2015.10.06 climate change, natural catastrophe and political risks

FERMA Risk Management Forum October 2-5, 2011 Stockholm Sponsorship & Partnership Program

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PROFESSION INNOVATION DIVERSITY

Workshop on Climate Change and Political Risk Introduction Gatan LefvrePresident BELRIM, facilitator

Climate change and insurance Gilles GalludecPrincipal, Finance and Markets , World Bank Group

Managing Political Risks a practical view from a leading broker in Africa Benot FisseDevelopment Manager, Gras Savoye International

Going forward New technologies and their applications to anticipate and mitigate political risks in Africa Tanguy TouffutHead of Parametric Insurance, AXA Corporate Solutions

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BRUSSELS, 20-21 October www.ferma.eu

FORUM 2015Venice, Italy 4-7 OctoberClimate change, food insecurity, and political risk Climate change has caused an increase in the frequency of weather anomalies such as excess rainfall or droughts

According to the World Food Programme, and although context-specific, there is historical evidence linking declining agricultural yields to periods of regional conflict throughout the World.

Governments, policy-makers, and risk managers can use tools to develop the right strategy to understand, anticipate, and mitigate risks

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FORUM 2015Venice, Italy 4-7 October

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4Climate change and insurance a view from the World Bank Gilles GalludecPrincipal, Finance and Markets, World Bank Group


FORUM 2015Venice, Italy 4-7 October5The problem: natural disasters are likely to be more frequent, more severe and more uncertain

The consequences: a wide range of stakeholders are becoming increasingly vulnerable

A potential solution: Insurance markets can offer a powerful solution which Governments can support

But some challenges: Government support to insurance needs to be structured in a way that is sustainable and supports climate change adaptation

Some inspiring examples

Contents


FORUM 2015Venice, Italy 4-7 October6

Natural disasters are likely to be more frequent, more severe


FORUM 2015Venice, Italy 4-7 October7but also more uncertain

CLIMATE CHANGE 2013 - The Physical Science Basis. Summary for Policymakers - Working group contribution to the fifth assessment report of the intergovernmental panel on climate change By the end of the 21st century, global average surface temperature is likely to increase by 1.5 degree relative to 1900 for all RCP scenarios It is very likely that heat waves will occur with a higher frequency and durationExtreme precipitation events over most of the mid-latitude land masses and over wet tropical regions will very likely become more intense and more frequent


FORUM 2015Venice, Italy 4-7 October8For Governments, natural catastrophes create severe budget problems / Private Sector is needed

Example from Bangladesh:In the aftermath of Cyclone Sidr, recovery and reconstruction needs were estimated at US$1.3 billion, or 28% of government expenditures. Funding gap can reach more than US$1.5 billion in bad years (Air Worldwide and ADPC 2014).Funding gap

Speed

Targeting

Public assistance (local and International) can take up to 8 months to be disbursedHow to make sure that disaster relief gets to intended beneficiaries?


FORUM 2015Venice, Italy 4-7 October9For financial institutions, large covariate shocks can lead to liquidity crisis Ex-post

Ex-ante

Example from Senegal:

During the droughts of 1988 -1991, six commercial banks and one development bank closed accounting roughly for 20 - 30% of financial system assets. In 2012, agriculture lending dropped by 37% by in the groundnut basin following a large drought the year beforeFinancial institutions generally unable to do business in vulnerable sectors or regions


FORUM 2015Venice, Italy 4-7 October10For farmers, production shocks can push people into poverty even before they happen Agriculture is the most prevalent livelihood in lower income countries and is particularly vulnerable to climate change.2.5 billion people in lower income countries are in households involved in agricultureEx-post

Ex-ante

Low incentives to investLow access to creditLack of infrastructureExample from Bangladesh:Net crop incomes available for consumption for average households can drop by up to 50% at a frequency of 1 in 5 years in parts of Bangladesh which can push small and medium-scale farmers into povertySenegal Agriculture yields are half of theoretical yields given the level of rainfall


