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RiskFinancin
gStrateg
yOlga Jonas - Joaquin
ToroBangkok - February
2006
Overview of Concepts
EVENTbefore after
PreparednessMitigationAwareness
ResponseReliefReconstruction
FINANCIAL STRATEGIES
RISKREDUCTION
RISK FINANCING
RISK
ASSESSMENT
A Comprehensive Risk Management Framework
RISK FINANCING
RISK MITIGATION
INSTITUTION
BUILDING
EMERGENCY PREPAREDNESS
Key Questions for Policy Makers
• What is country’s risk exposure?• Natural hazards
• Man-made hazards
• Can risk exposure be reduced through mitigation (reduce vulnerability)?
• What is the ex-post funding gap?• Should gov’t retain this residual risk or
should it transfer part of it to international reinsurance/capital markets?
What is country’s risk exposure?
Can vulnerability be reduced?
• Retrofitting critical public assets• Preparedness• Hazard mapping and land-use
planning• Building codesNeed incentives, institutions …
very high social returns
Ex-post financing needs
• Wide discrepancy between economic and insured losses most of the risk is carried by governments and homeowners
• Lack of liquidity in the aftermath of disasters may severely retard economic recovery
• Recurrent disasters impair and constrain public finances (excessive borrowing)
Timeliness and Phasing of Financing
Ex-post funding gap for government's budgetary outlays
0
5
10
15
20
25
30
1 2 3 4 5Time (quarters)
Am
ou
nt
$m
Post-disaster funding
Funding gap
Types of Financing to Address Gap
• Risk retention (reserves)
• Risk transfer• Insurance (e.g., pilot parametric small states
pool)• Catastrophe bonds
• Inter-temporal risk spreading• Contingent debt
RISK FINANCING
Probability of Occurrence
Type of Risk
Resource Gap
Reserve Funds
2-3 years
20-30 years
50-200 years
Recurrent Risks
All Hazards
Catastrophic Risks
ParametricCoverage
ContingentFacility
Budget Capacity
Cat Bonds
Probabilistic Catastrophic Risk Modeling
HAZARD MODULE
EXPOSURE MODULE
VULNERABILITY
DAMAGE MODULE
LOSS MODULE
COLOMBIADisaster Vulnerability Reduction APL
APL1 National Level
APL2 Municipal Level
APL3 Municipal Level
Repeater
COLOMBIA DVRPEmergency Assistance Instrument:
ERLs still take time to prepare, disbursement 16 months after the earthquake struck Armenia.
APL floating phase requires preparation of an appraisal document, due diligence at the Bank and the signature of the Vice President.
The DDO is intended to give middle-income borrowers access to long-term IBRD resources if market borrowing becomes difficult and a financing need materializes. The DDO, however, functions as a Development Policy Loan with all conditions satisfied prior to loan signing, and could not, in this case, be used to finance eligible expenditures needed for investments.
COLOMBIA DVRP Disasters Reported per Year in Colombia, According to Database of Desinventar
Number of Disasters Reported
0
200
400
600
800
1000
1200
1400
1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
COLOMBIA DVRP
L100 L500 L1000AAL
Total 6,333.3 11,028.6 13,099.1 55.7
Government 1,470.1 2,501.6 2,950.3 132.6
Strata 1 – 2 329.8 731.7 942.4 17.3
Total as % of GDP 6.46% 11.25% 13.37% 0.37%
Gvt. as % of National Budget
11.03% 18.75% 22.13% 1.03%
Str. 1&2 as % of Nat. Budget
2.5% 5.51% 7.06% 0.14%
Simulations
COLOMBIA DVRP
3 weeks 6 months 1 year
Government’s post disaster commitment
1. Lifeline infrastructure replacement2. Provision of safety nets3. High return and sustainable mitigation investment4.Other infrastructure
Ex post sources of fundsAid
Central funds transfer
Budget reallocation
Tax surcharge
Domestic credit
Development Banks
Other external Credit
Ex post funding gap
Specific Scenario
COLOMBIA DVRP
Time after the catastrophic event
One week One month Six months
Cumulative monetary values
Ex post funds
available
Government budgetary
outlays
Ex post funding gap
COLOMBIA RISK FINANCING
• Optimizing coverage of Public Assets
• Promoting insurance of Private Assets
• Designing an optimal financial strategy for residual risks– Reserves– Contingent loan– Additional (Parametric) coverage
CARIBBEAN CATASTROPHE RISK INSURANCE INITIATIVE (CCRII)
Stormy Weather
Particularities of CARICOM States
• High exposure to a variety of adverse natural events
• Limited resilience to disasters because of small size and limited borrowing capacity
• Dependence on donor support for post-disaster needs
• Limited access to insurance
Catastrophe Risk Insurance Facility
• Payouts triggered by parametric index (e.g., hurricane category, wind speed, etc.)
• Insurance premium related to individual risk exposure (avoid cross subsidization)
• Long term financial sustainability – Annual premium paid by participating countries
– Small losses covered by a reserve pool (risk capital provided by donor countries)
– Reinsurance of excessive losses on the international market
Reducing Premium Cost
• Commercial Premium = – Expected Loss (Pure Premium)– Reserve (Cost of capital)– Administrative Cost – Return on Equity
Pure vs. Commercial Premiums
18
00.5
11.5
22.5
33.5
4
US$
milli
on
Pure premium
Commercial premium
For illustrative purpose only
Conclusions
• Risk Management should be an integral part of development planning– Comprehensive long-term approach– Residual risk includes indirect losses– Time dimension of financing needs
• Need for Public/Private partnerships
• Premium = EL + Reserve & Cat Load + Admin Cost + ROE