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Libertad y Orden

Libertad y Orden

República de Colombia


Presentación MHCP_

Ministry of Finance and Public Credit Republic of Colombia

Libertad y Orden

Libertad y Orden



Contingent Liabilities arising from Natural Disasters:

The Case of Colombia

March, 2013

World Bank

Washington DC, USA

Libertad y Orden

Libertad y Orden



1. Background

2. Legal Framework

3. Financing strategy

4. Short – Term Challenges

AGENDA

Libertad y Orden

Libertad y Orden



1. Background

2. Legal Framework



AGENDA

Libertad y Orden

Libertad y Orden



Geographic Conditions

• The country has the highest rate of recurrent natural disasters in Latin America, with an average of over 600 reported disasters every year. (1970-2000 US4500 milli)

• In the last 30 years, Colombia has suffered ten major earthquakes, two major volcanic eruptions, five major flooding and annual major landslides.

• The damage of the “Ola Invernal” exceed the most damage of the earthquake in the “Eje Cafetero” (US1590 mill).

Seismic Hazard Map Comments

Libertad y Orden

Libertad y Orden



1. Background

2. Legal Framework



AGENDA

Libertad y Orden

Libertad y Orden



Establishes the National Calamity Fund Decree 1547/84

Establishes the System for Disaster Prevention and Attention (SNPAD) Law 46/88

The National Plan for Prevention and Attention of Disasters (PMPAD) was

adopted. It defines 4 strategies:

• Risk identification and monitoring

• Risk reduction

• Institutional strengthening

• Socialization of disaster prevention and care

Decree 93

of 1998

Establishes the strategy to prevent and attend disasters CONPES 3146

of 2001

Legal Framework

Create the National Unit for Disaster Risk Management whit the function of

coordinating the SNPAD.

Decree 4147

of 2011

Libertad y Orden

Libertad y Orden



Includes as an objective to reduce fiscal exposure PND 2002 -

2006

Includes as an objective to reduce fiscal exposure through transfer risk

mechanisms

PND 2006 -

2010

Article 220 : MHCP should design a strategy to reduce Natural Disaster

fiscal exposure. To do so, the MHCP could use resources from the

National Budget to get the mechanisms to cover those events.

PND 2010 -

2014

Legal Framework

National Development Plan (PND)

Libertad y Orden

Libertad y Orden



1. Background

2. Legal Framework



AGENDA

Ministerio de Hacienda y Crédito Público República de Colombia

Libertad y Orden


Estimation of Contingent Liabilities in Colombia

Designing a financial strategy to decrease the fiscal vulnerability of the nation upon

the occurrence of natural disasters is one of the strategic themes of the Minister of

Finance as part of the contingent liabilities of Colombia.

Natural disaster risks are the second largest source of contingent liabilities.

Contingent

Liabilities

Contingent

% GDP*

Legal Disputes 14,04%

Natural Disasters 13% **

Infrastructure

Projects

Guarantees 0,26%

Debt Guarentees 0,22%

*GDP real base 2010

US35615 millions (TR 250 years)

**Calculations made from PML estimated by GAR-ERN (2011)

Source: Deputy Directorate of Risk -MFPC-

Libertad y Orden

Libertad y Orden



Risk management public policies perspective

Number in Millions of USD.

Inst

itutio

nal,

polit

ical

, no

rmat

ive,

finan

cial

con

text

A. Risk identification

D. Preparedness

E. Post-disaster reconstruction

B. Risk reduction

• Hazard mapping, risk modeling

• Social perception, priority settings

• Territorial and sectorial planning, building codes

• Risk mitigation works, infrastructure retrofitting

• Education, creation of a culture prevention

• Alert and early warning systems

• Response planning training, equipment logistics, simulations

• Response systems management

• Institutional planning, strengthening

• Recovery, planning reconstruction policies

• Rehabilitation plans

• Reserve mechanism, budget planning

• Risk transfer, insurance, insurance linked securities

• Budget appropriation, execution in emergency C. Financial protection

Libertad y Orden

Libertad y Orden



Financial risk strategy

Reduce

Retain

Transfer

Libertad y Orden

Libertad y Orden



Financing Strategy - Colombia

With

hold

ing

Tra

nsfe

r.