FORUM 2015Venice, Italy 4-7 OctoberNatural Events/Disasters and their political, economic and social impact

From Natural Events to Natural DisastersDrought & floods account for 80% of loss of life and 70% of economic losses The 2000 floods in Mozambique cost an estimated $550 million and lowered the GDP growth rate to 1.5 percent (Mozambiques growth averaged 7.5 percent annually during 1994-2003)In Paraguay, mostly due to drought in 2011, estimated losses were close to $1 billion or over 20% of the agricultural GDPDisasters lead to increased pressure on fiscal budgets and divert scarce financial resources from the development agenda - financial impact is extremely high And.financial / economic instability can create political/social unrest, particularly in areas severely affected by humanitarian crisis and the need to support refugees11


FORUM 2015Venice, Italy 4-7 October12Multilateral institutions have therefore called to support insurance markets

Article 4.8 of the United Nations Framework Convention on Climate Change:Climate Finance and climate insurance on the agenda at the G20, G7, COP21

The Parties shall give full consideration to what actions are necessary under the Convention, including actions related to funding, insurance and the transfer oftechnology, to


FORUM 2015Venice, Italy 4-7 October13Insurance can mitigate climate change impact in various ways

Protecting ex-postReduced vulnerabilityQuick, adequate, targeted payouts in times of needs

Changing behaviors ex-anteIncreased incomeIncreased incentives to invest Increased access to creditIncrease investmentsPrice signals which can support transition to more sustainable practicesCulture of Risk Management


FORUM 2015Venice, Italy 4-7 October14Government can support insurance markets through a wide range of interventions


FORUM 2015Venice, Italy 4-7 October15Climate change is likely to increase insurance costs

Insurance premiums=Pure risk+Catastrophic load costsAdmin.costs+Ambiguity load costs+FrequencySeverityUncertaintyClimate change

Actuarial rate 31%Subsidized rate3.5%13.5%3.5%How can Government react?Governments need to carefully analyze the fiscal implications of supporting insurance markets and use insurance as part of a broad risk management frameworkGovernments can reduce ambiguity loads through improved data (infrastructure)If governments subsidize insurance costs, these should be designed appropriately as to not dis-incentivize climate adaptation


FORUM 2015Venice, Italy 4-7 October16Insurance needs to be part of a broad Disaster Risk Management and Disaster Risk Financing Framework No single product can mitigate disaster riskLayered bottom up approach based on probability & severity of event is recommended

Agriculture: Irrigation infrastructure, improved seeds, extension servicesInfrastructure: river embankments, building construction codes etc..Disaster Risk Management


FORUM 2015Venice, Italy 4-7 October17Conclusion Insurance can offer a powerful solution - at macro, meso, and micro level - to address the impact of climate change

Governments can support the development of sustainable insurance markets through PPPs. Key role of Private Sector.

While climate change is likely to increase the demand for insurance, it is also likely to increase its costs

Government support to insurance (Private Sector etc) needs to be structured: in a way that supports climate change adaptation as part of a broad disaster risk management and risk financing framework


FORUM 2015Venice, Italy 4-7 October182. Managing political risks A practical view from a leading broker in Africa

Benot FisseDevelopment Manager, Gras Savoye International


FORUM 2015Venice, Italy 4-7 October19Our expertise and history across Africa

Key Figures of the African GrowthClimate Change Major Risks combined with aggrieving factors Link Between Climate Change & Political ViolenceExamplesOverview of the Climate Change Vulnerability How to Mitigate the Risks : Political Violence & Terrorism InsuranceConclusion


FORUM 2015Venice, Italy 4-7 OctoberOverview of existing approaches towardsMonitoring of political risks in AfricaRisk mitigation tools from consulting to insurance and assistance

