1. World Bank Group Managing Catastrophe Risks of Natural Disasters at the Country Level: The World Bank Prospective Eugene N. Gurenko Senior Insurance Specialist email: egurenko@ifc.org World Bank/IFC Insurance Unit Washington DC April 28-29, 2002 egurenko@ifc.org Distance Learning Course for Insurance Supervisors

2. World Bank Group 2 Key Messages n Catastrophe Risk Management is an Integral Part of Good Governance and of Best Insurance Supervision Practices n World Bank Plays an Active Role in Assisting its Client Countries in Building Effective Catastrophe Risk Management Systems n 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

3. World Bank Group 3 Key Objectives of an Insurance Supervisor : n Ensure company’s solvency, i.e., its ability to meet its claims; n Ensure the availability of insurance coverage at fair market rates for individuals and corporate users; n Meet other social and economic objectives such as raising insurance awareness, professional standards in the industry, affordability and insurance penetration concerns, etc.

4. World Bank Group 4 Characteristics of Catastrophe Risk n Low frequency but high severity events which endanger the financial health and solvency of insurance companies. n 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). n Mismanagement of catastrophe risk has numerous highly adverse social, economic and political implications for the affected countries.

5. World Bank Group 5 Impact of the Luthar Storm in France and the Northridge EQ on Domestic Insurers 1992: Hurricane Andrew 1994: Northridge Earthquake 1999: Storm Lothar 2001: 11 September* Loss ratio in California in earthquake policy for 1994: 1,200% (source Wharton)

6. World Bank Group 6 Insured and Uninsured Losses from Natural Disasters ( in US Billions ) 1950 1955 196019651970197519801985199019952000 80 70 60 50 40 30 20 10 0 Economic losses (2000 values) of which insured losses (2000 values) Trend of economic losses Trend of insured losses US$ 160 bn

7. World Bank Group 7 Impact of National Disasters on Insurance Companies n Potential insolvency n Premiums raised n Closed down of companies

8. World Bank Group 8 Key Challenges Faced by the Bank in Building Risk Transfer Systems n Lack of risk awareness at the government level and among population; n Undeveloped insurance sector; n Excessive reliance on the government as the reinsurer of last resort; n Low country incomes; n High degree of uncertainty with regard to expected economic losses.

9. World Bank Group 9 Designing Effective Risk Management Programs for Government Clients n Risk Identification and Measurement t 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) n Loss control programs t Loss prevention programs/national mitigation efforts/enforcement of building codes, construction supervision. n Risk transfer/risk financing t Reinsurance t Government t Insurance Industry

10. World Bank Group 10 Country Assets (people, housing, factories, schools…) Risk Analysis Expected Annual Loss Loss Exceedance (PML’s) Risk Transfer Cost/Benefit Risk Analysis Expected Annual Loss Loss Exceedance (PML’s) Risk Transfer Cost/Benefit Revise Strategy Reinsurance/Alternative Risk Financing Strategies Revise Strategy Reinsurance/Alternative Risk Financing Strategies Manage Position No Yes Lower Risk Mitigation, Land use planning Lower Risk Mitigation, Land use planning (Risk Transfer/Financing) ( Risk Reduction) Achieve Risk Management Objectives? Flood, Earthquake, Wind…. National Catastrophe Risk Management Source: EQE

11. World Bank Group 11 World Bank’s Role in Building National Risk Transfer Systems n Vulnerability of the world’s poor to natural disasters underpins the World Bank’s work on risk transfer and risk financing. n 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.

12. World Bank Group 12 World Bank’s Role in Building National Risk Transfer Systems n 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.

13. World Bank Group 13 World Bank’s Role in Building National Risk Transfer Systems n The latest examples include Bank’s 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.

14. World Bank Group 14 Quantifying the Uncertainty: The Role of World Bank n Independent Estimates of Countries’ Economic Exposures and Vulnerability to Natural Disasters; n Quantification of Economic Benefits from Different Risk Transfer/Risk Hedging Arrangements; n Selection of Best Risk Transfer and Financing Programs

15. World Bank Group 15 Quantifying the Uncertainty: The Role of World Bank n Review of premium rates and assistance in the design of risk transfer instruments n Determination of expected survivability of insurance/reinsurance pools for given levels of exposure and capitalization n Provision of risk funding facilities n Design of Legal and Institutional Frameworks for Risk Management

