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2018 DRR Financing 2.1 Andy Palmer

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Sovereign Risk Financing: Introduction to Disaster Risk Transfer - Framing the "Problem"

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2018 DRR Financing 2.1 Andy Palmer

  1. 1. DRR Financing Workshop, Istanbul, 4-5 October 2018 Andy Palmer, Swiss Re Capital Markets Sovereign Risk Financing: Introduction to Disaster Risk Transfer – Framing the “Problem”
  2. 2. DRR Financing Workshop | Istanbul, 4-5 October 2018 2 Sovereign Risk Financing – Framing the “Problem” Introduction to Swiss Re Global Partnerships / Swiss Re Capital Markets Reinsurance Corporate Solutions Swiss Re Group Life Capital Global Partnerships • The Swiss Re Group is a leading wholesale provider of reinsurance, insurance and other insurance- based forms of risk transfer to insurance companies, mid-to-large-sized corporations and public sector clients around the world • Swiss Re Global Partnerships is the global client practice within Swiss Re Group focused on the public sector – As the first dedicated public sector team in the reinsurance industry, Swiss Re Global Partnerships has been responsible for over 250 bound transactions since 2011 • Created in 1997, Swiss Re Capital Markets is the broker/dealer arm of Swiss Re, responsible for the arrangement of Insurance-Linked Securities transactions for its clients and for Swiss Re itself – Swiss Re Capital Markets is the leading underwriter in the history of the ILS market, having placed over $33bn since 1997
  3. 3. DRR Financing Workshop | Istanbul, 4-5 October 2018 3 Sovereign Risk Financing – Framing the “Problem” Examples of Innovative Public Sector Risk Transfer Solutions India Weather insurance for farmers Uruguay Energy production shortfalls due to drought Caribbean Hurricane, earthquake and excess rainfall risk Pacific Islands Earthquake and tropical cyclone risk Vietnam Agriculture yield cover Beijing Agricultural risk Turkey Earthquake pool Bangladesh Flood insurance African Risk Capacity Government drought insurance pool Florida Hurricane risk United Kingdom Flood risk Guangdong Typhoon/rainfall Thailand Crop insurance Mexico Earthquake/hurricane and livestock risk Louisiana Hurricane risk Heilongjiang Multiperil disaster risk Kenya Livestock insurance California/Utah Earthquake risk Guatemala Nat cat business interruption risk United States Flood risk Philippines Earthquake and tropical cyclone risk IDA countries Pandemic outbreak
  4. 4. DRR Financing Workshop | Istanbul, 4-5 October 2018 4 Source: Swiss Re CatNet, Regional Seismic Hazard Zones Sovereign Risk Financing – Framing the “Problem” The Risk is Real…
  5. 5. DRR Financing Workshop | Istanbul, 4-5 October 2018 5 Sovereign Risk Financing – Framing the “Problem” … and can cause Significant Damage
  6. 6. DRR Financing Workshop | Istanbul, 4-5 October 2018 Sovereign Risk Financing – Framing the “Problem” Multiple Risks can impact Public Budgets… 6 illustrative A significant portion of the largest risks ends up with the public sector 1. Risk Landscape Individuals Corporates Insurers Public Sector Banks 2. Impact on Public Budgets
  7. 7. DRR Financing Workshop | Istanbul, 4-5 October 2018 Sovereign Risk Financing – Framing the “Problem” … in a Variety of Ways 7 Reconstruction of public property & infrastructure Emergency response costs Lower tax income Costs of replacements (e.g. alternative energy production and/or higher imports) Public Budgets Lower tourism income Support for non-insured households Reputational damage / loss of investor confidence Higher Costs Lower Revenues Lower export revenues
  8. 8. DRR Financing Workshop | Istanbul, 4-5 October 2018 Insured (Private): 3.7 12% Insured (Public): 1.3 4% Infrastructure (uninsured): 9.3 31% GDP loss: 7.6 26% Emergency spending: 1.1 4% Private: 6.7 23% 2m people affected in the six central provinces, 800’000 lost their homes 370’000 houses severely damaged or destroyed On public sector side: 73 hospitals, 4’000 schools, 221 bridges damaged Total reconstruction efforts require $30bn over a period of 3-4 years Sovereign Risk Financing – Framing the “Problem” Example: Chile Earthquake, 2010 8 Total cost, including damages to productive capital stock and real GDP losses, was estimated to $29.7bn, of which 84% was uninsured. Governments have to revert to tax increases, additional borrowing, or assets sales at the worst moment possible. In the immediate aftermath of the event, the state needs to address the direct and indirect consequences of the disaster. The country was severely affected by the historic earthquake, followed by a tsunami: Fiscal risks and sovereign budget protection| Swiss Re Global Partnerships On 27 February 2010, an 8.8 moment magnitude earthquake strikes Chile It was one of the most powerful and expensive in recorded history
  9. 9. DRR Financing Workshop | Istanbul, 4-5 October 2018 Sovereign Risk Financing – Framing the “Problem” Uninsured Losses are Growing… 9 Source: Swiss Re Institute, Swiss Re Sigma 1/2018 – Natural catastrophe losses 1970 – 2017 (in 2017 USD billion) 0 50 100 150 200 250 300 350 400 450 500 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Insured losses Uninsured losses 10-year moving average insured losses 10-year moving average total economic losses
  10. 10. DRR Financing Workshop | Istanbul, 4-5 October 2018 Sovereign Risk Financing – Framing the “Problem” … and Place a Significant Burden on the Public Sector 10 No country can fully insulate itself against extreme natural disasters, despite prevention and mitigation efforts Individuals, corporations and governments – both on national and sub-national level – bear the brunt of economic losses from natural disasters Public physical assets Emergency response Livelihood assistance, rehabilitation of the poor Foregone revenue Uninsured private assets