Overview of existing approaches towardsMitigation: action taken to limit the impact of political riskAction: example a country goes from Green Flag to Orange Flag because of an expected weather event -> risk manager takes action (travel limitations, or even repatriation)Reduced investment plans in the country

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Our History in Africa Avant 1990200020142015

1907: Gras Savoye is founded1928: 1st office in Paris1965: Morocco1974: Gabon1978: Togo1981: Cameroon & Cte dIvoire1985: Senegal

1992: Benin1995: Tunisia1996: Burkina Faso & Congo1997: Mali & Chad1998: Egypt1999: Guinea Conakry

2003: Madagascar & Maurice2004: Mauritania2005: DRC2006: Niger & Ghana2007: Algeria2009: Central Africa2010: Soudan2011: Liberia2012: Uganda, Kenya, Nigeria2013: Sierra LeoneAngolaMozambiqueTanzania



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Key Figures of African GrowthGDP increase of 5,9% over the last 10 years6 of the 10 countries reporting the biggest growth in the world are located in Africa (Angola, Chad, Nigeria, Ethiopia, Mozambique and Rwanda)Population of 1.2 billion people in 2014FDI : consistent growth; 1990 = 2,8 billion USD versus 2014 = 65,7 billion USD Inflation: consistent reduction; 23% in 1990 versus 8% in 2010




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22Climate Change Major Risks combined with aggrieving factors Aggrieving FactorsDemography:

Current Situation: 1,2 billion people in 2014Evolution: 2,2 billion in 2040Urbanization:

Current Situation: 35% of the population leaves in an agglomeration in 2014Evolution: In 2030, 50% of the African population will leave in an agglomeration

Majors Risksa) Food Shortage50% of African GDP depends on rain-fed agriculture90% of employment related to agriculture .40% of the population living near coastal territories & lakes. They depend on fishing activitiesDecrease of rainfall and water stress could generate the disappearance of 35% of arable lands in the next 50 years.Example : SomaliaDisappearance of lakes because of higher evaporation which induces a lack of fish.Example : Lake Turkana in KenyaConsequences: Droughts, Increase of Livestock mortality, famine, rebellion Water& Food Wars

Important flows of climate refugees looking for food

A deserted drought-stricken village in Mauritania seen in 2011 A Sudanese woman and children in East Jebel Marra, South Darfur 2011




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23Climate Change Major Risks combined with aggravating factors Aggrieving FactorsDemography:

Current Situation: 1,2 billion people in 2014Evolution: 1.9 billion in 2040Urbanization:

Current Situation: 35% of the population leaves in an agglomeration in 2014Evolution: In 2030, 50% of the African population will leave in an agglomeration

Major Risksb) Rising Oceans & Water Shortage

An important part of the biggest West African cities are located in front of the ocean (Lagos, Accra, Abidjan)40% of West African population leaves on the coastal territoriesA 1 meter elevation of the ocean (planned for 2100) could slowly flood themExample: Fishing Villages in Ada (Ghana) Most important water reserves in Africa are shared between several countries (Ex: Nil River or Chad Lake) Draining of water reserves and Fishing resourcesConsequences: War between border countries or population to have the water access

Important flows of climate refugees looking for food & Water

Size of the Chad Lake from 1963 to 2015




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24Link Between Climate Change & Political Violence

Since 1980, 90% of African countries have experienced at least one year of armed conflicts

The last 30 years, 8 major famines were followed by armed conflicts in each case (Liberia, Rwanda, Burundi, Mozambique, Somalia)

Community of Experts (Sociologist, Archeologists,Historian,Crimologists) agree that Climate Change impacts human behaviors and make them more violent

A survey published by the Berkeley & Princeton Universities demonstrates that an increase of the temperature of 1C in Africa increased the risk of civil commotion and civil war of 20%.

An augmentation of 2C generating drought and crop failure will increase the risk of Violent conflicts by 40%.

