Natural Disaster Risk Management Arup Chatterjee Senior Financial Sector Specialist Asian Development Bank Let’s Listen to the Insurance Regulators and Experts Seminar organized by Association of Insurers and Reinsurers of Developing Countries, Association of Insurance Supervisory Authorities of Developing Countries, and Insurance Institute for Asia and Pacific Manila, 7 September 2012

Outline Disaster Risk Management in Developing Member Countries of Asia Role of Multilateral Agencies in Disaster Risk Financing An Overview of ADB's Disaster Risk Financing Activities Key Messages Q & A

Disasters continue to erode development gains throughout Asia and the Pacific, a region that generates one quarter of the world's GDP. Asia and the Pacific account for 42% of global economic losses and 85% of deaths as a result of natural hazard impacts. On average $15 billion is required each year to restore infrastructure and economic momentum in Asian countries affected by disasters.

Climate change is with us. Weather risks exert a large impact on GDP and national budgets of developing countries: Direct economic losses- housing and infrastructure Production slowdown – agriculture activity adversely affected - Trauma and social disruption

Measuring disaster impacts against development investments On the disaster side Between 2005–2010 the economic costs of disasters exceeded $269 billion, averaging $53.8 billion a year. On the development side The most recent OECD figures indicate that total ODA assistance to ADB’s developing member countries for 2009 was $32 billion. Implication The combined contributions of all the region’s development partners does not keep up with the economic and social costs of disasters in Asia and the Pacific. Due to their geographical location developing countries are particularly exposed to extreme natural phenomena. Storms, heavy rains and landslides are more frequent and severe in the subtropical and tropical regions of the South. Hydrometeorological, seismic, volcanic and other natural events pose a permanent ongoing threat to the people living in these regions. The comparatively low level of development, as evident in the fragile infrastructure, the poor building fabric of housing, the vulnerability of productive activities, the low level of political and social organization and the absence of warning systems, makes them more vulnerable to natural disasters. Natural disasters have direct and indirect effects on developing countries. First, during and after a disaster people lose their homes, their belongings, the very basis of their livelihood. The poorer population is much harder hit than the middle and upper classes because their vulnerability is far greater. This is due to social, economic and political factors. The poorest people often have nothing left with which to resume their daily battle for survival. It is very difficult for them to recover from the losses they have suffered and many migrate elsewhere in the hope of finding better conditions of life. Then, the direct losses in productive sectors are followed by indirect impacts. In the largely agrarian economies the production losses lead to the dismissal or unemployment of day laborers. The loss of jobs reduces income and curbs spending power in families that already live under very pre- carious conditions. This in turn affects trade and transportation as well as other ser- vices. Finally, losses can occur in the financial sector and even result in economic collapse if deposits and large amounts of savings are withdrawn. Disasters thus impoverish the population further, and in- crease their vulnerability. A vicious circle of vulnerability to more frequent extreme natural events is established.

Disaster risk reduction is development Disaster risk management is not a separate development sector. DRM is a development approach and is part and parcel of development actions. Without a risk-sensitive approach, development cannot be sustainable. In the industrialized nations, the damage caused by extreme natural events is also on the increase. This increase may be explained in good part by the higher density of large-scale assets (e.g. infrastructure, industrial plant, technology). Unlike the developing countries, material losses far out- weigh human loss. Also, population and governments have the capacity to make good these losses, at least in the medium term. Most are insured and part of the costs of rebuilding and rehabilitation are borne by the insurance firms. Nor does local and national economic stability depend on a few marketable products. This signifies far lower levels of economic vulnerability. The figure below illustrates the different medium-term economic effects of disasters, taking capital formation as a benchmark. The disaster itself causes disruption to economic development, which is overcompensated at first by the rapid provision of additional capital. After the additional funds for emergency aid and reconstruction have been consumed, the local economy has to cope with the remaining adverse effects on its own. While the industrialized countries manage this relatively quickly, in the developing countries the disaster depletes capital formation for a long time.

