Catastrophe Risk Catastrophe Risk FinancingFinancing

A Comprehensive Model?A Comprehensive Model?

For many countries extreme losses are very large relative to average losses

Hotspots Report shows 3 regions where Hotspots Report shows 3 regions where this should automatically be in a CAS- this should automatically be in a CAS- Economic Loss Risks as a Proportion of GDP per Unit AreaEconomic Loss Risks as a Proportion of GDP per Unit Area

http://www.ldeo.columbia.edu/chrr/research/hotspots/maps.html

If human capital (mortality) is considered If human capital (mortality) is considered South Asia enters the rapid onset picture – South Asia enters the rapid onset picture – African drought is an ongoing economic and African drought is an ongoing economic and social disastersocial disaster

PatternPattern

• International response – relief aid flows in International response – relief aid flows in quickly (not all useful)quickly (not all useful)

• A large number of organizations become A large number of organizations become involved – there may be coordinationinvolved – there may be coordination

• The initial high powered capacity leavesThe initial high powered capacity leaves• Assessments are completed – programs Assessments are completed – programs

agreedagreed• Work begins on reconstruction – but is Work begins on reconstruction – but is

never completed – can be ad hocnever completed – can be ad hoc• Entrepreneurs may take advantage of the Entrepreneurs may take advantage of the

poor (e.g. beachside property)poor (e.g. beachside property)

Funding tends to be ad hoc Funding tends to be ad hoc and ex postand ex post

• Often there is no national, state or local Often there is no national, state or local risk management plan in placerisk management plan in place

• If there is it is likely to assume funding If there is it is likely to assume funding sources – donors (often tied), temporary sources – donors (often tied), temporary taxes, reallocated capital spending taxes, reallocated capital spending

• Some countries have catastrophe line Some countries have catastrophe line items in their annual budgets – but based items in their annual budgets – but based on avergaes rather than extreme events, on avergaes rather than extreme events, and can be captured.and can be captured.

Benson - 2003Benson - 2003

• Cross sectional study – 115 Cross sectional study – 115 countries, 1960 – 1993countries, 1960 – 1993

• Some selection bias but inference Some selection bias but inference that countries with higher disaster that countries with higher disaster incidence tended to have lower incidence tended to have lower growthgrowth

• Counterevidence tends to be based Counterevidence tends to be based on short term GDP effects and have a on short term GDP effects and have a geo hazards selection biasgeo hazards selection bias

Development implication of not Development implication of not having a risk management having a risk management strategystrategy

• UnderinvestmentUnderinvestment

• Infrastructure degradationInfrastructure degradation

• The poor are differentially and The poor are differentially and adversely affected – particularly in adversely affected – particularly in rural areasrural areas

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

Key issues for TA and Key issues for TA and FundingFunding

• Establishing a viable response capacity ex Establishing a viable response capacity ex anteante

• Building incentives for mitigation investmentBuilding incentives for mitigation investment• Getting essential infrastructure into place Getting essential infrastructure into place

immediately after the disaster (e.g. immediately after the disaster (e.g. helicopters and clean water equipment helicopters and clean water equipment needs almost universal)needs almost universal)

• Developing financial capacity to deal with Developing financial capacity to deal with long term reconstructionlong term reconstruction

Arguments against ex ante Arguments against ex ante fundingfunding

• Moral hazard – countries will not engage in Moral hazard – countries will not engage in mitigation – evidence?mitigation – evidence?

• Not a permissible use of state funds – legal Not a permissible use of state funds – legal not economicnot economic

• Ex post funding will always be there – not Ex post funding will always be there – not the actual experience after the shouting the actual experience after the shouting dies downdies down

• Cost – are short term officials the right Cost – are short term officials the right ones to make the trade offs?ones to make the trade offs?

Arguments for ex ante fundingArguments for ex ante funding

• Forces risk assessment – can encourage Forces risk assessment – can encourage mitigation effortmitigation effort

• Less moral hazard than assumed ex post Less moral hazard than assumed ex post fundingfunding

• Creates immediate liquidity post disasterCreates immediate liquidity post disaster• Work + money = better psychological Work + money = better psychological

outcome for the populaceoutcome for the populace• The money goes where the losses are – The money goes where the losses are –

less scope for wastage/ corruption etcless scope for wastage/ corruption etc• Lower post disaster costsLower post disaster costs