Major Conflicts during the last thirty yearsMajor famine zones during the last thirty years




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25Examples

1. Nigeria (North-East) 2009:Abnormal droughts caused insecurity and famine.Favorable conditions for the emergence of the Terrorist Group Boko Haram

2. Syria 2007:

Drought produced a widespread crop failure and a mass migration of farming families Contributed to the outbreak of civil war in the country because of political unrest

3. Destruction of a factory by a Sovereign State 2011:

A chemical factory had received a lot of complaints from nearby fishermen because of a low level of fish in the river due to the pollution generated by the factoryGovernment authorities decided to confiscate and destroyed the factory without any warning




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26Overview of the Climate Change Vulnerability*

5 of the 10 countries in the World which will face extreme climate change are located in sub-Saharan Africa: Sierra Leone, Guinea Bissau, South Sudan, Nigeria, Ethiopia

*Vulnerability: Countries subjected to a massive change of their climate




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How to Mitigate the Risks : Political Violence & Terrorism InsuranceTwo major Types of Political Risks

3 Types of Insurable AssetsINVESTMENTS : Subsidiaries, production/extraction plants, inventoriesMOBILE ASSETS : Construction equipment, transport equipment, diversINTANGIBLE ASSETS : Loans, licenses, contracts

Revolution Foreign war Civil war Civil unrest Malicious actsRiots General strikes Terrorism

Compensation:

Costs of repair or replacement value BI component availableConfiscation Nationalization Requisition Revoking licenses Inability to function Destruction upon order Expropriation Selective discrimination

Compensation:

Carrying Amount BI component available Inconvertibility Of Local Currency component available POLITICAL VIOLENCE & TERRORISMPVTCONFISCATION & EXPROPRIATIONCED



How to Mitigate the Risks : Political Violence & Terrorism InsuranceDefinitions from London Market:

Civil Commotion/Riots: shall mean any committed in the course of a disturbance of the public peace by any person taking part together with others in such disturbance or any act of any lawfully constituted authority for the purpose of suppressing or minimizing the consequence of such act

Civil War : shall mean an internecine war, or a war carried on between or among opposing citizens of the same country or natio Example : Central Africa in 2013

Coup dEtat: shall mean the sudden, violent and illegal overthrow of a sovereign government or any attempt at such overthrow Example: 2015 of Coup dEtat in Burkina Faso against the Transition Government

Insurrection, Revolution and Rebellion: shall mean a deliberate, organized and open resistance, by force and arms, to the laws or operations of a sovereign government, committed by its citizens or subjects and/or a rising against a sovereign government or other authority

Strike: shall mean any willful act of any striker or locked-out worker in the furtherance of a strike or in resistance to a lock-out or any act of any lawfully constituted authority for the purpose of suppressing or minimizing the consequence of such act Example : Liban 2015

War: shall mean a contest by force between two or more sovereign nations, carried on for any purpose, armed conflict of sovereign powers and / or declared or undeclared and open hostilities between sovereign nations. Example: Afghanistan, Irak...



How to Mitigate the Risks : Political Violence & Terrorism Insurance

CIMA Countries:Assets All Risks Policies covered the risks of Strike, Riots & Civil Commotion non linked to a political event (FANAF Clause) with very high level of deductible. Risk of Political Violence & Terrorism is NOT COVERED in CIMA RegionSolution: Subscribe a dedicated coverage Political Violence & Terrorism on London or European Market Non Admitted Tolerated / Possibility to use a local fronterSouth AfricaExistence of the SASRIA (equivalent of the GAREAT, Pool Re or TRIA)Compulsory Insurance included in the Assets All Risks PolicyEastern & Southern AfricaAssets All Risks Policies excluded Political Violence & TerrorismSolution: Subscribe a dedicated coverage Political Violence & Terrorism on London or European Market Non Admitted Tolerated / Possibility to use a local fronter

CIMAs Countries

South AfricaEastern & Southern Africa


FORUM 2015Venice, Italy 4-7 October30Conclusion

Climate change is an additional factor which could increase the risk of Violence and War in Africa,

Two different kinds of insurance can help to mitigate these risks :

Corporate Side: Protecting the different kinds of companys assets subscribing Political Violence & Terrorism policies

Local Side: Protecting the revenues of the farmers , the cooperatives and the companies by subscribing Weather Insurance or crop insurance.