A Hurricane’s Impact on Asset Trajectory shock recovery better-off HH poorer HH poverty-trap threshold Time Assets Prevention of disasters, mitigation of their occurrence and extent of their effects, and adaptation to their impacts, all require financing That gives rise to the need for: Mitigation – Insurance, Savings Response – Financing: Donations, Loans Financing Tools/Mechanisms Source: Carter, Little, Mogues, and Negatu 2005

represents Vulnerability Recovery = Finance factor Extent of damage Basics of DRM Losses = Risk factor Risk = Hazard x Exposure x Sensitivity Capacity where represents Vulnerability Recovery = Finance factor Every disaster calls for a response – in material and moral support, recovery and rehabilitation. DRM is the systematic process of using administrative directives, organizations, and operational skills and capacities to implement strategies, policies and improved coping capacities in order to lessen the adverse impacts of natural hazards and related environmental and technological disasters, including avoidance (prevention) and reduction (mitigation and preparedness). Extent of damage > Available Finance The biggest financing challenge is availability of liquidity at the onset of a disaster 3

Rationale for DRM and DRF Governments are responsible for large portfolios of public infrastructure assets subject to risk Guarantee sufficient capital for emergency relief and assistance to affected households, businesses and communities Analyze, measure and manage government's disaster contingent liability comprehensive approach to embedded contingent risks from disasters Avoid diverting funds from budgets or from already disbursed development loans to finance post-disaster expenses

Emergency Preparedness Applying DRM Ex-ante Development planning, programs and projects Existing vulnerability of populations and their infrastructure Ex-post Emergency response Disaster recovery and reconstruction Risk Assessment Risk Mitigation Ex ante Institution Building Emergency Preparedness Risk Financing Risk event Risk Operations Ex post Recovery Process Time Reconstruction

Achieve Risk Management Objectives? National Catastrophe Risk Management Country Assets (people, housing, factories, schools…) Risk Analysis Expected Annual Loss Loss Exceedance (PML’s) Risk Transfer Cost/Benefit Revise Strategy Reinsurance/Alternative Risk Financing Strategies Manage Position No Yes Lower Risk Mitigation, Land use planning (Risk Transfer/Financing) (Risk Reduction) Achieve Risk Management Objectives? Flood, Earthquake, Wind…. Building Capacities to Address Financial Implications of External Shocks and Climate Change Source: EQE

Outline Disaster Risk Management in Developing Member Countries of Asia Role of Multilateral Agencies in Disaster Risk Financing An Overview of ADB's Disaster Risk Financing Activities Key Messages Q & A

ADB’s Integrated Disaster Risk Management Approach Increased Resilience through Integrated Disaster Risk Management Disaster Risk Reduction Climate Change Adaptation Disaster Risk Financing Country level IDRM model Management of retained risks Elimination of preventable risks Transfer of disaster risks (amortization) Strengthened risk governance & capacity development Risk assessment ADB promotes an integrated disaster risk management (IDRM) approach that combines disaster risk reduction, elements of climate change adaptation, and disaster risk financing. Disaster risk reduction and climate change adaptation are essential for helping avoid and reduce vulnerability to natural hazards. ADB's initiatives in these areas support member countries in developing their capacities to manage disaster risk at national and city levels more proactively, thereby yielding greater opportunity to reduce vulnerabilities, enhance climate resilience and respond faster to impacts. There are 5 key themes underlying ADB’s IDRM framework: Ex ante DRM should be proactive to anticipate future risks Holistic DRM should encompass all aspects of disaster management, including CCA and risk reduction, and based on the principles of risk management Tailored IDRM should be designed to individual country or regional requirements Able to leverage finance options DRM should include finance options to manage risks Responsive to post-disaster needs Recons ruction and rehabilitation is still of vital importance – creation of APDRF testimony to ADB’s willingness to assist in the post-impact area What ADB hopes to achieve Use the (i) three pillars and (ii) the governance support framework to advocate, develop and implement ex ante DRM measures and capacities Link DRR and DRF initiatives to encourage systematic risk management Harmonize DRM and CCA programs to achieve common objectives Play a catalyst role to crowd in private sector players and markets Demonstrate feasibility and effectiveness of IDRM via demonstration projects and capacity development Create expanded donor support for IDRM National & local development systems Stakeholder engagement Policy frameworks Development planning Development investment Knowledge Inputs Guidance Best practices Lessons learned Technical Assistance Expert consulting Regional cooperation Financing Loans Grants Guarantees Input streams

