Natural Disaster Risk Management
Arup Chatterjee
Senior Financial Sector Specialist
Asian Development Bank
Let’s Listen to the Insurance Regulators and Experts
Seminar organized by
Association of Insurers and Reinsurers of Developing Countries,
Association of Insurance Supervisory Authorities of Developing Countries, and
Insurance Institute for Asia and Pacific
Manila, 7 September 2012
Outline
Disaster Risk Management in Developing Member Countries of Asia
Role of Multilateral Agencies in Disaster Risk Financing
An Overview of ADB's Disaster Risk Financing Activities
Key Messages
Q&A
2
3
4
5
6
7
Measuring disaster impacts against
development investments
On the disaster side
Between 2005–2010 the economic costs of disasters exceeded $269
billion, averaging $53.8 billion a year.
On the development side
The most recent OECD figures indicate that total ODA assistance to
ADB’s developing member countries for 2009 was $32 billion.
Implication
The combined contributions of all the region’s development partners does
not keep up with the economic and social costs of disasters in Asia
and the Pacific.
8
Disaster risk reduction
is development
• Disaster risk management is
not a separate development
sector.
• DRM is a development
approach and is part and
parcel of development
actions.
• Without a risk-sensitive
approach, development
cannot be sustainable.
9
A Hurricane’s Impact on Asset Trajectory
shock
recovery
Assets
better-off HH
poorer HH
poverty-trap
threshold
Time
Source: Carter, Little, Mogues, and Negatu 2005
10
Basics of DRM
Losses = Risk factor
Risk = Hazard x
Exposure x
Sensitivity
Capacity
where
represents Vulnerability
Recovery
= Finance factor
Extent of damage
> Available Finance
The biggest financing challenge is availability
of liquidity at the onset of a disaster
3
11
Rationale for DRM and DRF
• Governments are responsible for large portfolios of public
infrastructure assets subject to risk
• Guarantee sufficient capital for emergency relief and
assistance to affected households, businesses and
communities
• Analyze, measure and manage government's disaster
contingent liability
– comprehensive approach to embedded contingent risks from
disasters
• Avoid diverting funds from budgets or from already
disbursed development loans to finance post-disaster
expenses
12
Applying DRM
Risk Assessment
Risk Mitigation
Institution Building
Ex-ante
– Development planning,
programs and projects
Ex ante
– Existing vulnerability of
populations and their
infrastructure
Emergency Preparedness
Risk Financing
Risk Operations
Recovery Process
Ex-post
Risk event
– Emergency response
– Disaster recovery and
reconstruction
Ex post
Time
Reconstruction
13
National Catastrophe Risk Management
Country Assets
(people, housing, factories, schools…)
Flood, Earthquake, Wind….
Risk Analysis
Revise Strategy
Expected Annual Loss
Loss Exceedance (PML’s)
Risk Transfer Cost/Benefit
Reinsurance/Alternative
Risk Financing Strategies
No
(Risk Transfer/Financing)
Achieve
Risk Management
Objectives?
Lower Risk
Mitigation, Land use
planning
No
(Risk Reduction)
Yes
Manage Position
14
Building Capacities to Address Financial Implications of External Shocks and Climate Change
Source: EQE
Outline
Disaster Risk Management in Developing Member Countries of Asia
Role of Multilateral Agencies in Disaster Risk Financing
An Overview of ADB's Disaster Risk Financing Activities
Key Messages
Q&A
15
ADB’s Integrated Disaster Risk Management Approach
Increased Resilience through
Integrated Disaster Risk Management
Disaster Risk
Reduction
Country level IDRM
model
Disaster Risk
Financing
Climate Change
Adaptation
- Management of retained risks
- Elimination of preventable risks
- Transfer of
disaster risks
(amortization)
Strengthened risk governance &
capacity development
Risk assessment
National & local
development systems
Input streams
Stakeholder
engagement
Knowledge Inputs
• Guidance
• Best practices
• Lessons learned
Policy
frameworks
Development
planning
Technical Assistance
• Expert consulting
• Regional cooperation
Development
investment
Financing
• Loans
• Grants
• Guarantees
16
WB Disaster Risk
Management
Framework
Manage the volatility of the costs
Understand contingent liability
17
Key Components of a
Results-Based Strategic Approach to DRM
Analysis-driven
– Natural hazard (including
climate change hazard),
vulnerability and risk
assessments
Focused design
– Selection of intervention
type(s) – policy, investment,
capacity
– Selection of risk
management option(s) financial, economic, physical
Optimized for necessary scope and
scale
• Core results attributes –
planning, budgeting,
implementation, monitoring and
evaluation
• Focus on common results
• Interdependency – top down,
bottom up and linked
• Horizontal and vertical linkage
– across agencies in all
sectors at all administrative
levels
18
What could the DRF solutions look like?