Prevention, Analytics and monitoring data by using satellites




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313. Going forward New technologies to anticipate political risks in Africa

Tanguy TouffutHead of Parametric Insurance, AXA Corporate Solutions


FORUM 2015Venice, Italy 4-7 October32Land images have been improving greatly in the last century 2000s

1990198019701960

1850 19401950

1858

1946

1960

1972

1986

1995

1999

2000

Images still used today for monitoring food security 1975Space-view TIROS-1SPOTTERRA

RADARSAT LANDSATGOESBalloon-viewIKONOS



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33New information such as land vegetation and plant health

Dove satellitesMore frequent and granular data

Sentinel Satellites Even more granular and abundant data will be available in the future

Source: ESA and Planet Labs websites


FORUM 2015Venice, Italy 4-7 OctoberSatellite imaging has revolutionized our knowledge of the Earth. What we ideally want is images of the whole planet every day.

The problem used to be that satellites were big, expensive, and too slow.

Today, if we want to understand satellites much more regularly, we need many more satellites that are much smaller.

In 2014, Planet Labs launched its Doves, ultra compact, ultra-precise satellites that measure 10 x 10 x 30 cm, weighs only 4 kilograms. These satellites can take pictures ten times the resolutions of the bigger satellites

Access to satellite information is democratized anyone can have access to it, and for free. 28 launched making it the largest constellation of earth imaging satellites in human history, providing a radical new data set about our changing planet. Over 100 launched over the course of the next year. How does it work?

Acting in a single orbit plane, the earth rotates undernearth, the cameras scan across. The earth rotates every 24 hours, so they scan every point on the planet every 24 hours. See crops as they grow in all fields, every farmers field, across the planet, every day. 33

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How does a satellite capture information on the ground?Source: NASA



Healthy Vegetation reflectance

Stressed Vegetation reflectanceNDVI=0.72NDVI=0.14In practice, the information extracted can help for instance monitor and assess crop yieldsVegetation index



This output has been used from the 1980s onward to anticipate famines and eventually political risk


FORUM 2015Venice, Italy 4-7 October37Time in MonthsCost of a drought to households increases 35-fold if support is delayed to six months or more* * From a study in East Africa conducted by the World Bank Group

Eat less-preferred food HARVEST

Use savings and borrow Sell non-productive assets Reduce food intake Sell productive assets Political risk DROUGHT

Actions can thus be taken more rapidly to limit the emergence of political risk and its consequencesCost in $


FORUM 2015Venice, Italy 4-7 October38Today we mainly use satellite imagery for designing new insurance products

Tomorrow we could expect the development of new prevention tools for risk managers based on those satellites as well as drones

More than ever, risk managers will be empowered with the right tools and data to better predict and mitigate risks

Advancements in technology and data processing methods will mean that risk managers will be able to be more specific in establishing and quantifying the companys risk on new levels, including weather-related risk and beyond

Technology will empower risk managers through better prediction and mitigation tools


FORUM 2015Venice, Italy 4-7 October39Conclusion

Gatan LefvrePresident BELRIM, facilitator


FORUM 2015Venice, Italy 4-7 October40Climate change will put pressure on food production and lead to an increase in political instability

Both the public and private sectors are finding answers

Going forward, technology will empower risk managers and reinforce their strategic role in organizations

Conclusion & Closing Statement


FORUM 2015Venice, Italy 4-7 OctoberThanks for your support !

2015.10.06 climate change, natural catastrophe and political risks

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