WB Disaster Risk Management Framework Manage the volatility of the costs Understand contingent liability

Key Components of a Results-Based Strategic Approach to DRM Analysis-driven Natural hazard (including climate change hazard), vulnerability and risk assessments Focused design Selection of intervention type(s) – policy, investment, capacity Selection of risk management option(s) - financial, economic, physical Optimized for necessary scope and scale Core results attributes – planning, budgeting, implementation, monitoring and evaluation Focus on common results Interdependency – top down, bottom up and linked Horizontal and vertical linkage – across agencies in all sectors at all administrative levels

What could the DRF solutions look like? Disaster liquidity / reserves Contingent credit or insurance based solutions Using parametric, index or modeled loss triggers Public infrastructure asset coverage Transport, power, water Stengthening of safety nets Microinsurance Facilitate mitigation and adaptation Climate Funds, Carbon Finance Microfinance Carbon Finance DRF solutions can be developed and tailored to suit any number of specific issues. Fund liquidity: Could be used to provide Government, or the city with available liquidity so that $ is immediately accessible to pay public servant salaries, provide emergency relief, and so on – budgetary reallocation, reserves, calamity funds Facilitate Risk transfer: focus on asset protection by providing insurance for critical infrastructure – traditional insurance, parametric insurance, derivatives Provide social protection by supporting micro-insurance schemes or strengthening other safety nets

Disaster Risk Finance Solutions For effective DRF, DMCs need access to a range of DRF tools that taken together provide coverage across the full range of disaster risks that each DMC faces. This chart shows a series of different sized disaster events (the “blue” blocks, categorized here by their return period – or how often they are expected to occur). On the right side is an outline of the various DRF options. The chart as a whole shows the layer of risk for which each DRF option is most useful and how they can provide comprehensive protection in combination. Source: Adapted from the World Bank

Three-tiered risk layering approach Source: Adapted from the World Bank Building Capacities to Address Financial Implications of External Shocks and Climate Change

Risk Modeling Disaster Impact Analysis - Scenario or Stochastic - Vulnerability Hazard (i.e. hurricane wind) Exposure (i.e. houses) Vulnerability functions (of house to wind) Risk (i.e. probable loss) Disaster Impact Analysis - Scenario or Stochastic -

Designing Effective Risk Management Programs for Sovereign 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

Costs and benefits of financial instruments Source: Ghesquiere and Mahul (2010) Instruments Indicative Cost (multiplier) Disbursement (months) Amount of funds available Donor support (relief) 0-1 1-6 Uncertain Donor support (recovery & reconstruction) 0-2 4-9 Budget contingencies 1-2 0-9 Small Reserves Budget reallocations Contingent debt facility (e.g., CAT DDO) Medium Domestic credit (bond issue) 3-9 External credit (e.g. emergency loans, bond issue) 3-6 Large Parametric insurance 2 & up ART (e.g., CAT bonds, weather derivatives)

Matching the Funding Needs The challenge is how to utilize a wide range of instruments to address the costs of disasters and be sure that they are available if and when needed. Source: Adapted from the World Bank

Key Challenges Low country incomes Limited finance and related market tools for mitigation and adaptation Degradation of environment due to growing demands of rapidly growing population High degree of uncertainty with regard to expected economic losses Poor statistics Catastrophe Risk Financing Instruments: scepticism on reliability of weather data Extent of devastation and loss normally underestimated Losses arising from business interruption and bankruptcies often unclear and undisclosed Corruption and poor governance