Lower Limit

Upper Limit

Total Account

PML

Res

idua

l Ris

k

Without protection

Long – Term actions

(CAT Bonds, Taxes, Long -Term

loans)

Insurance and Reinsurance

Contingent loans

Reserve Fund

Source: Cardona (2005).

Libertad y Orden

Libertad y Orden



Financing strategy

With

hold

ing

Tra

nsfe

r. R

esid

ual R

isk

Without protection



loans)


Contingent loans

Reserve Fund

• The Calamity Fund has

insufficient proceeds.

• To modernize the legal and

institutional framework.

• To establish a clear allocation of

responsibilities

Libertad y Orden

Libertad y Orden



Financing strategy

With

hold

ing

Tra

nsfe

r. R

esid

ual R

isk

Without protection



loans)


Contingent loans

Reserve Fund

• USD 150 Mill – IBDR

• From 2006 to 2011 (It was

used in the flood “Fenomeno

del Niño” 2011)

• Trigger Event: President’s

decree declaring the

occurrence of the disaster,

indicating magnitude,

geographic area and effects. Source: Cardona (2005).

Libertad y Orden

Libertad y Orden



Financing strategy – Risk transfer instruments

With

hold

ing

Tra

nsfe

r. R

esid

ual R

isk

Without protection



loans)


Contingent loans

Reserve Fund

• To implement the insurance of

public infrastructure through

collective insurances.

• To foster the private insuring.

Libertad y Orden

Libertad y Orden



Financing strategy

With

hold

ing

Tra

nsfe

r. R

esid

ual R

isk

Without protection



loans)


Contingent loans

Reserve Fund

• To study the feasibility

instruments to cover residual risk

(catastrophic Bonds).

• To develop internal procedures to

face a disaster.

Source: Cardona (2005).

Libertad y Orden

Libertad y Orden



Time dimension

Reserves

Contingent debt facility

Parametric insurance

Budget reallocation

Multilateral loans

Traditional insurance

Disaster Event

Humanitarian

Relief Recovery Reconstruction and development

Time

Libertad y Orden

Libertad y Orden



Pillars of catastrophic financing structure

Fuente: Cummins y Mahul (2008), Banco Mundial

Government

Contingent liability

assessment

Risk transfer

promotion to

competitive

insurance markets

Sovereign

catastrophe risk

financing

Catastrophe risk

financing model:

exposure to natural

disasters and

losses associated

to different events

The government

can reduce its

contingent liability

promoting private

insurance

Public assets

insurance and

mechanism to

protect budget

against liquidity

crisis

Libertad y Orden

Libertad y Orden



Remarkable cases

• Voluntary catastrophe insurance;

• Premiums are collected through the

property taxes;

• they include a subsidy to the poorer

areas.

• Insurance on the assessed value of

residential buildings, aimed at all the

homes that have no outstanding property

taxes to pay.

• Financial strategy of the System for

Prevention and Emergency Response in

Bogota. (DRAFT AGREEMENT No. 097,

2009)

Manizales

Sabaneta

Bogotá

Libertad y Orden

Libertad y Orden



1. Background

2. Legal Framework



AGENDA

Libertad y Orden

Libertad y Orden



• Transformation of the National Calamity Fund in the National Fund for Disaster Risk

Management in order to strengthen the instruments of Risk Retain natural disaster risk.

• Evaluate the possibility with DNP to create the figure in the procurement framework of

the "Negotiating Framework Agreements."

• Perform Agreements with entities “central government” to negotiate a collective

insurance.

Next Steps….

Libertad y Orden

Libertad y Orden



• Technical Assistance whit CAPRA in order to obtain a catastrophic risk modeling and

strengthen the measurements.

• Develop guidelines for law enforcement entities to conduct decentralized

procurement of insurance policies against natural disasters.

• Implementation : Article 11, numeral 4 of Act 1508, of January 2012, which regulates

PPPs, established as mandatory to elaborate risk and vulnerability analysis for

avoiding the generation of disaster risk conditions.

Next Steps….

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