Managing Catastrophe Risks of Natural Disasters at the Country Level: The World Bank Prospective

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Managing Catastrophe Risks of Natural Disasters
at the Country Level The World Bank
Prospective
Distance Learning Course for Insurance
Supervisors
Eugene N. GurenkoSenior Insurance Specialist
email egurenko_at_ifc.orgWorld Bank/IFC Insurance
UnitWashington DC April 28-29, 2002
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Key Messages

• Catastrophe Risk Management is an Integral Part
  of Good Governance and of Best Insurance
  Supervision Practices
• World Bank Plays an Active Role in Assisting its
  Client Countries in Building Effective
  Catastrophe Risk Management Systems
• Risk Pooling and Clearly Defined Allocation of
  Catastrophe Risk Between the Insurance Industry
  and the Government can be a Effective Way to
  Reduce Countries Financial Exposures to Natural
  Disasters

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Key Objectives of an Insurance Supervisor

• Ensure companys solvency, i.e., its ability to
  meet its claims
• Ensure the availability of insurance coverage at
  fair market rates for individuals and corporate
  users
• Meet other social and economic objectives such as
  raising insurance awareness, professional
  standards in the industry, affordability and
  insurance penetration concerns, etc.

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Characteristics of Catastrophe Risk

• Low frequency but high severity events which
  endanger the financial health and solvency of
  insurance companies.
• Frequently, in the aftermath of cat events, the
  industry is no longer able or willing to continue
  to provide insurance coverage for cat type risks
  (the Northridge, September 9/11, Florida
  Hurricanes).
• Mismanagement of catastrophe risk has numerous
  highly adverse social, economic and political
  implications for the affected countries.

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Impact of the Luthar Storm in France and the
Northridge EQ on Domestic Insurers
2001 11 September
1994 Northridge Earthquake
1992 Hurricane Andrew
1999 Storm Lothar
Loss ratio in California in earthquake policy for
1994 1,200 (source Wharton)
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Insured and Uninsured Losses from Natural
Disasters (in US Billions)
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Impact of National Disasters on Insurance
Companies

• Potential insolvency
• Premiums raised
• Closed down of companies

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Key Challenges Faced by the Bank in Building Risk
Transfer Systems

• Lack of risk awareness at the government level
  and among population
• Undeveloped insurance sector
• Excessive reliance on the government as the
  reinsurer of last resort
• Low country incomes
• High degree of uncertainty with regard to
  expected economic losses.

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Designing Effective Risk Management Programs
for Government 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

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National Catastrophe Risk Management
Source EQE
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World Banks Role in Building National Risk
Transfer Systems

• Vulnerability of the worlds poor to natural
  disasters underpins the World Banks work on risk
  transfer and risk financing.
• By ensuring that sufficient liquidity exists
  after a disaster, risk transfer mechanisms can
  help to speed economic recovery and reduce
  government exposure to natural disasters.

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World Banks Role in Building National Risk
Transfer Systems

• Catastrophe risk management can also assist
  countries in the optimal allocation of risk in
  the economy, thus contributing toward higher
  economic growth, better mitigation and more
  effective poverty alleviation.

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World Banks Role in Building National Risk
Transfer Systems

• The latest examples include Banks involvement in
  the design of the Turkish Catastrophe Insurance
  Pool, preparation of the launch of the Disaster
  Pool in the Caribbean, studies of economic
  vulnerabilities to natural hazards in Honduras,
  India, Bangladesh, Pakistan and Sri Lanka,
  feasibility studies on parametric weather
  insurance in Morocco, Mexico and Turkey.