Key Challenges Inability to put in place pre-requisites for an efficient catastrophe risk financing instrument – e.g. enforced building codes Undeveloped insurance sector General inadequacy in local insurance laws with respect to post-disaster damages Excessive reliance on the government as the reinsurer of last resort Lack of risk awareness at the government level and among public Perceived low probability of disasters: hence insurance is of low priority among would be consumers of insurance products Lack of understanding of insurance by locals; low awareness of insurance benefits vis-a-vis costs (premiums) Lack of local technical knowledge and experience Build complex insurance models and carry out loss assessments Adapt to climate change effects

Role of Multilateral Agencies Reducing vulnerability of the poor to natural disasters Quantifying the uncertainty Independent estimates of countries’ economic exposures and vulnerability to natural disasters Enabling risk reduction by providing governments with access to hazard maps and information on hazard impacts on populations, land area, ports and airports Estimating the economic benefits from different risk transfer/ risk hedging arrangements Selecting best risk transfer and financing programs Reduce government exposure to natural disasters Optimal allocation of risk in the economy Ensuring sufficient liquidity exists after a disaster Speeding economic recovery Build capacity, fill knowledge and funding gaps, and integrate private sector expertise and resources Better mitigation and more effective poverty alleviation

Outline Disaster Risk Management in Developing Member Countries of Asia Role of Multilateral Agencies in Disaster Risk Financing An Overview of ADB's Disaster Risk Financing Activities Key Messages Q & A

Vision: “An Asia and Pacific Free of Poverty” Strategy 2020 of ADB Vision: “An Asia and Pacific Free of Poverty” Three complementary strategic agendas Inclusive growth putting in place sound policies and institutions to improve the poor’s access to credit/ insurance and basic productive assets Strengthening social safety nets to prevent extreme deprivation Environmentally sustainable growth Regional integration To better mobilize resources - including region’s savings and inbound capital flows – and maximize returns

Southeast Asia Disaster Profile

ADB Application of Disaster Funds DRM Funds by Country 1987–2011 APDRF Fund Utilization by Region 1987–2011 DRM Funds by Type 1987–2011

ADB’s DRF Activities in South East Asia Southeast Asian countries extraordinarily exposed to human and economic shocks from natural disasters Since 1987, ADB has provided over $2.3b for 145 hazard and DRM activities – 62% for DRR actions Region is largest recipient of APDRF funds Disaster Response Facility under the Asian Development Fund to be established support the poorest countries respond to natural calamities on a pilot basis

Addressing the Region’s DRR Priorities Capacity Finance Policy Institutionalizing DRM Community-Based DRM Achieving Gender Equality Private Sector Participation Disaster Risk Finance Water-Related Disasters DRR-CCA Linkages Regional DRR Cooperation Urban Disaster Risk Disaster Recovery Governance and Participation Capacity Development Addressing Critical Hazard Challenges Financing

ADB DRF Initiatives in Southeast Asia Regional Level Initiatives IDRM Trust Fund ASEAN-UNISDR Technical Cooperation Regional Economic Integration ASEAN-ADB Memorandum of Understanding Country Initiatives Philippines Indonesia Viet Nam Other Initiatives ADB Disaster Stand-by Credit Microinsurance

