The Framework for Ex Ante Risk Financing: The Latest Bank Initiatives

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The Framework for Ex Ante Risk FinancingThe
Latest Bank Initiatives
World Bank Catastrophe Risk Financing
Seminar Washington DC October 27, 2005

• Francis Ghesquiere, LAC
• Olivier Mahul, OPD

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COUNTRY CATASTROPHE RISK MANAGEMENT
R I S K A S S E S S M E N T
R I S K F I N A N C I N G
R I S K M I T I G A T I O N
C A P A C I T Y B U I L D I N G
E M E R G E N C Y P R E P A R E D N E S S
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Probabilistic Catastrophe Risk Model
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Disaster Risk Management
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Identifying Ex Post Funding Gap
50 Year Event 100 Year Event 150 Year Event
Governments post disaster commitment
1.Lifeline infrastructure replacement 2.Provision of living needs of the poor 3. High return and sustainable mitigation investment 3.Other infrastructure
Ex post sources of funds
Aid
Central funds transfer
Budget reallocation
Tax surcharge
Domestic credit
Development Banks
Other external Credit
Ex post funding gap
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Dynamic Funding Gap
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Contingent Hazard Recovery Management Loan
(CHaRM)

• Adjustment characteristics
• Rapidly disbursing
• Conditionalities based on risk management
  capacity being built
• Response capacity in place
• Post disaster national accounting system in place
• Risk management institution in place and active
• Etc
• Deferred front end fee
• Low commitment fee
• Link to risk management TA
• Long repayment and grace periods

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Natural Disaster Vulnerability Reduction
Program Republic of Colombia
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Project Description

• Adaptable Program Loan
• Need to address sector issues at the national
  level and thereby to create a platform for
  coordinating and supporting subsequent phases for
  vulnerability reduction in key municipalities
• Three phase project
• Phase 1 Colombia
• Phase 2 Bogotá DC
• Phase 3 To be defined

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Colombia Hazard Maps
Floods
Landslides
Seismic
Source INGEOMINAS
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Colombia

• APL in the amount of USD260 million
• Disaster risk reduction
• Disaster risk financing
• Development of a risk financing strategy
• Identification and assessment of residual risk
• Financing of residual risk
• Disaster management assistance
• Contingent debt facility of USD150 million

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Disaster Vulnerability Reduction Project APL
II Bogotá DC
Floods
Landslides
Seismic
Source SIRE
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Disaster Risk Financing

• Optimizing the current insurance portfolio of
  public assets
• Promoting the development of a private
  catastrophe insurance market
• Delivering cat insurance through the property tax
  system
• Designing an optimal financial strategy for
  residual risks
• Reserves
• (Parametric) insurance
• Contingent debt

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Caribbean Catastrophe Risk Insurance Facility

• September 2005

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Background

• High exposure to a variety of adverse natural
  events
• Limited resilience to disasters because of small
  size and limited borrowing capacity
• Dependence on extensive financing from
  international donors to finance post-disaster
  needs
• Limited access to insurance facilities is limited
  because of high transaction costs

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CCRII Objectives

• Provide immediate liquidity to countries hit by
  adverse natural events (e.g., hurricanes)
• Ensure long term financial sustainability
• Annual premium paid by participating countries
• Related to country risk exposure to avoid
  cross-subsidization
• Initial risk capital provided by donor countries
• Affordable premium rates
• Limited dependence on reinsurance
• Multi-year reinsurance to cover excessive losses

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CCRII Next Steps

• First semester 2006
• Further develop individual country and regional
  catastrophic risk models
• Design country parametric insurance policies
• gates/boxes, triggers, sum insured
• Design insurance captives risk financing
  strategies
• Initial risk capital
• Reinsurance policies
• Second semester 2006
• Pledges on seed capital
• Commitment of participating countries
• Facility targeted to be effective in January 2007