World Bank Group WMO Expert Meeting on Weather Risk Management Geneva, Switzerland South-eastern Europe Disaster Risk Management Project Eugene N. Gurenko, Ph.D., CPCU, ARe Lead Insurance Specialist December 5, 2007

World Bank Group Contents  The rationale for the SEEDRM project  The project structure  Risk transfer solutions for governments, homeowners and SMEs  Next steps

World Bank Group Contents  The rationale for the SEEDRM project  The project structure  Risk transfer solutions for governments, homeowners and SMEs  Next steps

World Bank Group Temperature changes in Europe around 2100 (A1B scenario ) Source: D. Jacob, Max Planck Institute; A1B scenario is the third worst socio-economic scenario of the six developed by the IPCC Temperatures will be increasing leading to a hotter drier climate

World Bank Group Precipitation changes in Europe around 2100 (A1B scenario) Source: D. Jacob, Max Planck Institute; berlin2007.org/documents/jacob.pdfhttp:// berlin2007.org/documents/jacob.pdf A1B scenario is the third worst socio-economic scenario of the six developed by the IPCC Reduced precipitation patterns but more precipitation extremes

World Bank Group Recurrence of flood events in Europe, Source: EEA, based on data from Dartmouth Flood Observatory

World Bank Group SEE economic vulnerability to the risk of earthquake

World Bank Group SEE governments are fiscally unprepared to deal with catastrophic losses

World Bank Group Liquidity gaps often emerge in the early days after a disaster Need for an instrument to provide liquidity early on until other sources of funds can be accessed

World Bank Group Contents  The rationale for the SEEDRM project  The project structure  Risk transfer solutions for governments, homeowners and SMEs  Next steps

World Bank Group SEERMP Objective:  To reduce vulnerability of SEE countries to natural disasters by building the capacity and promoting a coordinated approach in disaster risk mitigation, risk transfer, preparedness and response. Rationale for regional cooperation  Many hazards are common to a number of neighboring countries  Information sharing will allow for greater reduction of hazard risk at the national and regional level  Individual countries may not be able to cope with a major disaster on their own  Stand-by, fully equipped emergency response units and relief materials are expensive  Countries are small in size and hazards risk insurance may not be optimal at the country level

World Bank Group Key Areas of the Initiative 1.Hydrological and meteorological forecasting and flood early warning; 2.Financing of disaster losses and creation of regional risk transfer mechanisms. 3.Strengthening regional capacities in disaster risk reduction and response

World Bank Group Hydrological and Meteorological Forecasting, Data Sharing and Early Warning System  Initiative has been agreed during the ICEED meeting in Dubrovnik in May 2006  Strong partnership with WMO  Objective of this initiative is to promote a coordinated approach and data sharing in Hydromet services in South Eastern Europe  Feasibility assessment has been completed and was discussed in a regional meeting on October 24-25, 2007 in Zagreb  Coverage: Moldova, Romania, Bulgaria, Serbia, Montenegro, Croatia, Albania, Macedonia, Bosnia & Herzegovina

World Bank Group Flood Forecasting and Early Warning System on Sava River  Initiative was agreed during Podgorica the meeting of the Directors of Hydromet services for Sava river basin countries in April  Objectives are to build capacity and to re-establish data sharing and collaboration on flood forecasting and early warning system on the Sava river.  Feasibility Assessment has been completed and discussed in a regional meeting in Zagreb on October 24-25, 2007.

World Bank Group Risk transfer component  Creation of a regional catastrophe insurance pool that would offer affordably-priced catastrophe insurance coverage to homeowners and SMEs in SEE countries.  Development of standardized tradable weather risk hedging instruments to protect businesses against loss of revenue due to adverse weather conditions.  Structuring and issuance of a catastrophe risk bond for governments of the region.  Contingent loan facilities for natural disasters – “A Cat DDO”

World Bank Group Schematic allocation of sovereign catastrophe risk by sources of risk financing and available World Bank instruments Risk retention Risk financing Reinsurance Catastrophe bonds Donor aid 20 year event or up to 3% of fiscal revenue 30 year event or up to 5% of fiscal revenue year event or in excess of 5% of fiscal revenue year event or in excess of 5% of fiscal revenue 200+ year event or in excess of 5% of fiscal revenue Available World Bank instruments Disaster Draw-Down Option loans Catastrophe risk insurance pools Catastrophe bonds for sovereigns Emergency reconstruction loans

World Bank Group Disaster Risk Reduction and Response  Objective is to promote and implement investment priorities for strengthening the capacity and promote a coordinated approach to disaster preparedness and response  Will be built on existing agreements: Civil-Military Emergency Planning Council and the Disaster Preparedness Initiative of the Stability Pact  Vulnerability Assessment is completed  More detailed assessment of disaster response is needed.