Regional Initiatives IDRM Trust Fund Pending support from CIDA IDRM solutions for ASEAN region ASEAN-UNISDR Technical Cooperation Regional mapping and stocktaking via web-based portal project Regional Economic Integration Office of Regional Economic Integration considering: DRM data enhancement, strengthening insurance regulatory regimes, microinsurance, development of cat bonds and contingent credit products ASEAN-ADB MOU A channel for DRF cooperation CIDA Trust Fund: is designed to provide support for DRR and DRF projects that, from inception, have regional applications in South East Asia and mitigate impacts on the most vulnerable- especially women. Possible applications of Trust Fund support include: regional risk sharing; data collection, maintenance and sharing; development of DRF education programs and disaster simulation models; and regional legal and regulatory reform initiatives. Regional Stocktaking: The ASEAN project portal will be coordinated with the website of the ASEAN Coordinating Center for Humanitarian Assistance (AHA Center) and will initially focus on disaster prevention, DRR, early warning and response. Regional Economic Integration: OREI – as part of ADB’s Financial Sector Operational Plan – is exploring how it can support disaster risk transfer including: Risk mapping and model development Insurance regulatory capacity development Development of insurance pooling mechanisms Support for microinsurance initiatives ASEAN-ADB MOU: represents a pathway for DRF issues to be included into the Work Plan currently being developed.

Country Initiatives Philippines and Indonesia Viet Nam (2011-14) Phases Key activities Phase 1 Risk profiling and city selection Phase 2 Study of potential DRF options Phase 3 Evaluation/selection of DRF options Phase 4 Implementation of DRF scheme Philippines and Indonesia JFPR TAs for Urban-based DRF programs ($2m) (2011-14) DRF pilots in two cities in each country Risk profiling > city selection > DRF options > implementation DRF Framework for the Philippines (2011-12) Collaborate with World Bank to spearhead DRF Technical Working Group Viet Nam (2011-14) JFPR TA for DRF-CCA program development ($1m) DRF pilots in two cities Special focus on DRF/CCA application Philippine Earthquake Pool (2011-12) ADB acts as catalyst to support private sector pool development Philippine Earthquake Pool: ADB will support the development of a pilot EQ pool to offset risk for urban residential and commercial exposures. Principal objective: for ADB to act as a catalyst between the Insurance Commission ( Dept. of Finance) and private sector insurance and reinsurance companies. A final report will identify strategic and sustainable options and presentation of a finalized EQ Pool to key Government and private sector stakeholders. JFPR projects: Philippines and Indonesia - Phase 1 ( risk profiling and city selection) 6-8 months, beginning April 2012; Phase 2 (city risk modeling and DRF options developed) 12-15 months, beginning by December 2012; Phase 3: (final DRF option selection) 2-3 months, beginning by March 2014. Vietnam: lags the above schedule by 2-3 months.

Other Initiatives ADB Contingent Credit Program Microinsurance Emergency stand-by credit is a basic DRF tool Opportunity costs need to be avoided Two-tier facility allows new borrowing or reallocation of undisbursed loan balances Microinsurance ADB active in the Philippines supporting (GIZ, MIPSS) Microinsurance Innovation Project for Social Security Developing policy framework at national level Developing new regulatory framework Developing financial literacy for microinsurance Contingent Credit: opportunity cost constraints have been an obstacle to developing contingent credit products at ADB. A new proposal permits new emergency liquidity to be maintained on a stand-by basis without incurring opportunity costs for either ADB or the DMC by allowing for the option of funding the new lending from undisbursed loan balances, in the event that new borrowing is not feasible or appropriate.

Outline Disaster Risk Management in Developing Member Countries of Asia Role of Multilateral Agencies in Disaster Risk Financing An Overview of ADB's Disaster Risk Financing Activities Key Messages Q & A

Key Messages Strong and continuous political commitment is essential Foundation for a unified country plan integrating DRR, DRF, and CCA is central Local ownership Value proposition for all the parties (client/donor/industry/ NGOs) A “bottoms- up” high quality risk analysis is essential for decision making and risk capital financing Risk assessment technology and financial market development create new options for government risk management Disaster management (ex-ante+ex-post) as crucial element of sustainable development Risk reduction initiatives should be integrated into disaster response and recovery measures ADB’s Integrated Disaster Risk Management approach encompasses regional DRM interests and management of shared risks across national boundaries

Arup Chatterjee Senior Financial Sector Specialist Office of Regional Economic Integration Asian Development Bank Manila, Philippines Email: achatterjee@adb.org