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Introduction to the World Bank Insurance Practice: Key Lessons Learned and the Road Ahead

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email: egurenko_at_worldbank.org. Washington DC. June 2-3, 2003 ... by facilitating the development of catastrophe risk markets around the globe. ... – PowerPoint PPT presentation

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Title: Introduction to the World Bank Insurance Practice: Key Lessons Learned and the Road Ahead


1
Introduction to the World Bank Insurance
PracticeKey Lessons Learned and the Road Ahead
Financing the Risks of Natural Disasters A New
Perspective on Country Risk Management
Eugene N. GurenkoSenior Insurance Specialist
World Bank Insurance Practice email
egurenko_at_worldbank.orgWashington DCJune 2-3,
2003
2
From Ex-Post Financing to Ex-Ante Risk Management
  • Ex-Post Financing
  • Emergency reconstruction loans (over 38 billion
    over the last 20 years)
  • Required no clear risk management plan on the
    part of countries
  • Always late and never enough (liquidity aspects)!
  • Leads to no visible improvements in countries
    vulnerabilities
  • Perpetuates wrong incentives on the part of
    vulnerable countries
  • Ex-Ante Risk Financing and Risk Transfer
  • Contingent capital facilities to national risk
    pools and governments and financing of
    reinsurance premium (lt200 million over the last
    3 years)
  • Reduces government fiscal exposures
  • Enables to access liquidity immediately in
    aftermath of natural disasters
  • Requires major improvement in country risk
    management and reduces countries vulnerabilities
    in the long-run and contributes to long-term
    economic growth

3
Insured vs. Total Economic Loss in Major Natural
Catastrophes
5,000
4,571
2,000
21,591
10,024
5,000
3,700
1,660
136
2,000
36,406
4,535
Total Economic Loss (USMM)
Source Swiss Re CatNet database, AXCO database
4
Fiscal and Economic Effects of Disasters
Uninsured Economic Loss as of GDP and
Government Revenues
Uninsured Economic Loss as
5
Key Indicators of Countries Fiscal and Economic
Vulnerability
  • Catastrophe Risk Exposures
  • Insurance penetration
  • Size of the economy
  • Geographical diversification/concentration of
    economy
  • Size of government revenue (tax base)

6
Residential Catastrophe Coverage in Turkey
Before and After TCIP
7
Why National Catastrophe Insurance Pools is a
Potential Way Forward?
  • Low catastrophe insurance penetration.
  • Local reinsurance and insurance markets have
    limited risk bearing capacity making the
    government a reinsurer of last resort.
  • Satisfy the need for immediate post event
    liquidity.
  • Develop risk awareness and encourage better
    mitigation.

8
Macro Lessons
  • Public private partnerships in the area of
    catastrophe risk management are the only
    effective way forward.
  • The World Bank can add value by facilitating the
    development of catastrophe risk markets around
    the globe.
  • Creation of specialized catastrophe insurance
    programs considerably helps to boost insurance
    penetration and reduce government exposure to
    catastrophe risk.

9
Micro Lessons
  • Importance of good governance and management.
  • Government commitment to provide a solid
    foundation for catastrophe risk management and
    set the incentives right for mitigation are key.
  • Involvement of the private insurance industry and
    support of the program by the agent force is key
  • Support of global reinsurers is essential.
  • Building and protecting the pools surplus
    through prudent underwriting, pricing, asset
    management and reinsurance.

10
Micro Lessons (continue)
  • Leaving no safety valves for politicians may be
    detrimental to the future of a program.
  • A retail approach to the distribution of the
    policies may be difficult to implement and
    perhaps some sort of risk socialization through a
    special mandatory property tax or surcharge may
    be justified.
  • Housing exposure accounts only for a fraction of
    countrys economic exposure, with public sector
    infrastructure being mostly at risk.
  • Risk transfer has to be supplemented with risk
    financing.

11
Our Current Vision of Catastrophe Risk Management
at the Country Level
Risk Financing
Risk Transfer
Risk Reduction
Institutional Incentives
12
Our Operational Approach to Catastrophe Risk
Management
  • (i) Conduct a thorough assessment of country risk
    exposures
  • (ii) Recommend feasible approaches to finance
    them
  • (iii) Identify the role to be played by the World
    Bank vs. that of the private insurance or
    reinsurance markets
  • (iv) Design lending programs and advisory
    services aimed at building domestic catastrophe
    risk management capabilities both in government
    and at the level of domestic insurance
    industries.

13
Our Products
  • (i) contingent capital facilities in support of
    national catastrophe reinsurance programs
  • (ii) loans to finance reinsurance premium
  • (iii) ex-ante (pre-disaster) liquidity facilities
    in support of government reconstruction efforts
  • (iv) technical assistance loans to finance risk
    management and financial design and feasibility
    studies
  • (v) sectoral risk management studies (at no cost
    to the borrower), if included in the CAS
  • (vi) catastrophe risk management services to
    governments on a stand-alone basis separate from
    lending.

14
Countries with Disaster Risk Management World
Bank Financed Activities
Country Status
Turkey Ongoing risk financing and TA
Romania Insurance component under preparation
Iran Ongoing financing of TA for risk management
Columbia Insurance lending program under preparation
India Risk management study is complete
Philippines Risk management study under preparation
Cambodia Risk management study
Mexico TA and lending under preparation
Caribbean countries Risk management study
15
What Are We Trying to Achieve?
  • (i) increase insurance penetration for natural
    hazards in the client countries
  • (ii) reduce government catastrophe risk
    exposures
  • (iii) make catastrophe insurance management an
    integral part of overall government risk
    management practices.

16
Means to Achieve Our Goals
  • (i) to have thorough risk assessments done in
    each disaster prone client country and advise
    the government on available options for risk
    financing and risk transfer
  • (ii) ensure that CAS explicitly account for
    catastrophe risk management
  • (iii) support the development of country detailed
    risk models and hazard maps that can be made
    available to domestic insurers and reinsurers for
    risk pricing purposes
  • (iv) design of new lending products with built-in
    catastrophe insurance options (loss triggered
    debt forgiveness or loan restructuring, for
    instance)
  • (v) build effective partnerships with
    international reinsurance community in addressing
    the risk of natural disasters in developing
    countries.

17
Key Constraints to Expand Disaster Risk
Management Practice
  • We are restricted in our ability to assist
    exposed countries by the Bank lending practices
    (as most of risk management work piggybacks on
    disaster reconstruction loans)
  • By the rarity of natural disasters (no EQ no
    risk management work!). Although there has been
    lots of improvement on that count!

18
Conclusions
  • (i) Development of ex-ante catastrophe risk
    management capabilities at the country level is
    gradually becoming an integral part of the World
    Bank country economic work but there is still a
    lot of work ahead
  • (ii) Disaster prone countries are becoming more
    active in utilizing the expertise of the Bank and
    global reinsurance markets in building national
    effective risk management programs (although
    there is still a long way to go!
  • (iii) Global reinsurers should be more pro-active
    in assisting the Bank efforts to develop
    catastrophe insurance market in developing
    countries.
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