Hazards of Nature, Risks and Opportunities for Development in
South Asian Countries
World Bank Group
Regional Conference in New Delhi, India
All About Risk Financing: Theory and Practice
Eugene N. Gurenko, Ph.D., CPCU, ARe
Lead Insurance Specialist
December 19-20, 2006
Agenda
 Catastrophe insurance in developing countries
 Enabling the development of catastrophe insurance market
through public policies
 The potential role of the World Bank
World Bank Group
Agenda
 Catastrophe insurance in developing countries
 Enabling the development of catastrophe insurance market
through public policies
 The potential role of the World Bank
World Bank Group
Catastrophe insurance in developing countries
Catastrophe insurance in developing countries: the current
status quo

Very low catastrophe insurance penetration

Growing government fiscal liabilities to natural disasters

Volatile, and often unaffordable, reinsurance premium
World Bank Group
Catastrophe insurance in developing countries
Catastrophe insurance penetration in developing countries
(% dwellings covered)
World Bank Group
% homes covered
Premium/ Capita $US
15
Global Indicator
10
Philippines
5
Indonesia
India – under 0.3%

Philippines – 0.3%

Iran – under 0.05%

Romania – under
4%

India
Vietnam
0
China

3%

0
200
400
Bulgaria – under
600
800
1,000
1,200 
GDP/ Capita $US
PERSONAL INSURANCE PREMIUM = 1.3*(GDP/1000)^2
PERSONAL CAT INSURANCE PREMIUM = 0.1*PERSONAL INSURANCE PREMIUM
China – under 0.5%
Turkey – 18%
Catastrophe insurance in developing countries
Insured and economic damages from natural disasters (%)
World Bank Group
•More than 45% of
Insured vs. economic losses in rich and poor countries
economic damages
60,0%
covered by insurance
50,0%
in rich countries
40,0%
•Less than 3 percent
30,0%
Developing
Developed
covered in developing
countries
20,0%
10,0%
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
0,0%
Source: Munich Re NatCatService database, 2005
Over 25 years the share of economic loss covered by insurance in developed
Markets increased considerably while remaining stagnant in poorer countries.
6
Catastrophe insurance in developing countries
World Bank Group
Economic Loss from Uninsured Natural Disasters
Loss (USD, bn)
Insured Loss (%)
Uninsured Loss
% GDP
% Govt. revenues
22.0
5%
5%
21%
Honduras
3.0
6%
34%
158%
Earthquake
Gujart/Bhuj (2001)
India
6.0
2%
1%
7%
Floods
Mumbai (2005)
India
5.0
7%
0.8%
5.5%
Quake
Kashmir (2005)
Pakistan
5.0
0%
5%
40%
Earthquake
Northridge (1992)
USA
43.0
47%
0.3%
2%
Winter Storm
France
6.2
100%
-
-
Earthquake
Izmit (1999)
Turkey
Hurricane
Mitch (1998)
(1999)
Catastrophe insurance in developing countries
World Bank Group
Major sources of disaster finance
Financing of catastrophe losses in developing countries
•Loss retention was on
average $31 bn per year
80000
70000
•Loss retention has been
60000
highly variable – 50%
50000
coefficient of variation
$ mm 40000
30000
20000
10000
0
19871989
average
1991
1993
Emergency relief aid
1995
1997
Insured loss
1999
2001
2003
Retained loss
Sources: OECD, Munich Re
•On average, 92,6% of economic loss was retained by developing
countries.
World Bank Group
India is Illustrative of the Trend
5,000
4,500
4,000
3,500
3,000
2005 events (USD,bn)
2,500
•Orisa floods: 0.12
2,000
•AP floods:
1,500
•Mumbai flood: 5.0
0.4
•Gujarat flood: 0.4
1,000
•Kashmir EQ: 5 bn
500
01
20
98
19
95
19
92
19
89
19
86
19
83
19
80
19
77
19
74
19
71
19
68
19
19
65
0
Direct losses from natural catastrophes (USD bn):
1976-1981 - 2.9; 1981-1995 -13.4; 1996-2001 - 13.8; billion;
2005 alone over $7 billion.
Source: SwissRe, 2006
World Bank Group
Growing Fiscal Costs of Natural Disasters
Margin Money/ CRF Expenditures Rs millions
India
25000
20000
15000
10000
5000
0
74-79
79-84
84-89
90-95
95-00
00-05
Agenda
 Catastrophe insurance in developing countries
 Enabling the development of catastrophe insurance market
through public policies
 The potential role of the World Bank
World Bank Group
National Catastrophe Risk Management
World Bank Group