16. World Bank Group 16 Table 1 Reported Natural Catastrophe Exposures in Asia, 1996- 2000 South Asiareportedpercentagereported GDP 1 government - loss intensities - countryincidentsassessedlosses [$ mill.] revenues 2 pct. GDPpct. revenues India 73 19.2% $9,176 $407,850$75,500 2.25%12.15% Pakistan 220.0%$52,280$9,150 Afghanistan 200.0%$3,895 Bangladesh 488.3%$2,879$37,650$4,360 7.65%66.03% Sri Lanka 90.0%$11,625$2,185 Bhutan 00.0%$430$165 Nepal 1526.7%$52$6,250$690 0.84%7.58% 1877.7%$12,107$519,980$92,0503.58%0.2859

17. World Bank Group 17 BuildingsInfrastructure Agriculture GDP InventoryVulnerabilityHazard Expected Annual Loss100,200,500 yr. loss InsuredInsurer Reinsurer/Capital Markets EquityReinsuranceGov”t. Sales & Service Claims NATURAL PERILS: EARTHQUAKE, FLOOD, WIND, DROUGHT Coordination- Natural Disaster s Risk Mgmt. Potential loss Loss parameters Loss probability & severity Risk allocation, rating plan, pricing, transfer Risk financing Distribute policies, collect premium, service claims Building codes, land use, disaster management Claims, solvency, operations, risk financing National Responsibility / Accountability Source: EQE National Catastrophe Risk Management

18. World Bank Group 18 TCIP: Historical Background n Low EQ insurance penetration - about 2% outside Istanbul and 15% within Istanbul; almost 0% in low-income, middle-class segment of property market n Highly competitive, poor underwriting standards, systemic links with the banking system n Low capital base and low level of reserves against earthquakes in the domestic insurance industry

19. World Bank Group 19 TCIP: Historical Background n Poor prospects of expanding EQ coverage since Disaster Law mandated funding of replacement of dwellings nearly free of charge n Insufficient technical capacity in pricing and managing catastrophic risk in the industry n Continuous government financial exposure to EQs n Inadequate understanding and management of EQ risk by households and contractors

20. World Bank Group 20 TCIP’s OBJECTIVES n Ensure most domestic dwellings have EQ insurance. n Reduce government fiscal exposure. n Transfer most of catastrophe risk to international reinsurance and capital markets. n Overtime, build up TCIP’s capital base to insure against larger events n Encourage risk mitigation and safer construction practices

21. World Bank Group 21 TCIP: Main Highlights Legislation n Amendment of the Disaster Law: t no more government interest-free loans to homeowners n Enactment of Earthquake Insurance Decree Law: t EQ insurance is made compulsory t TCIP is created as the sole-source provider of EQ coverage t TCIP was required to become operations on September 27,00

22. World Bank Group 22 TCIP: Main Highlights Legislation n Pending Enactment by the Parliament of Earthquake Insurance Law t introduces penalties t enhances the Decree law

23. World Bank Group 23 TCIP: Main Highlights n Around 2 million policies n Compulsory EQ cover for all registered residential dwellings n Stand-alone product, separate from fire (homeowner’s) insurance n Cover up to $20,000 per dwelling & none for contents n 15 rating categories based on hazard zone and the type of buildings

24. World Bank Group 24 TCIP: Main Highlights n Cover in excess of TCIP (>$30,000) is obtainable from private insurers n Private insurers distribute TCIP policies acting as agents, i.e. assume no risk of loss n To eliminate “penny claims” and reduce administrative and reinsurance costs of the pool, a deductible of 2% is introduced. n Online (web-automated) policy underwriting and data management n Independent (hired by TCIP) loss adjusters are used in claim settlement

25. World Bank Group 25 TCIP: Main Highlights n Independent (hired by TCIP) loss adjusters are used in claim settlement n Outsource extensively/no public sector employees n Premium reserves held in creditor-proof escrow accounts, with at least 50% invested in foreign assets n Overall protection against losses up to $1 billion in the first 5 years n If claims exceed TCIP’s available financial resources, the GOT will step in

26. World Bank Group 26 TCIP: Main Highlights

27. World Bank Group 27 GOVERNMENT SPONSORED CATASTROPHE INSURANCE POOLS AND FUNDS Source: Guy Carpenter

28. World Bank Group 28 Conclusions n Risk assessment technology and financial market development create new options for government risk management n Catastrophe risk pooling with government acting as a reinsurer of last resort can be an attractive solution for managing the country’s risk exposure to natural disasters n Foundation for a unified country plan for managing cat risk is a must n A “bottoms- up” high quality risk analysis is essential for decision making and risk capital financing