1. 4/26/2017
World Bank Finance Forum 2002
Managing Catastrophe Risks of Natural Disasters at the Country Level: The World Bank Prospective
Eugene N. Gurenko Senior Insurance Specialist World Bank/IFC Insurance Unit Washington DC June 21, 2002

2. 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

3. Key Objectives of an Insurance Supervisor:
Ensure company’s 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.

4. 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.

5. Insured and Uninsured Losses from Natural Disasters (in US Billions) 80 70 60 50 40 30 20 10
Economic losses (2000 values)
of which insured losses (2000 values)
Trend of economic losses
Trend of insured losses
US$ 160 bn

6. World Bank’s Role in Building National Risk Transfer Systems
Vulnerability of the world’s poor to natural disasters underpins the World Bank’s 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.
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.
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.

7. 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
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

8. 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.

9. 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

10. 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….
Source: EQE

11. National Responsibility / Accountability
National Catastrophe Risk Management
Buildings
Infrastructure
Agriculture
GDP
Inventory
Vulnerability
Hazard
Expected Annual Loss
100,200,500 yr. loss
Insured
Insurer
Reinsurer/Capital Markets
Equity
Reinsurance
Gov”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

12. 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
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

13. TCIP’s 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 TCIP’s capital base to insure against larger events
Encourage risk mitigation and safer construction practices

14. 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
Pending Enactment by the Parliament of Earthquake Insurance Law
introduces penalties
enhances the Decree law

15. TCIP: Main Highlights Around 2 million policies
Compulsory EQ cover for all registered residential dwellings
Stand-alone product, separate from fire (homeowner’s) insurance
Cover up to $20,000 per dwelling & none for contents
15 rating categories based on hazard zone and the type of buildings
Cover in excess of TCIP (>$30,000) 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
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 TCIP’s available financial resources, the GOT will step in

16. TCIP: Main Highlights

17. GOVERNMENT SPONSORED CATASTROPHE INSURANCE POOLS AND FUNDS
Source: Guy Carpenter

18. Foundation for a unified country plan for managing cat risk is a must
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 country’s risk exposure to natural disasters
Foundation for a unified country plan for managing cat risk is a must