States with state sponsored ex States with state sponsored ex ante mechanismsante mechanisms• NorwayNorway• FranceFrance• IndonesiaIndonesia• South KoreaSouth Korea• JapanJapan• US (California/ Florida/ Flood Insurance Scheme)US (California/ Florida/ Flood Insurance Scheme)• TaiwanTaiwan• New ZealandNew Zealand• SwitzerlandSwitzerland• TurkeyTurkey• Mexico (crop)Mexico (crop)

Ex ante mechanismsEx ante mechanisms

• Insurance/ reinsuranceInsurance/ reinsurance• Pools/specialist reinsurersPools/specialist reinsurers• Capital market instruments – Cat Bonds, Capital market instruments – Cat Bonds,

weather insuranceweather insurance• Contingent facilities – debt forgiveness, Contingent facilities – debt forgiveness,

contingent debtcontingent debt

Where do they fit?Where do they fit?

• Residual item after mitigation and Residual item after mitigation and other funding sourcesother funding sources

• As an incentive to support mitigation/ As an incentive to support mitigation/ response capacity buildingresponse capacity building

When does contingent debt When does contingent debt make sense ?make sense ?• When it is very cheap relative to When it is very cheap relative to

insuranceinsurance

• When the frequency of events is When the frequency of events is relatively high – savings/ credit relatively high – savings/ credit modalitymodality

• When viable insurance markets (or When viable insurance markets (or proxies) cannot be formedproxies) cannot be formed

• When governments have legal or When governments have legal or cognitive problems with insurancecognitive problems with insurance

Our Ideal product – Contingent Our Ideal product – Contingent Hazard Recovery & Management Hazard Recovery & Management Loan (CHaRM)Loan (CHaRM)• Adjustment characteristicsAdjustment characteristics

• Rapidly disbursingRapidly disbursing• Conditionalities based on risk management capacity being Conditionalities based on risk management capacity being

builtbuilt Response capacity in placeResponse capacity in place Post disaster national accounting system in placePost disaster national accounting system in place Risk management institution in place and activeRisk management institution in place and active EtcEtc

• Not in CAS envelope – but post disaster adjustment Not in CAS envelope – but post disaster adjustment capacitycapacity

• Deferred front end feeDeferred front end fee• Low commitment feeLow commitment fee• Link to risk management TALink to risk management TA• Long repayment and grace periodsLong repayment and grace periods

ModalitieModalitiess

Donors GovernmentPrivate Reinsurance/ Cat Bond Markets

Cat. Pool

Insurers, Property Lenders

Formal housing owners, small business

Post-disaster Subsidized Loan and Grant Facility

Lifeline infrastructure, the poor and disadvantaged

Response Capacity, Mitigation Incentives

Risk

Management Agency

DDODDO/ERL

Building a response capacity is Building a response capacity is not Rocket Science – Lisbon not Rocket Science – Lisbon 17751775• Population 275,000, alluvial soils, Population 275,000, alluvial soils,

masonry buildingsmasonry buildings• Earthquake followed by tsunami Earthquake followed by tsunami

foillowed by firefoillowed by fire

Response:Response:• The King retreated to the country The King retreated to the country • The Chief Minister became coordinatorThe Chief Minister became coordinator

His actionsHis actions

First:First:

• Bury the dead (at sea) and feed the Bury the dead (at sea) and feed the living (initially the job of the army)living (initially the job of the army)

• Looters convicted and hung on the Looters convicted and hung on the spotspot

• Secured in situ supplies, instituted Secured in situ supplies, instituted pass system, ensured tenants rightspass system, ensured tenants rights

After immediate needs dealt After immediate needs dealt withwithPlanned rebuilding:Planned rebuilding:• Sought architectural and engineering advice – invited out of Sought architectural and engineering advice – invited out of

the box thinking - Lisbon changed from a royal to a the box thinking - Lisbon changed from a royal to a mercantile citymercantile city

• Introduced earthquake proof building standards – built on Introduced earthquake proof building standards – built on the rubble, intriduced metal and timber cross ties (gaiola) –the rubble, intriduced metal and timber cross ties (gaiola) –tested the resultstested the results

• Wall design to inhibit the spread of fireWall design to inhibit the spread of fire• Prefabricated outside city to speed reconstructionPrefabricated outside city to speed reconstruction• Funding- the Church took over food supply and temporary Funding- the Church took over food supply and temporary

housing, 4% tax imposed on imports (other taxes housing, 4% tax imposed on imports (other taxes temporarily suspended), active efforts to revive economytemporarily suspended), active efforts to revive economy

• Time to complete – 100 years!!Time to complete – 100 years!!