I n v i r t i e n d o p a r a l a R e s i l i e n c i a Disaster Risk Financing: I n v i r t i e n d o p a r a l a R e s i l i e n c i a The Evolving Role of (Re)Insurance and Financial Markets Claudia Melo Swiss Re I n v i r t i e n d o p a r a l a R e s i l i e n c i a 1
Massive gap between total and insured losses highlights potential exposure for the public sector Natural catastrophe losses 1970-2013, in USD billion (2013 prices) 450 400 350 300 250 200 150 100 50 Insured losses Trendline Uninsured losses Trendline 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Swiss Re Economic Research & Consulting, sigma catastrophe database 2
Risk transfer is key to sustaining economic growth after a disaster BIS developed a model from which they can simulate the impact of natural catastrophes on a country's growth path Countries generally do not recover their previous growth paths and consequently Natural catastrophes leave behind a permanent macroeconomic cost, over and above the direct loss from the destruction. Sluggish growth in each subsequent year after an uninsured disaster brings the cumulative permanent loss to nearly 4% of GDP However, following an insured event, the cumulative output gain is 2.4% Source: Bank of International Settlements 3
A more balanced mix of financing is needed Post-event financing versus pre-event financing Post event Pre event Loss Severity Tax increases World Bank Policy Research Working Paper 5564, "How do Governments Respond after Catastrophes", 2/2011 "From an ex-post perspective, the availability of insurance offers the best mitigation approach against real and fiscal consequences of disasters" Donor assistance Raise debt Risk transfer Contingent Financing Budget reallocation Reserve Fund Loss Frequency 4
Risk transfer: efforts required on all fronts Macro, micro and pooling economic Solution type Description loss Foregone revenues How to close the gap? gap Damaged public physical assets Clean up costs Macro Risk transfer solutions for (sub)sovereigns to cover their direct or indirect costs Emergency relief insured loss Damaged uninsured private assets Livelihood assistance, rehabilitation of the poor Pooling Micro Insurance schemes and pools to increase insurance penetration Simplified products distributed via aggregators such as MFIs, NGOs, and corporates 5
Structure of risk transfer solutions Reinsurers Capital Markets Insurers Premiums Insurance Policy/ Contract Government Policy: Insurance linked securities ("cat bonds") ), swaps and reinsurance Risks: Natural catastrophes, agriculture risk, pandemics, longevity Use of funds: Emergency costs, long term liabilities, internal funding 6
Macroinsurance expanding to cover new disaster risks The list of potential risks that governments can "insure" is growing, including catastrophes, weather and commodity-linked weather Turkey: Earthquake pool Alabama: Hurricane risk Beijing: Agricultural risk Caribbean: Hurricane H i and d earthquake risk Vietnam: Agriculture yield cover Mexico: Earthquake and hurricane risk Pacific Islands: Earthquake and tropical cyclone risk India: Weather insurance for farmers Uruguay: Energy gy p production shortfalls due to drought Kenya: Drought insurance for seed growers 7
More holistic public sector risk management CRO a "recent" development, embraced by enterprise and, increasingly, the public sector Private Sector GE Capital appoints James Law head Credit, Market & Liquidity risk: calls himself "CRO" Swiss Re appoints its first CRO Euro storms: Lothar, Martin Economist survey shows ~45% of companies have a CRO (61% in Financial Services) 2002 2004 S&P / AM Best disclosures establish link between ERM and Financial Strength Ratings Lehman Brothers files for bankruptcy Study suggests ERM adoption reduces cost of capital 1 2006 2009 2010 2012 2013 2014 1993 1997 1999 2005 2005-6 2008 Public Sector Sarbanes Oxley Basel II Mexico becomes first country to transfer risk to markets with securitised insurance Solvency II directive Basel III New York appoints NY2100 Commission after Hurricane Sandy; recommendations include appointing CRO for NY state Rockefeller is funding CROs in 100 cities US treasury creates CRO role 8
Mensaje final El sector privado tiene la función de apoyar al Gobierno y la sociedad en la gestión del riesgo de desastres 9
PROFESSIONAL PROFILE and Development Banks in Latin America. Claudia Melo has 10 years of experience in the financial sector, which of them six in the national and international insurance and reinsurance markets. Claudia works at Swiss Re since March 2008 when she joined the company as Client Manager for the Brazilian market, serving as well the Southern Cone region. Her responsibility was to develop and manage all reinsurance opportunities across the different countries in South Latin America. Since 2011, as part of Swiss Re Global Partnerships team, she focuses in developing risk management and risk transfer solutions for addressing public sector needs, in order to create a more resilient society and economy. It includes, among others, partnering with Government and its entities, NGOs, Multilaterals Claudia has completed a Master Degree in Finance and Entrepreneurial Management at Universidade de São Paulo and has a bachelor degree in Business Administration at Fundação Getúlio Vargas, São Paulo. humanitarian relief operations in disaster and conflict areas, and in institution-building to strengthen national capacity for disaster preparedness, response and for risk reduction. Previous appointments Client Manager at Swiss Re, 2008 Project Manager at Santander Bank, 2006 Finance Analyst at ABN AMRO Bank, 2004