1. 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

2. 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

3. 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.

7. 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

8. 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.

9. 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.

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

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

18. 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

19. 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

20. 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

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

22. 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 -

23. 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

24. 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)

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. Southeast Asia Disaster Profile

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

33. 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

34. 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

35. 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

36. 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.

37. 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) ( )
DRF pilots in two cities in each country
Risk profiling > city selection > DRF options > implementation
DRF Framework for the Philippines ( )
Collaborate with World Bank to spearhead DRF Technical Working Group
Viet Nam ( )
JFPR TA for DRF-CCA program development ($1m)
DRF pilots in two cities
Special focus on DRF/CCA application
Philippine Earthquake Pool ( )
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) 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.

38. 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.

39. 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

40. 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

41. Arup Chatterjee
Senior Financial Sector Specialist
Office of Regional Economic Integration
Asian Development Bank
Manila, Philippines