 Disaster liquidity / reserves
– Contingent credit or insurance based solutions
– Using parametric, index or modeled loss triggers
 Public infrastructure asset coverage
– Transport, power, water
 Stengthening of safety nets
– Microinsurance
 Facilitate mitigation and adaptation
– Climate Funds, Carbon Finance

Microfinance

Carbon Finance
19
Disaster Risk Finance Solutions
High frequency
Low frequency
High severity
International Donor
Assistance
Catastrophe bonds &
other Insurance
Linked Securities
Insurance /
Reinsurance
Risk
transfer
Contingent credit
Reserves / Calamity
Funds (potentially
insurance backed)
Low severity
Once in
3-5 years
Once in
10-15 years
Once in
15-20
years
Risk
retention
Once in
Once in
25-50 years 75-100 years
Expected return period
Source: Adapted from the World Bank
20
Three-tiered risk layering approach
Source: Adapted from the World Bank
Building Capacities to Address Financial Implications of External Shocks and Climate Change
21
Risk Modeling
Vulnerability
Hazard
(i.e. hurricane wind)
Exposure
(i.e. houses)
Risk
Vulnerability functions
(i.e. probable loss)
(of house to wind)
Disaster Impact Analysis
- Scenario or Stochastic -
22
Designing Effective Risk Management
Programs for Sovereign Clients
• Risk Identification and Measurement
– Extensive use of stochastic catastrophe risk models employing the
latest scientific research on natural hazards and utilizing stock
inventory and vulnerability data (EQECAT, RMS, AIR)
• Loss control programs
– Loss prevention programs/national mitigation efforts/enforcement of
building codes, construction supervision
• Risk transfer/risk financing
– Reinsurance
– Government
– Insurance Industry
23
Costs and benefits of financial instruments
Source: Ghesquiere and Mahul (2010)
Instruments
Indicative
Cost
(multiplier)
Disbursement
(months)
Amount of funds
available
Donor support (relief)
0-1
1-6
Uncertain
Donor support (recovery & reconstruction)
0-2
4-9
Uncertain
Budget contingencies
1-2
0-9
Small
Reserves
1-2
0-1
Small
Budget reallocations
1-2
0-1
Small
Contingent debt facility (e.g., CAT DDO)
1-2
0-1
Medium
Domestic credit (bond issue)
1-2
3-9
Medium
External credit (e.g. emergency loans, bond
issue)
1-2
3-6
Large
Parametric insurance
2 & up
1-2
Large
ART (e.g., CAT bonds, weather derivatives)
2 & up
1-2
Large
24
Matching the Funding Needs
The challenge is how to utilize a wide range of
instruments to address the costs of disasters
and be sure that they are available if and when
needed.
25
Source: Adapted from the World Bank
Key Challenges
• Low country incomes
– Limited finance and related market tools for mitigation and adaptation
• Degradation of environment due to growing demands of rapidly
growing population
• High degree of uncertainty with regard to expected economic
losses
– Poor statistics
• Catastrophe Risk Financing Instruments: scepticism on reliability of
weather data
– Extent of devastation and loss normally underestimated
– Losses arising from business interruption and bankruptcies often
unclear and undisclosed
• Corruption and poor governance
26
Key Challenges
• Inability to put in place pre-requisites for an efficient catastrophe risk
financing instrument – e.g. enforced building codes
• Undeveloped insurance sector
– General inadequacy in local insurance laws with respect to post-disaster
damages
– Excessive reliance on the government as the reinsurer of last resort
• Lack of risk awareness at the government level and among public
– Perceived low probability of disasters: hence insurance is of low priority
among would be consumers of insurance products
– Lack of understanding of insurance by locals; low awareness of
insurance benefits vis-a-vis costs (premiums)
• Lack of local technical knowledge and experience
 Build complex insurance models and carry out loss assessments
 Adapt to climate change effects
27
Role of Multilateral Agencies
• Reducing vulnerability of the poor to natural disasters
• Quantifying the uncertainty
– Independent estimates of countries’ economic exposures and vulnerability to
natural disasters
– Enabling risk reduction by providing governments with access to hazard maps
and information on hazard impacts on populations, land area, ports and airports
• Estimating the economic benefits from different risk transfer/ risk
hedging arrangements
– Selecting best risk transfer and financing programs
• Reduce government exposure to natural disasters
• Optimal allocation of risk in the economy
– Ensuring sufficient liquidity exists after a disaster
– Speeding economic recovery
• Build capacity, fill knowledge and funding gaps, and integrate private
sector expertise and resources
– Better mitigation and more effective poverty alleviation
28
Outline
Disaster Risk Management in Developing Member Countries of Asia