  11. 11. DRR Financing Workshop | Istanbul, 4-5 October 2018 Sovereign Risk Financing – Framing the “Problem” There is a Growing Consensus on the Macroeconomic Impact of Climate Change and Natural Events… 11 “Insurance confers benefits both before and after disaster strikes. Beforehand, the underwriters [demand] better planning and higher-quality, more resilient building from property developers and city planners. Afterwards, insurance helps entire economies to recover more rapidly.” The Economist, 13 June 2015 "Major natural catastrophes have large and significant negative effects on economic activity... However, it is mainly the uninsured losses that drive the subsequent macroeconomic cost, whereas sufficiently insured events are inconsequential in terms of foregone output." Working Paper No. 394, December 2012 "Natural disasters can damage sovereign creditworthiness” Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness, September 2015 "Climate change is likely to be one of the global mega-trends impacting sovereign creditworthiness…. Government budgets could come under additional pressure as disaster recovery and emergency support for affected populations is likely to fall on the state in most cases." Climate Change is a Global Mega Trend for Sovereign Risk, May 2014
  12. 12. DRR Financing Workshop | Istanbul, 4-5 October 2018 Sovereign Risk Financing – Framing the “Problem” … and on Governments’ Role in Risk Financing 12 "National and subnational governments can develop and implement comprehensive disaster risk financing strategies to reduce risk and to provide adequate and timely post-disaster support to strengthen financial resilience." Investing in Resilience "Finance Ministries play a pivotal role in DRM strategies [by] ensuring proper fiscal management of disaster risks by anticipating potential budgetary impacts and planning ahead to ensure adequate financial capacity and rapid release of funds, thus enabling emergency response, reconstruction of public assets and infrastructure, and targeted financial assistance." Disaster Risk Assessment and Risk Financing - A G20/OECD Methodological Framework "States, (…) regional and international organizations should develop partnerships to implement schemes that spread out risks, reduce insurance premiums, expand insurance coverage and thereby increase financing for post disaster reconstruction and rehabilitation, including through public and private partnerships." Hyogo Framework for Action 2005 - 2015 "One way to mitigate the economic and ratings impact of natural disasters [on sovereign creditworthiness] is catastrophe insurance." Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness, September 2015
  13. 13. DRR Financing Workshop | Istanbul, 4-5 October 2018 Post-Event Pre-Event Reserve Fund Contingent Financing Risk Transfer Budget Reallocation Raise Debt Donor Assistance Tax Increases "From an ex-post perspective, the availability of insurance offers the best mitigation approach against real and fiscal consequences of disasters" World Bank, Policy Research Working Paper 5564, 2011 13 Sovereign Risk Financing – Framing the “Problem” Governments' Financing Options: Post-Event vs Pre-Event
  14. 14. DRR Financing Workshop | Istanbul, 4-5 October 2018 14 gap 14 Which Risk? Governments Who Carries the Risk? Pooling Insurance schemes and pools to increase insurance penetration Macro Risk transfer solutions for (sub)sovereigns to cover their direct or indirect costs Micro Simplified products distributed via aggregators such as MFIs, NGOs, and corporates Risk Transfer Solution Businesses, homeowners, farmers Public physical assets Emergency response costs Foregone revenue Uninsured private assets Livelihood assistance ProtectionGap Individuals Sovereign Risk Financing – Framing the “Problem” Different Risk Transfer Solutions to Close the Protection Gap
  15. 15. DRR Financing Workshop | Istanbul, 4-5 October 2018 Sovereign Risk Financing – Framing the “Problem” Risk Transfer Solutions can take Various Forms Reinsurers Government Risk Premium Risk Transfer Contract Capital Markets Insurers • Risk Transfer Contract: Re/insurance, Insurance-Linked Securities ("cat bonds"), derivatives • Risks: Natural catastrophes, agriculture risk, renewable energy, pandemics • Use of funds: Emergency costs, long term liabilities, internal funding 15
  16. 16. DRR Financing Workshop | Istanbul, 4-5 October 2018 16
  17. 17. DRR Financing Workshop | Istanbul, 4-5 October 2018 Legal Notice 17 ©2018 Swiss Re. All rights reserved. You are not permitted to create any modifications or derivative works of this presentation or to use it for commercial or other public purposes without the prior written permission of Swiss Re. The information and opinions contained in the presentation are provided as at the date of the presentation and are subject to change without notice. Although the information used was taken from reliable sources, Swiss Re does not accept any responsibility for the accuracy or comprehensiveness of the details given. All liability for the accuracy and completeness thereof or for any damage or loss resulting from the use of the information contained in this presentation is expressly excluded. Under no circumstances shall Swiss Re or its Group companies be liable for any financial or consequential loss relating to this presentation.

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