Embed Size (px)
Citation preview
RISK TRANSFER MECHANISMS: Towards
Policy Innovations in the Philippines
14 May 2014
UP NCPAG Center for Policy and Executive Development
University of the Philippines, Diliman, Quezon City
Ou
tlin
e o
f P
rese
nta
tio
n
Bases in International Policy • The Bali Action Plan
In the 13th Conference of Parties of the UN Framework Convention on Climate Change in 2007, one of the climate change adaptations actions pushed was risk transfer mechanisms (RTMs), as part of “enhanced adaptation action” in the nature of “risk management and risk reduction strategies.” (1/CP.13, par. (c)(ii))
• The Hyogo Framework for Action (HFA)
This identified RTMs as part of risk-reducing measures, specifically as part of the 4th priority action which seeks to “reduce underlying risk factors.”
Entities Working on RTM • World Bank Global Facility for Disaster
Reduction and Recovery (GFDRR)
Through its Track II Projects, is already spearheading the preparation of innovative risk finance instruments as part of its work in 31 focus countries (including five in Southeast Asia: Cambodia, Indonesia, Lao People’s Democratic Republic, the Philippines and Vietnam).
• Munich Climate Insurance Initiative (MCII)
- Innovative insurance will play a key role in long-term adaptation financing and “provide timely finance to recompense loss & damage”
- Southeast Asia is largely inadequately insured with a property insurance premium of only <10 US$ per capita, compared to >1,000 US$ for highly insured countries
What is Risk Transfer? • Risk transfer defined
“process of shifting the burden of financial loss or responsibility for risk financing to another party, through insurance, reinsurance, legislation, or other means.”
- should be distinguished from risk pooling, which is defined as the “aggregation of individual risks for the purpose of managing the consequences of independent risks
• Features of RTMs
- ex ante risk financing mechanisms/innovative insurance
- seen as a critical part of a comprehensive risk management strategy that must be inclusive, meaning/should reach the poor
Hence, microinsurance is seen as part of a sustainable model that targets poor households.
What are the RTM Categories (MCII)? • (Traditional) Insurance
Insurance is a contractual transaction that guarantees financial protection against potentially large loss in return for a premium (e.g. fire, theft insurance, automobile liability insurance)
• Microinsurance
Characterized by low premiums or coverage and is typically targeted at lower income individuals who are unable to afford or access more traditional insurance (e..g. weather index-based insurance or parametric
• Reserve fund
Catastrophe reserve funds are typically set up by governments
• Risk pooling
Risks pools aggregate risks regionally (or nationally (e.g. Caribbean Catastrophe Risk Insurance Facility)
• Insurance-linked securities
Insurance-linked securities, most commonly catastrophe (cat) bonds, offer an avenue to share risk more broadly with the capital markets.
What are the RTM Categories (GFDRR)? • Sovereign disaster risk financing
Financial strategies to increase the financial response capacity of governments in the aftermath of natural disasters, while protecting their long-term fiscal balances.
• Property catastrophe risk insurance
Develop catastrophe insurance markets and increase property catastrophe insurance penetration among homeowners, small and medium enterprises, and public entities.
• Agricultural insurance
Develop programs for farmers, herders and agricultural financing institutions (e.g., rural banks, microfinance institutions) to increase their financial resilience to adverse natural hazards.
• Disaster microinsurance
Facilitate access to disaster insurance products to protect the livelihood of the poor against extreme weather events and promote disaster risk reduction in conjunction with social programs such as conditional cash transfer programs.
What is Parametric Insurance? • Parametric insurance defined
“makes indemnity payments based not on an assessment of the policyholder’s individual loss (proof of indemnity), but rather on measures of a parametric index that is assumed to proxy actual losses.” Hence also the similar term “index-based insurance;” synonymous with innovative insurance (MCII)
• Elements of innovative RTMs
Immediacy of payout: Once threshold values or parameters are breached, insurance payouts are triggered, doing away with the long claims process for traditional insurance
Targeting of the poor: Properly designed microinsurance targets poor households, which otherwise are shunned by traditional insurance product design
RTM and ASEAN National Policies • In the Philippines
The Climate Change Act of 2009 and the Philippine Disaster Risk Reduction and Management Act of 2010 both mandate the appropriate design of risk transfer mechanisms as part of resiliency measures.
