured: Broward County Swiss Re: Lead structurer and sole underwriter Broker: AJ Gallagher 19 19

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