World Bank Group Contents  The rationale for the SEEDRM project  The project structure  Risk transfer solutions for governments, homeowners and SMEs  Next steps

World Bank Group Deferred Draw-Down Option Loan for Natural Disasters (DDO)  Will provide immediate liquidity to fill the budget gap in the aftermath of natural disasters.  Disburses under pre-defined conditions such as declaration of national emergency by government.  Certainty of disbursement.  Highly affordable pricing.  Prerequisites:  Sustainable debt level  Satisfactory macroeconomic framework  Satisfactory emergency budget appropriation legislation/system in place  Completion of a risk assessment program and preparation of a hazard risk mitigation strategy  Could be used to support gov’t recovery programs or gov’t backed insurance

World Bank Group Toward a multi-layered risk financing strategy for governments Disaster Deferred Draw Down Option (DDO) and a catastrophe bond combined SEEcountries IBRD(TRE) IBRD (ECA) Special Purpose Vehicle Investors Commitment Fee Contingent Capital Facility Protection Spread Libor+Spread Bond principal IBRD (ECA) provides a contingent capital facility ( DDO) to SEE countries which can be drawn to address immediate government liquidity needs after a disaster. IBRD (TRE) offers SEE countries a catastrophe insurance bond. IBRD (TRE) transfers all the risk to capital markets by issuing a cat bond through an SPV. Protection Premium Risk transfer solutions for governments

World Bank Group Sovereign Catastrophe Bonds: Illustrative Summary  Governments of developing countries; Government-sponsored institutions InsuredInsured  May include Earthquake, Hurricane, Tropical wind and other catastrophe risks Covered Perils  Parametric insurance, with pre-defined amounts of coverage per country/peril TriggerTrigger  Up to three years when appropriate, to contribute toward better price stability TermTerm  $ [ ] mm  The event limit will be selected based on projected post disaster fiscal liquidity needs Limits of Coverage Transaction Size

World Bank Group Proposed South Eastern Europe Regional Catastrophe Insurance Facility SEEcountries SER CIF IBRD Special Purpose Vehicle Investors Reinsurers Commitment Fee Contingent Capital Facility Contingent Credit Facility Protection Spread Libor+Spread Bond principal Sum Insured IBRD provides a contingent capital facility to SEERCIF member countries which is then extended to the Facility. Alternatively, non-IBRD countries with investment grade ratings can extend their own sovereign guarantee to the facility structured similarly to IBRD’s credit line. The line can be drawn to pay facility’s claims. SEE households buy a SEERCIF insurance policy by paying an annual premium for its cover. The facility retains a part of risk relying on IBRD contingent capital to pay small claims. In the absence of claims it accumulates reserves. The facility transfers most of risk to reinsurance and capital markets either through a reinsurance contract or by issuing a cat bond. Premium Protection Premium SEEHomeowners Catastrophe insurance coverage against the risks of flood and quake for homeowners and SMEs Risk transfer solutions for homeowners and SMEs

World Bank Group Hedging weather exposure of businesses to weather in SEE Sellers of weather risk protection Buyers of weather risk protection Electronic portal Weather reference indices (temperature, precipitation, wind) Risk management advisor to SMEs SEE metservices

World Bank Group Contents  The rationale for the SEEDRM project  The project structure  Risk transfer solutions for governments, homeowners and SMEs  Next steps

World Bank Group Next steps  Develop weather data reporting protocols  Install the missing parts of essential weather data generating infrastructure (weather stations, radars, satellite imagery, etc.).  Develop weather data bases and access policies.  Carry out a feasibility study to determine the demand for weather risk hedging products based on the most common weather risk exposure of businesses in the region.  Develop reference weather risk indices.  Create an on-line risk underwriting platform.  Hire a weather risk hedging advisor for local SMEs  Carry out a marketing campaign.  Get it ALL DONE!