Consequently, RTM has been identified as part of the key actions in both the National Disaster Risk Reduction and Management Plan (NDRRMP) and the National Climate Change Action Plan (NCCAP)
RTM has already been piloted in Southern Philippines at the community level through the project “Climate Resilient Farming Communities in Agusan del Norte through Innovative Risk Transfer Mechanisms
RTM and ASEAN National Policies • In Indonesia
Its National Action Plan Addressing Climate Change (NAPACC) articulates that “several funding mechanism should be immediately tried,” including market instruments like insurance and reinsurance as part of its climate actions.
Significantly in April 2007, Law 24/07 was enacted on National Disaster Management, creating the National Disaster Management Agency (BNPB). Subsequently, the National Action Plan for Disaster Risk Reduction 2010-2012 was formulated, promoting the implementation of an Indonesian disaster risk financing strategy, including risk transfer instruments like insurance.
The Government of Indonesia has also availed of the technical assistance of the World Bank in improving its financial response capacity after the occurrence of a natural disaster, including post-disaster assistance funding mechanism.
•
RTM and ASEAN National Policies • In Vietnam
Its Government formulated the National Strategy for Natural Disaster Prevention, Response and Mitigation to 2020 in November 2007. The said national plan includes a strategy on the development of catastrophe risk financing solutions (including insurance) to complement other disaster risk management measures.
The Government of Vietnam also availed of the technical assistance on disaster risk financing strategy from World Bank.
• In Thailand
Its Second National Communication to the UNFCCC specifies that “in addition to prioritization and integration into local development, financial support, insurance (emphasis mine), and technology transfer are also highly important.”
The Climate Change Master Plan (currently being finalized) seeks the creation of a “financial mechanism to support the implementation of adaptation for coping with the negative effects of climate change.”
Regional Trends: ASEAN DRFI World Bank, the Global Facility
for Disaster Reduction and Recovery (GFDRR),
the ASEAN Secretariat, and UNISDR formulate
a comprehensive body of knowledge on
the state of disaster risk financing and insurance
in ASEAN Member States to promote the
development of national and regional disaster risk
financing and insurance strategies in ASEAN
Member States within the context of the
broader disaster risk management agenda.
ASEAN Finance Ministers n highlighted the
importance of regional cooperation on disaster risk
financing and insurance in Bali in April 2011.
Regional Trends: ASEAN DRFI World Bank, the Global Facility
for Disaster Reduction and Recovery (GFDRR),
the ASEAN Secretariat, and UNISDR formulate
a comprehensive body of knowledge on
the state of disaster risk financing and insurance
in ASEAN Member States to promote the
development of national and regional disaster risk
financing and insurance strategies in ASEAN
Member States within the context of the
broader disaster risk management agenda.
ASEAN Finance Ministers n highlighted the
importance of regional cooperation on disaster risk
financing and insurance in Bali in April 2011.
Indonesian Strategy on DRFI
Regional Trends: ILO Piloting
RTM has already been piloted in Southern Philippines at the community level through the MDG-F 1656 Joint Program on Strengthening the Philippines’ Institutional Capacity to Adapt to Climate Change (Outcome 3.4), entitled “Climate Resilient Farming Communities in Agusan del Norte through Innovative Risk Transfer Mechanisms.”
ILO will scaleup in Asia, starting with Nepal and Bangladesh, with other project sites under negotiation.
Issues and Challenges • On the operational entity: Technical Working Group and
Secretariat/s
• Possible work program:
Design/Typology of Microinsurance/RTMs
Insurance Science and Technology
Delivery Mechanisms and Financing
Reforms on Policy Barriers (e.g. taxation, guaranty, ease of doing business)
• Capacity development: platform for sharing, especially given the piloting activities at the project/community level (e.g. flood insurance, parametric/agricultural insurance)
