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2015/FDM1/018 Session: 5

Disaster Risk Finance: Enhancing Financial Resiliency

Purpose: Information

Submitted by: World Bank

Finance and Central Bank Deputies’ MeetingTagaytay, Philippines

5-6 March 2015

Disaster Risk Finance: Enhancing Financial Resiliency Olivier Mahul Program Manager, Disaster Risk Financing and Insurance Program

MAR

6 2015

APEC FINANCE AND CENTRAL BANKS DEPUTIES’ MEETING March 5-6, 2015 Tagaytay City, Philippines

Financial Resilience Against Disaster Risks Matters

• Financial Resilience Against Natural Disasters is an imperative for sustainable development

• GFDRR-WB supported Disaster Risk Finance (DRF) initiatives help governments, businesses, and households manage the financial impacts of disaster/climate risks.

Loss events worldwide – Number of events

Source: Munich Re (2014)

Source: Munich Re (2014)

Loss events worldwide – Overall and insured losses

DRF Supports and Complements other Policy Areas

Financial Protection is a key component of DRM

Pillar 2: Risk Reduction

Pillar 3: Preparedness

Pillar 4: Financial Protection

Pillar 5: Resilient Recovery

Pillar 1: Risk Identification Risk assessment and risk communication

Structural and non-structural measures; e.g. infrastructure, land-use planning, policies and

regulation

Early warning systems; support of emergency measures; contingency planning

Assessing and reducing contingent liabilities; budget appropriation and execution; ex-ante

and ex-post financing instruments

Resilient recovery and reconstruction policies; ex-ante design of institutional structures

Building Resilience Through Disaster Risk Finance

• Financial protection provides governments, individuals and business with the resources to respond to disasters while minimizing threats to development progress, fiscal stability, or wellbeing.

• Financial Protection complements, but does not

replace, risk reduction and resilience measures

Operational DRFI Framework From Products to Strategies

Disaster risk layering

Disaster Risk Finance Around the World

Pacific Risk Insurance Pilot

Development Challenge

– Small economies are highly exposed to natural disaster: Marshall Islands, Tonga, Solomon Islands, Samoa, Vanuatu

– Cost of catastrophic events have big fiscal impacts

DRF Solution

– Pacific Catastrophe Risk Insurance Pilot (2012) pooled risk approach provides coverage for up to a maximum of $45 M

– Rapid payouts linked to impact of a tropical cyclone, tsunami or earthquake.

– Country-specific catastrophe risk policies taken to the market as single, well-diversified portfolio

– Japan co-financed the premium

Philippines DRF Program Development Outcomes

1. To sustain economic growth and protect gains from natural disaster shocks

2. To reduce impact on the marginalized sector and prevent them from falling into a cycle of poverty.

Four Policy Objectives for Actions by the Government

1. National Level: Enhancing the financing of post-disaster emergency response, recovery, and reconstruction needs

a. Quantifying and clarifying the contingent liabilities faced by the government.

b. Building up multi-year reserves through annual contributions to a response contingency fund

c. Using risk transfer to access international private reinsurance and capital markets.

2. Local Level: Providing local governments with funds for recovery and reconstruction after a disaster

a. Catastrophe risk insurance facility for local governments

b. Improve Insurance of public assets of LGUs

3. Individual Level: Empowering poor and vulnerable households and SMEs to quickly restore their livelihoods after a disaster

a. Broadening private property catastrophe risk insurance and micro-insurance coverage.

b. Broadening agricultural insurance and micro-insurance coverage

4. Risk Analytics: Using risk information to support decision making on financial protection

a. Build an improved asset exposure database and historical loss database

b. Refine the catastrophe risk model to the local government level

c. Develop financial and actuarial tools to inform future disaster risk financing and insurance decisions

Development Challenge

– Mexico is highly exposed to earthquake and hurricane risks

– Cost of recovery and reconstruction can be high and funds are needed quickly after a catastrophic event

– Need for accountable and predictable post disaster funding for reconstruction

DRF Solution

– A sovereign fund to finance reconstruction of public infrastructure

– Annual budget allocation, anchors DRF strategy

– Rules based, disciplined institutional framework

Guiseppe Franchini / World Bank

Mexico FONDEN Program

/World Bank

Development Challenge

– Following large disaster losses Peru began to develop strategies to become more resilient and protect economic development.

DRF Solution

– A Disaster Risk Financing and Insurance Strategy

– Revised guidelines for cat risk insurance of concessions and public assets

– Cat risk insurance program for low-income households

Peru DRF Program

Summary

• Financial impacts from disasters can slow down development progress, keep people in poverty, or push them back into it

• Tailored financial products can help developing countries increase financial resilience against natural disasters

• Those instruments are most effected when integrated into a comprehensive disaster risk management strategy

• Comprehensive national disaster risk financing strategies bring together multiple policy areas to strengthen financial resilience of key beneficiaries

Further information

Contacts:

Olivier Mahul, Program Manager

Disaster Risk Financing and Insurance Program

World Bank

omahul@worldbank.org

https://www.gfdrr.org/ disaster-risk-financing- and-insurance