Role of Multilateral Agencies in Disaster Risk Financing
An Overview of ADB's Disaster Risk Financing Activities
Key Messages
Q&A
29
Strategy 2020 of ADB
• Vision: “An Asia and Pacific Free of Poverty”
• Three complementary strategic agendas
– Inclusive growth
• putting in place sound policies and institutions to improve the poor’s
access to credit/ insurance and basic productive assets
• Strengthening social safety nets to prevent extreme deprivation
– Environmentally sustainable growth
– Regional integration
To better mobilize resources - including region’s savings
and inbound capital flows – and maximize returns
30
Southeast Asia Disaster Profile
31
ADB Application of Disaster
Funds
DRM Funds by
Country
1987–2011
APDRF Fund Utilization by
Region
1987–2011
Cambodia
11.32%
DRM Funds by Type
1987–2011
SERD
15,000,000
52.63%
Indonesia
35.65%
Viet Nam
32.60%
Rehabilitation/
Reconstructio
n
31.54%
Thailand
0.37%
Regional
2.77%
Philippine
s
12.32%
Malaysia
2.99%
Lao PDR
1.99%
CWRD
6,000,000
21.05%
SARD
3,000,000
10.53%
Emergency
Assistance
6.36%
EARD
2,500,000
8.77%
PARD
2,000,000
7.02%
Disaster Risk
Reduction
62.10%
32
ADB’s DRF Activities in South East
Asia
• Southeast Asian countries extraordinarily exposed to human and
economic shocks from natural disasters
• Since 1987, ADB has provided over $2.3b for 145 hazard and DRM
activities – 62% for DRR actions
• Region is largest recipient of APDRF funds
• Disaster Response Facility under the Asian Development Fund to
be established
• support the poorest countries respond to natural calamities on
a pilot basis
33
Addressing the Region’s DRR
Priorities
Policy
Finance
Capacity
Regional DRR
Cooperation
Disaster Risk
Finance
Urban
Disaster
Risk
34
ADB DRF Initiatives in Southeast Asia
• Regional Level Initiatives
*
*
*
*
IDRM Trust Fund
ASEAN-UNISDR Technical Cooperation
Regional Economic Integration
ASEAN-ADB Memorandum of Understanding
• Country Initiatives
* Philippines
* Indonesia
* Viet Nam
• Other Initiatives
* ADB Disaster Stand-by Credit
* Microinsurance
35
Regional Initiatives
• IDRM Trust Fund
* Pending support from CIDA
* IDRM solutions for ASEAN region
• ASEAN-UNISDR Technical Cooperation
* Regional mapping and stocktaking via web-based portal project
• Regional Economic Integration
* Office of Regional Economic Integration considering:
– DRM data enhancement, strengthening insurance regulatory regimes,
microinsurance, development of cat bonds and contingent credit
products
• ASEAN-ADB MOU
* A channel for DRF cooperation
36
Country Initiatives
• Philippines and Indonesia
* JFPR TAs for Urban-based DRF
programs ($2m) (2011-14)
– DRF pilots in two cities in each
country
– Risk profiling > city selection > DRF
options > implementation
Phases
Key activities
Phase 1
Risk profiling and city
selection
Phase 2
Study of potential DRF options
Phase 3
Evaluation/selection of DRF
options
Phase 4
Implementation of DRF
scheme
* DRF Framework for the Philippines
(2011-12)
– Collaborate with World Bank to
spearhead DRF Technical Working
Group
• Viet Nam (2011-14)
* JFPR TA for DRF-CCA program
development ($1m)
– DRF pilots in two cities
– Risk profiling > city selection > DRF
options > implementation
– Special focus on DRF/CCA
application
* Philippine Earthquake Pool
(2011-12)
– ADB acts as catalyst to
support private sector pool
development
37
Other Initiatives
•
ADB Contingent Credit Program
*
*
*
•
Emergency stand-by credit is a basic DRF tool
Opportunity costs need to be avoided
Two-tier facility allows new borrowing or reallocation of
undisbursed loan balances
Microinsurance
*
ADB active in the Philippines supporting (GIZ, MIPSS)
Microinsurance Innovation Project for Social Security
–
Developing policy framework at national level
–
Developing new regulatory framework
–
Developing financial literacy for microinsurance
38
Outline
Disaster Risk Management in Developing Member Countries of Asia
Role of Multilateral Agencies in Disaster Risk Financing
An Overview of ADB's Disaster Risk Financing Activities
Key Messages
Q&A
39
Key Messages
• Strong and continuous political commitment is essential
• Foundation for a unified country plan integrating DRR, DRF, and CCA
is central
– Local ownership
– Value proposition for all the parties (client/donor/industry/ NGOs)
• A “bottoms- up” high quality risk analysis is essential for decision
making and risk capital financing
• Risk assessment technology and financial market development create
new options for government risk management
• Disaster management (ex-ante+ex-post) as crucial element of
sustainable development
– Risk reduction initiatives should be integrated into disaster
response and recovery measures
40
Arup Chatterjee
Senior Financial Sector Specialist
Office of Regional Economic Integration
Asian Development Bank
Manila, Philippines
Email: achatterjee@adb.org
41