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Presentation prepared to: The International Catastrophic Risks Forum 4th Edition
“Catastrophe Risk Management Strategies for Governments of Developing Countries”
October 1st-2nd, 2007, Bucharest, Romania
Presented byVíctor Cárdenas
Page 2
Agenda
1. The high incidence of infrequent cat-events
2. Approaching to new markets: governments in developing
economies
3. Some successfully stories
4. Potential new solutions: creating new markets
Page 3
Agenda
1.1. The high incidence of infrequent cat-eventsThe high incidence of infrequent cat-events
2. Approaching to new markets: governments in developing
economies
3. Some successfully stories
4. Potential new solutions: creating new markets
Page 4
Natural disaster losses and its frequency in the world have experimented a clear increase
Source: EM-DAT
• It is basically explained by: – The demographic tendency and the mobility of the population settlements to zones of high risk;– The global warming, and;– Human influence in the environment.
0
50
100
150
200
250
300
350
400
450
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Frequency of Natural Catastrophes: 1900-2006
Page 5
Hydrological and geological hazards are the main sources of catastrophes in the world.
Source: EM-DAT
• The main hazards or natural disaster sources are: – Hydrological (wind storm, wage/surge, flood);– Geological (earthquake, slides, volcano), and– Others (extreme temperatures, wild fires, drought, etc).
Total losses in the world (Billions of US Dollars of 2007)
Page 6
1. The high incidence of infrequent cat-events
2.2. Approaching to new markets: governments in Approaching to new markets: governments in
developing economies developing economies
3. Some successfully stories
4. Potential new solutions: creating new markets
Agenda
Page 7
Typically, governments are the insurance of last resort in developing countries
Source: The World Bank and Swiss Re Sigma
Financing of Natural Catastrophes Losses
0% 20% 40% 60% 80% 100%
Japan
Italy
Germany
U.S.A
Canada
Israel
Australia
Belgium
U.K.
Netherlands
France
0% 20% 40% 60% 80% 100%
Bangladesh
India
El Salvador
Turkey
Mexico
Honduras
Poland
Colombia
Indonesia
Insured InsuredNot InsuredNot Insured
Page 8
In cases where the insurance sector is not adequately developed, the governments works as a last resort
insurer.
• In contrast, in developed countries there are several financial mechanism to share and transfer the risk, many of them supported by the insurance sector.
• Usually, developing countries retain a highly share of the losses, financing it with fiscal resources versus developed countries where the financial system is a risk taker.
Source: Swiss Re
Average Insurance Development by Region(%=Policies issued/GDP)
Page 9
Mexico exemplifies a case where the government finances what the insurance sector
does not cover.
High insurance industry penetration
Low insurance industry penetration
In 2005 the total losses for hurricanes were for 3.2 USD billions
Page 10
Governments in developing economies are the next target market
• It is fundamental to promote the development of the insurance industry in developing economies.
• Governments in developing economies are potential new insureds against catastrophes.
• Three fundamental insurance objects should be considered for governments as potential policy holder: – Losses for emergency expenses– Losses for reconstruction infrastructure– Governments losses for solidarity duties (housing for
poor people, among others)
Page 11
1. The high incidence of infrequent cat-events
2. Approaching to new markets: governments in developing
economies
3.3. Some successfully storiesSome successfully stories
4. Potential new solutions: creating new markets
Agenda
Page 12
There are several initiatives in LatAm promoting the implementation of risk management
strategies.
• Mexico Safety Net through calamity funds
• Mexico Earthquake Liquidity Hedge for Emergency Relief
• Caribbean Catastrophe Pool (CCRIF)
Some successfully examples:Some successfully examples:
Page 13
The Mexican calamity funds
• Historic Background– 1995: Natural Disaster Fund (FONDEN)
• Institutional framework for natural disaster risk management• Budgetary Planning: Public Policy framework (sustainability)• 3 eligible categories for financing
– Emergency relief and reconstruction– Public infrastructure– Productive assets for marginal populations (including low income or subsistence
farmers)» Target subsistence farmers: defined based on landholdings per state and eligibility inventory
from PROCAMPO
– 2001-2002: Special Contingency Fund for Agriculture (FAPRACC)• Spin-off from FONDEN (transferred to the Agricultural Ministry)• Insurance was defined as an eligible expense category of gov’t resources for risk
management• The Agricultural Ministry invested in R&D for the design of the drought safety net
program – Based on accumulated rainfall (insured: State Governments)
» Coverage for CAT loss: Equivalent to yield loss bigger than 70%
– Executing capacity on the ground (technical expertise)– Institutional flexibility for an appropriate financial engineering effort
Page 14
In 2006, México innovated in region and the world, developing a “insurance” for catastrophic
earthquakes.• The “insurance” is supported by cat-bonds
and high rated reinsurance and provide resources for emergency expenses.
• The “insurance” indemnify to Fonden (Mexican Calamity Fund) if met the following requirements:
– A state of emergency declaration issued by the Ministry of the Interior of Mexico and published in the Mexican Official Gazette,
– Epicenter location in or on the boundary of a Zone, and
– the following magnitude and depth requirements:
Page 15
In 2007, the World Bank developed an insurance mechanism for the Caribbean countries, that provides resources for
emergency expenses after hurricanes and earthquakes.
Caribbean Catastrophe Risk Insurance Facility (CCRIF)
• The trigger conditions are:
– Period: starting in June 2007 to June 2008.
– Payout according to parametric formulas.
Page 16
1. The high incidence of infrequent cat-events
2. Approaching to new markets: governments in developing
economies
3. Some successfully stories
4.4. Potential new solutions: creating new marketsPotential new solutions: creating new markets
Agenda
Page 17
Today there are several financial instruments created for developing countries.
Lessons learned from those financial instruments:
• The Mexican calamity funds show us how to implement efficient retention strategies
– This strategy generated a efficient framework for build in excess of loss insurance coverage for transfer high layers of risk to insurers.
• The Mexican transaction showed us an important interest from the international financial community (capital and reinsurance markets) in taking risk from developing countries.
• The work designed by the World Bank for the Caribbean community shows us important benefits for developing countries:– Create strategies for risk compensation in time and geographical.– The countries altogether could generate a critical mass in order to manage its
risks.– Economies scale, sharing administrative costs and related cost with risk transfer
strategies.
Page 18
Some final remarks
• The natural disaster losses and its frequency in the world have experimented a clear increment.
• Larger countries can often absorbed the impact of big natural catastrophes, compensating the losses geographically, in revenues from affected zones with the revenues of unaffected zones (Arrow and Lind, 1970) or in time through intertemporal retention (debt).
• However, developing economies have a limited capacity to spread its risk geographically and in time.
• There are numerous financial solutions for governments as insured, it are ready to be implemented for others countries.
• Government needs are a potential target market for insurance solutions.
Presentation prepared to: The International Catastrophic Risks Forum 4th Edition
“Catastrophe Risk Management Strategies for Governments of Developing Countries”
October 1st-2nd, 2007, Bucharest, Romania
Víctor Cárdenas, Víctor Cárdenas, Advisor for the Ministry of Finance of Mexico Consultant in Catastrophe Risk Management
Former Deputy Director of Catastrophe Risk in the Ministry of Finance of Mexico
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