financial solutions for risk management - world...

Financial Solutions for RiskManagementSovereign Debt Management ForumWashington DC – October 20, 2016

Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC 2

Uninsured losses from natural catastrophes area growing burden for governmentsNatural catastrophe losses 1970 – 2016 (in 2016 USD billion)

Source: Swiss Re Economic Research & Consulting and Cat Perils.

0

50

100

150

200

250

300

350

400

450

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Uninsured losses (nat-cat)Insured losses (nat-cat)10-year moving average insured losses10-year moving average total economic losses

Financial Solutions for Risk Management | Sovereign Debt Management Forum | Washington DC

First twelve months of financial crisis cost USD 650 billion, but theglobal risk landscape reveals other equally costly scenarios:

Pensions: US pensionsunderfunded by USD 1 trillion

Pandemics: Average annualcost of flu pandemic outbreak

estimated at $60bn a year

Disasters: Miami hurricanecould cause up to USD 500billion in economic losses

Economic

Environmental

Geopolitical

Societal

Technological

Risk categories:

Source: Global Risk Report 2016, 11th Edition,World Economic Forum, January 2016

Beyond natural catastrophes….


Fiscal: S&P calculates potential sovereign rating impact ofnatural catastrophes

0 0.5 1 1.5 2 2.5 3

Dominican Republic…Chile EQ

Bangladesh TCJapan EQ

Vietnam TCPeru EQ

Thailand FLTurkey EQ

Philippines EQDominican Republic…

Italy EQMexico EQ

Hungary FLIsrael EQ

Colombia EQNew Zealand EQ

Indonesia EQPortugal EQPakistan EQ

Philippines TCAustria EQMexico TCGreece EQ

Hypothetical rating downgrade in notches

Net rating impact (select cases with more than 1/4 notch impact)

FloodTropical CycloneEarthquake

Source: Swiss Re, Standard & Poor's calculations. © Standard & Poor's 2015.

S&P states:

“…natural disasters (earthquakes, tropicalstorms, floods, and winter storms), which can beexpected once in every 250 years, can weakensovereign ratings”.

“Insurance coverage can act as a mitigant”


Monetary: Potential Inflation Impacts of Natural Disasters

• Natural disasters have asignificant impact oninflation

• Impact is muted foradvanced economies withexception of largest 25%of events

• Impact material in shortterm, particularly for sub-indices, but moreambiguous in mediumterm


Case study Uruguay: Largest Transaction to ProtectAgainst Drought and Energy Price Risk

Solution features Insured peril: Drought & energy prices Use of proceeds: Purchase of energy when

drought conditions cause lack of hydro power Transaction Size: USD 450m Client: UTE (state-owned power company) Arranger: World Bank Treasury Key Takeaways:

1. Contingent liabilities can be insured forfixed costs

2. Combination of both exogenous shock +commodity risk

3. “Insurance” rewards for improved riskmanagement


Innovative risk transfer solutions for the public sector

7

VietnamAgricultureyield cover

Pacific IslandsEarthquake and

tropical cyclone risk

UruguayEnergy production

shortfallsdue to drought

IndiaWeather insurance

for farmers

CaribbeanHurricane,

earthquake andexcess rainfall risk

BeijingAgricultural risk

TurkeyEarthquake pool Bangladesh

Floodinsurance

African Risk CapacityGovernment drought

insurance pool

FloridaHurricane risk

United KingdomFlood risk

GuangdongTyphoon/rainfallThailand

Crop insurance

MexicoEarthquake/hurricane

and livestock risk

LouisianaHurricane risk

HeilongjiangMultiperil disaster

risk

KenyaLivestock insurance


Legal notice

9

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