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Quantifying the Uncertainty The Role of World
Bank

• Independent Estimates of Countries Economic
  Exposures and Vulnerability to Natural Disasters
• Quantification of Economic Benefits from
  Different Risk Transfer/Risk Hedging
  Arrangements
• Selection of Best Risk Transfer and Financing
  Programs

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Quantifying the Uncertainty The Role of World
Bank

• Review of premium rates and assistance in the
  design of risk transfer instruments
• Determination of expected survivability of
  insurance/reinsurance pools for given levels of
  exposure and capitalization
• Provision of risk funding facilities
• Design of Legal and Institutional Frameworks for
  Risk Management

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Table 1 Reported Natural Catastrophe Exposures
in Asia, 1996-2000
                     
1
South Asia
reported
percentage
reported
GDP
government
- loss intensities -
 
2
revenues
pct. GDP
pct. revenues
country
incidents
assessed
losses
mill.
India
73
9,176
2.25
12.15
19.2
407,850
75,500
Pakistan
22
0.0
52,280
9,150
Afghanistan
20
0.0
3,895
Bangladesh
7.65
66.03
48
8.3
2,879
37,650
4,360
Sri Lanka
9
0.0
11,625
2,185
Bhutan
0
0.0
430
165
Nepal
0.84
7.58
15
26.7
52
6,250
690
187
7.7
12,107
519,980
92,050
3.58
0.2859
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National Catastrophe Risk Management
Source EQE
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TCIP Historical Background

• Low EQ insurance penetration - about 2 outside
  Istanbul and 15 within Istanbul almost 0 in
  low-income, middle-class segment of property
  market
• Highly competitive, poor underwriting standards,
  systemic links with the banking system
• Low capital base and low level of reserves
  against earthquakes in the domestic insurance
  industry

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TCIP Historical Background

• Poor prospects of expanding EQ coverage since
  Disaster Law mandated funding of replacement of
  dwellings nearly free of charge
• Insufficient technical capacity in pricing and
  managing catastrophic risk in the industry
• Continuous government financial exposure to EQs
• Inadequate understanding and management of EQ
  risk by households and contractors

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TCIPs OBJECTIVES

• Ensure most domestic dwellings have EQ insurance.
• Reduce government fiscal exposure.
• Transfer most of catastrophe risk to
  international reinsurance and capital markets.
• Overtime, build up TCIPs capital base to insure
  against larger events
• Encourage risk mitigation and safer construction
  practices

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TCIP Main Highlights

• Legislation
• Amendment of the Disaster Law
• no more government interest-free loans to
  homeowners
• Enactment of Earthquake Insurance Decree Law
• EQ insurance is made compulsory
• TCIP is created as the sole-source provider of EQ
  coverage
• TCIP was required to become operations on
  September 27,00

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TCIP Main Highlights

• Legislation
• Pending Enactment by the Parliament of Earthquake
  Insurance Law
• introduces penalties
• enhances the Decree law

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TCIP Main Highlights

• Around 2 million policies
• Compulsory EQ cover for all registered
  residential dwellings
• Stand-alone product, separate from fire
  (homeowners) insurance
• Cover up to 20,000 per dwelling none for
  contents
• 15 rating categories based on hazard zone and the
  type of buildings

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TCIP Main Highlights

• Cover in excess of TCIP (gt30,000) is obtainable
  from private insurers
• Private insurers distribute TCIP policies acting
  as agents, i.e. assume no risk of loss
• To eliminate penny claims and reduce
  administrative and reinsurance costs of the pool,
  a deductible of 2 is introduced.
• Online (web-automated) policy underwriting and
  data management
• Independent (hired by TCIP) loss adjusters are
  used in claim settlement

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TCIP Main Highlights

• Independent (hired by TCIP) loss adjusters are
  used in claim settlement
• Outsource extensively/no public sector employees
• Premium reserves held in creditor-proof escrow
  accounts, with at least 50 invested in foreign
  assets
• Overall protection against losses up to 1
  billion in the first 5 years
• If claims exceed TCIPs available financial
  resources, the GOT will step in

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TCIP Main Highlights
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GOVERNMENT SPONSORED CATASTROPHE INSURANCE POOLS
AND FUNDS
Source Guy Carpenter
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Conclusions

• Risk assessment technology and financial market
  development create new options for government
  risk management
• Catastrophe risk pooling with government acting
  as a reinsurer of last resort can be an
  attractive solution for managing the countrys
  risk exposure to natural disasters
• Foundation for a unified country plan for
  managing cat risk is a must
• A bottoms- up high quality risk analysis is
  essential for decision making and risk capital
  financing