Country Assets
(people, housing, factories, schools…)
Flood, Earthquake, Wind….
Risk Analysis
Expected Annual Loss
Loss Exceedance (PML’s)
Risk Transfer Cost/Benefit
Risk Transfer and
Financing Strategy
Reinsurance/Alternative
Risk Financing Strategies
No
(Risk Transfer/Financing)
Achieve
Risk Management
Objectives?
Yes
Source: EQE
Manage Position
Lower Risk
Mitigation, Land use
planning
No
(Risk Reduction)
Enabling the development of catastrophe insurance market through public policies
Enabling public policies for catastrophe insurance
World Bank Group
Making insurance compulsory or
semi-compulsory
(Turkey/Romania/Columbia/Fran
ce);
Public risk awareness,
education campaigns
Creation of national pools;
Drawing a clear line between
public and private liabilities
(Spain)
Public
policies
Sovereign catastrophe
risk coverage (Mexico
bond, Caribbean Cat
Facility, GCIF)
Making catastrophe reinsurance
capacity more affordable for
developing countries through (i)
global mutualisation of risk; (ii)
partial risk retention; (iii) premium
subsidies to poorest nations; (iv)
subsidies for market infrastructure
and product development
Low cost of IBRD capital
First step: Recognize catastrophe risk exposure in the national
budget
National Budget
Calamity
Trust
Disaster
Budget
$
$
World Bank Group
However, self-insurance funds like Fonden are typically
underfunded
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Re-insurers
How one can
create a larger
Fonden Trust
w/o asking for
more budget?
Investors
Premium
National Budget
Additional
Capital
Insurance
Fonden
Trust
Fonden
Budgeted
$
$
Mexico: Catastrophe Risk Transfer in a Nutshell
World Bank Group
Cat-Bond Concept
“Insurance Company”
Needed a Financial
Entity with experience
and proved results
Collateral
Account
Funds
Return
Funds = Bonds
Premium
SPV
Insured
Protection
Return + Premium
Funds +
Return + Premium
+
Insurance Concept
+
Annual Expected Loss Probabilities
Zone A
Zone B
Zone C
0.63%
0.96%
0.30%
Investors
The FONDEN through an
international public bid
process, hired Swiss Re
Capital Markets, Swiss
Reinsurance Company and
Deutsche Bank Securities.
Enabling the development of catastrophe insurance market through public policies
Benefits of country risk pooling: Turkish Catastrophe
Insurance Pool
2000/1
2002
2003
2005
$ 600 mm
$ 900 mm
$ 800 mm
$ 1.6 billion
0.6 mm
2.48 mm
1.9 mm
2.5 mm
Surplus
$ 0 mm
$ 2 mm
$ 10 mm
$ 250 mm
Costs of
6.13
5.51
5.14
4.2
$ 13
$ 15
$ 17
$ 47
Claims Paying
Capacity
Policy #
(% of TH)
reinsurance
ROL %
Premium
Rate (average)
World Bank Group
Enabling the development of catastrophe insurance market through public policies
A Global Cat Insurance Facility (GCIF): A Feasibility Study
Disaster
contingent
payments
World Bank Group
Capital
Contributions
Global Insurance Pool
Shareholders
Reserves
Countries
Premiums
Premium Subsidies
Donors
Capital
Claims
Paying
Capacity
Global
Risk
Transfer
Reinsurance
Premiums
&
Capital
Donors
Markets
Enabling the development of catastrophe insurance market through public policies
Benefits of global risk pooling: Global Catastrophe
Insurance Facility
World Bank Group
•27 countries
4.50%
•2 perils
4.00%
Premium/Insured Limit
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
Countries
Regions
Portfolio
Agenda
 Catastrophe insurance in developing countries
 Enabling the development of catastrophe insurance market
through public policies
 The role of the World Bank
World Bank Group
The potential role of the World Bank
World Bank’s role in catastrophe insurance

Assistance to countries in risk quantification.

Assistance in building the national institutions of catastrophe
risk management – as an integral function of financial risk
management.

Advisory services in developing innovative catastrophe risk
transfer solutions: (i) national catastrophe pools; (ii) issuance
of catastrophe bonds; (iii) access to global reinsurance
capacity through global risk pooling; (iv) contingent capital
facilities to reduce the costs of reinsurance.
World Bank Group