RiskFinancin

gStrateg

yOlga Jonas - Joaquin

ToroBangkok - February

2006

Overview of Concepts

EVENTbefore after

PreparednessMitigationAwareness

ResponseReliefReconstruction

FINANCIAL STRATEGIES

RISKREDUCTION

RISK FINANCING

RISK

ASSESSMENT

A Comprehensive Risk Management Framework

RISK FINANCING

RISK MITIGATION

INSTITUTION

BUILDING

EMERGENCY PREPAREDNESS

Key Questions for Policy Makers

• What is country’s risk exposure?• Natural hazards

• Man-made hazards

• Can risk exposure be reduced through mitigation (reduce vulnerability)?

• What is the ex-post funding gap?• Should gov’t retain this residual risk or

should it transfer part of it to international reinsurance/capital markets?

What is country’s risk exposure?

Can vulnerability be reduced?

• Retrofitting critical public assets• Preparedness• Hazard mapping and land-use

planning• Building codesNeed incentives, institutions …

very high social returns

Ex-post financing needs

• Wide discrepancy between economic and insured losses most of the risk is carried by governments and homeowners

• Lack of liquidity in the aftermath of disasters may severely retard economic recovery

• Recurrent disasters impair and constrain public finances (excessive borrowing)

Timeliness and Phasing of Financing

Ex-post funding gap for government's budgetary outlays

0

5

10

15

20

25

30

1 2 3 4 5Time (quarters)

Am

ou

nt

$m

Post-disaster funding

Funding gap

Types of Financing to Address Gap

• Risk retention (reserves)

• Risk transfer• Insurance (e.g., pilot parametric small states

pool)• Catastrophe bonds

• Inter-temporal risk spreading• Contingent debt

RISK FINANCING

Probability of Occurrence

Type of Risk

Resource Gap

Reserve Funds

2-3 years

20-30 years

50-200 years

Recurrent Risks

All Hazards

Catastrophic Risks

ParametricCoverage

ContingentFacility

Budget Capacity

Cat Bonds

Probabilistic Catastrophic Risk Modeling

HAZARD MODULE

EXPOSURE MODULE

VULNERABILITY

DAMAGE MODULE

LOSS MODULE

COLOMBIADisaster Vulnerability Reduction APL

APL1 National Level

APL2 Municipal Level

APL3 Municipal Level

Repeater

COLOMBIA DVRPEmergency Assistance Instrument:

ERLs still take time to prepare, disbursement 16 months after the earthquake struck Armenia.

APL floating phase requires preparation of an appraisal document, due diligence at the Bank and the signature of the Vice President.

The DDO is intended to give middle-income borrowers access to long-term IBRD resources if market borrowing becomes difficult and a financing need materializes. The DDO, however, functions as a Development Policy Loan with all conditions satisfied prior to loan signing, and could not, in this case, be used to finance eligible expenditures needed for investments.

COLOMBIA DVRP Disasters Reported per Year in Colombia, According to Database of Desinventar

Number of Disasters Reported

0

200

400

600

800

1000

1200

1400

1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

COLOMBIA DVRP

L100 L500 L1000AAL

Total 6,333.3 11,028.6 13,099.1 55.7

Government 1,470.1 2,501.6 2,950.3 132.6

Strata 1 – 2 329.8 731.7 942.4 17.3

Total as % of GDP 6.46% 11.25% 13.37% 0.37%

Gvt. as % of National Budget

11.03% 18.75% 22.13% 1.03%

Str. 1&2 as % of Nat. Budget

2.5% 5.51% 7.06% 0.14%

Simulations

COLOMBIA DVRP

3 weeks 6 months 1 year

Government’s post disaster commitment

1. Lifeline infrastructure replacement2. Provision of safety nets3. High return and sustainable mitigation investment4.Other infrastructure

Ex post sources of fundsAid

Central funds transfer

Budget reallocation

Tax surcharge

Domestic credit

Development Banks

Other external Credit

Ex post funding gap

Specific Scenario

COLOMBIA DVRP

Time after the catastrophic event

One week One month Six months

Cumulative monetary values

Ex post funds

available

Government budgetary

outlays

Ex post funding gap

COLOMBIA RISK FINANCING

• Optimizing coverage of Public Assets

• Promoting insurance of Private Assets

• Designing an optimal financial strategy for residual risks– Reserves– Contingent loan– Additional (Parametric) coverage

CARIBBEAN CATASTROPHE RISK INSURANCE INITIATIVE (CCRII)

Stormy Weather

Particularities of CARICOM States

• High exposure to a variety of adverse natural events

• Limited resilience to disasters because of small size and limited borrowing capacity

• Dependence on donor support for post-disaster needs

• Limited access to insurance

Catastrophe Risk Insurance Facility

• Payouts triggered by parametric index (e.g., hurricane category, wind speed, etc.)

• Insurance premium related to individual risk exposure (avoid cross subsidization)

• Long term financial sustainability – Annual premium paid by participating countries

– Small losses covered by a reserve pool (risk capital provided by donor countries)

– Reinsurance of excessive losses on the international market

Reducing Premium Cost

• Commercial Premium = – Expected Loss (Pure Premium)– Reserve (Cost of capital)– Administrative Cost – Return on Equity

Pure vs. Commercial Premiums

18

00.5

11.5

22.5

33.5

4

US$

milli

on

Pure premium

Commercial premium

For illustrative purpose only

Conclusions

• Risk Management should be an integral part of development planning– Comprehensive long-term approach– Residual risk includes indirect losses– Time dimension of financing needs

• Need for Public/Private partnerships

• Premium = EL + Reserve & Cat Load + Admin Cost + ROE