INDEX BASED RISK TRANSFER AND INSURANCE MECHANISMS FOR ADAPTATION Abedalrazq Khalil, PhD Water Resources Specialist, World Bank
Outline Introduction: Climate Change and Extremes Index Based Risk Transfer: Instruments & Need for Adaptation Risk Transfer Examples Pacific Risk Assessment Initiative Examples from other regions Pacific Risk Initiative Caribbean Catastrophe Pool Peru ENSO Insurance Development Gaps Q& A
Climate change and Extremes Surface temperature in 2010 tied with 2005 as the warmest such period on record At 0.62 C above the 20th century average of 13.9 C. 3
Climate change and Extremes Inches of liquid water per year Changes in precipitation beyond 21 st century 4
Climate change and Extremes Cyclones are expected to be more intense Tropical storms will have substantially higher rainfall rates than present-day Resulting sea surge as a result of Sea Level Rise can be damaging 5
96 o E 108 o E 120 o E 132 o E 144 o E Climate change and Extremes Changes are already happening China: Category III typhoons making landfall in the last 20 years are significantly more than the previous two decades. 40 o N Philippines: 30 Category o N 5 making landfall between 1950-2010 20 o N 50 o N 40 o N 30 o N 20 o N 10 o N 0 o 72 o E 90 o E 108 o E 126 o E 144 o E 50 o N 40 o N 30 o N 1970-1990 1990-2010 10 o N 20 o N 0 o 10 o N 0 o 72 o E 90 o E 108 o E 126 o E 144 o E 10 o S
Risk Transfer Instruments Risk transfer as an option to complement adaptation Index Insurance and Parametric Derivatives Loss based on an index customized to reflect the risk Settlement utilizes the index rather than a possible consequence of weather, such as crop failure. Other Risk Transfer Instruments Catastrophe Bonds Insurance Linked Warrants derivative or reinsurance contracts that settle on total industry losses Catastrophe Futures 7
Examples of Risk Transfer Instruments Extreme Heat Cover Risk of low cotton seed production for seed grower due to excessive heat Every 7 consecutive days where the Average Temperature is greater than or equal to 81F indemnity is paid Frost Cover Risk of temperature below frost level in tomato harvest season Every frost day indemnity is paid Storm in a box cover A storm with specific strength passing within a specified region Rainfall based safety net Governments buy the insurance to manage the risk of
US Pasture, Rangeland, and Forage Insurance Program Pasture, Rangeland Forage - 2011 Crop Year
Pacific Catastrophe Risk Financing Initiative A joint initiative by the World Bank, the Asian Development Bank, and SOPAC Pacific disaster risk assessment to direct resources of countries and development partners based on actual risk and vulnerability Covers major perils: Earthquakes (and tsunami), Tropical cyclone (wind, storm surge and precipitation) Pacific disaster risk financing solutions Fiscal risk exposure Financial disaster risk management Regional risk pooling
Pacific Catastrophe Risk Financing Initiative Largest and most comprehensive risk exposure dataset ever collected within the Pacific Islands ~80,000 buildings surveyed and photographed ~400,000 building footprints digitized Exposure of major cash crops (coconut, banana, taro, etc.) Leverages information and data from many sources Satellite imagery, Agricultural Census Data, Soil Data ~1,500,000 buildings and other assets inferred from satellite imagery
Pacific Catastrophe Risk Financing Initiative Simulating earthquake risks and tropical cyclone risk from regional historical hazard database
Pacific Catastrophe Risk Financing Initiative Operational applications Disaster risk planning Post-disaster damage assessment Public access to risk information that can guide planning and development investments Disaster risk financing
Caribbean Catastrophe Pool A parametric insurance facility for 16 member countries Cover for hurricane and earthquake risk World s first multicountry risk pool The pooling of risks at the National or Regional level brings diversification benefits Reference: WB Disaster Risk Financing and Insurance program
Caribbean Catastrophe Pool The pool provides immediate financial assistance in the aftermath of a disaster More than $30mn paid out since inception: Country Payout ($mn) Year Peril Barbados 8.6 2010 Hurricane Haiti 7.8 2010 Earthquake Turks & Caicos 6.3 2008 Hurricane Anguilla 4.3 2010 Hurricane St. Lucia 3.2 2010 Hurricane St. Vincent & the Grenadines 1.1 2010 Hurricane Dominica ~0.5 2007 Earthquake St Lucia ~0.5 2007 Earthquake Reference: WB Disaster Risk Financing and Insurance program
Peru and ENSO Index Insurance El Niño responsible flooding in Northern Peru Extreme rains (Feb Apr 1998) 40x normal rainfall 41x normal river volume Widespread losses Many disrupted markets Agricultural production, 1/3 Total losses in Piura estimated at USD 200 million
Peru and ENSO Index Insurance Extreme rainfall and high sea-surface temperature (SST) are strongly correlated Use SST index (i.e. names ENSO 1.2) as a proxy for flood risk ENSO 1.2 Index
Peru and ENSO Index Insurance MFIs limit access to finance under extreme El-Nino conditions due to increased likelihood of default The instrument enables banks to avoids capital crunch and allow them to continue lending practices when credit is needed the most following a distaste Example of insurance use to target consequential losses (not just crop yield shortfalls).
Uruguay Risk Transfer Drought Risk
Development Needs and Gaps Regardless of the simplicity of the risk transfer instruments, still there are many challenges Capacity and Institutional Gaps Technical Gaps Regulatory and Legal Gaps Sustainable marketplace
Acknowledgment Iain Sukker Olivier Mahul Xiaolan Wang Q & A Abedalrazq Khalil, PhD Sustainable Development Department East Asia and Pacific Region T: 1 202 473-5456 F: 1 202 477-2733 E: akhalil@worldbank.org