2018 DRR Financing 3.4 David Simmons

Towards Resilience - Insuring Climate Risk
David Simmons
Managing Director, Capital, Science & Policy Practice, Willis Towers Watson
UNDP DRR financing workshop
Istanbul, Turkey, 4-5 October 2018
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Catastrophe Insurance Moving Beyond Property Risk
Caribbean Catastrophe Risk Insurance Facility
▪ Formed in 2007 in aftermath of Hurricane Ivan in 2004
▪ Aid arrived but too little, too late
▪ CCRIF is an insurance company to allow countries to
mutualise risk (capitalised by donors)
▪ Guarantees payment to countries for qualifying events
within 14 days
▪ Geared up by reinsurance, CCRIF is safe against the
worst year in 1000 modelled years
▪ Huge success in 2017 – but not big enough!
African Risk Capacity
▪ Inspired by CCRIF, a mutual of African countries covering
drought
▪ Again donor funded, paying far more quickly that tradition
aid, save lives and livelihoods
▪ Includes specific capacity building
▪ Early warning software, Risk management process,
contingency planning requirements
▪ Recent innovation: policy replication to insure post event
efficiency NGO/government
The Catastrophe Insurance market is strong:
▪ Big investment in science, modelling, risk/hazard understanding over 30 years
▪ We now have a problem – too much capital chasing too few traditional risks
▪ So catastrophe reinsurance has never been cheaper (despite climate change)
▪ Historically Catastrophe Insurance has focussed on property loss, but the scope is far wider, e.g. disaster response
© 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 2

Cities / Sub-state Regions
A scale for maximum climate risk impact and financial instability
3
Source: Swiss Re, 2015
Source: https://www.lloyds.com/cityriskindex/

Cityspendingneedpermonth(PHP)
Time
Relief
Early
recovery
Reconstruction
Schematic showing an indicative pattern of spending, based on observations from several cities and international experience
Requirement for Immediate post Disaster liquidity
• < 2 months after a disaster
• Humanitarian response
• e.g. providing food,
medicine, shelter
• < 9 months after a disaster
• Restoration of basic services
• e.g. Re-starting transport,
energy supplies, markets
• > 4 months after a disaster
• Reconstruction or
rehabilitation of assets
• e.g. Rebuilding infrastructure,
homes, build back better
PCDIP will provide
valuable cash injection
quickly after a catastrophe
event, before indemnity
insurance and/or aid
funding arrives, enabling a
fast effective disaster
response

Risk pooling
City A
Insurer
City B City C City A
Risk Pool
City B City C

Why does risk pooling reduce costs?
Additive Reduces
with more
members
Shared
between
members
Price
Expected
Loss= Uncertainty+ Expenses+ Profit+
Retained
by the pool

Philippines City Disaster Insurance Pool (PCDIP)
Cities themselves decide what cover they wish to buy
Initially there are two hazards covered:
▪ Tropical cyclone (wind speed)
▪ Earthquake (ground shaking)
Flood and excess rainfall will be added when modelling/data is available
For each hazard cities can chose:
▪ The probability of events leading to minimum and maximum pay-outs
▪ The required amounts of those minimum and maximum pay-outs
▪ OR they can see how much cover a set level of premium would buy

Tailoring to city-specific needs
Note: Premium excludes Documentary Stamp Tax
Annual premium
Cost of the targeted insurance
coverage
Event severity
How often the policy can be
expected to pay, on average
Minimum payout
Minimum payout if the policy
is triggered
Insurance limit
Maximum payout available
under the policy
Peril
Earthquake and/or
Tropical Cyclone

TRIGGER INDEMNITY PARAMETRIC INDEX
Speed of pay-out
Transparency
Cost effectiveness
Basis risk
Key benefits of parametric insurance
FAST
OBJECTIVE
COST-EFFECTIVE

Proposed Parametric structure – earthquake index
Index = SANANGKA * WNANGKA + … + SATANONG * WTANONG
Chosen parametric index trigger = 0.3gMarikina barangays
NANGKA
barangay
TANONG
barangay

PCDIP Administrative and governance structure *
* Discussions about the structure of the scheme are continuing with the Philippines Department of Finance, GSIS and the Insurance Commission

Summary of key benefits of PCDIP
▪ The quantum of
claim payment is
known within
days of event
▪ Payment is
received shortly
after
SPEED OF PAYMENT
▪ Less reliance on
central
government /
international
generosity
▪ PCDIP pooling
reduces exposure
to re/insurance
market price
volatility
BUDGET CERTAINTY
▪ A catalyst to
improved risk
understanding
▪ Supports risk-
informed
prioritization of
disaster risk
reduction actions
RISK AWARENESS
• Schemes can
encourage
development of
detailed, audited
contingency
plans
• Provides a forum
for shared
expertise,
potentially for
shared resources
PREPAREDNESS

Disaster Risk Insurance for the Poor
Protecting the most vulnerable
The poor may have least to lose in terms of assets but often are the worst hit in terms of loss of life, shelter and livelihood
The poor are invariably uninsured and have limited capacity to pay premium
Fiji Sub-bronze scheme
▪ Part of a programme to address market failure to cover sub-standard housing and the families living in them
▪ Bronze scheme: WTW working with Word Bank to define an insurance scheme to cover property not built to code
▪ Sub-bronze scheme: WTW working with IFC covering families in housing with no insurable value, aim for launch on 1st November 2018
▪ Payments made if a tropical cyclone hits their province: payment increases for winds of categories 3, 4 and 5 by local scale
Philippines Catastrophe Insurance Pool (PCIP)
▪ WTW has been working to design a domestic property/SME scheme inspired by the Turkish TCIP scheme, PCIP
▪ Recent political pressure has been to add an insurance for the poor element, work progresses on renamed PCRIP scheme
R4 Crop Insurance Scheme
▪ WTW working with World Food Program in Ethiopia to design and protect an insurance scheme to cover small scale farmers
▪ Scheme aims to link insurance to improvements in farming practice and inputs: increasing resilience and prosperity
▪ Includes innovative “work for premium” feature
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Conservation and Disaster Risk Reduction
Insurance: Incentivising sustainable behavior
▪ Insurance premiums are fundamentally risk responsive, i.e. the financial mechanism that rewards
investments in resilience
▪ Risk-sensitive financial tools provide funding for recovery after an event and also incentivise the development of
contingency plans that wrap around risk transfer solutions
▪ Risk transfer can also create incentives to reduce risk by rewarding investments to mitigate risks through reduced
insurance cost, retained market value, and maintained access and use.
▪ Valuing natural capital infrastructure in monetary terms (e.g. as compared to grey infrastructure providing
equivalent coastal protection) is critical first step to having protective qualities reflected in insurance pricing
▪ If models are responsive, pricing is responsive
▪ Insurance as reward
▪ E.g. COAST – parametric insurance product within the structure of CCRIF SPC promoting resilience of Caribbean
coastal communities and fisheries against natural disaster risk
▪ This type of insurance would protect stakeholders against risk factors they cannot control as a ‘reward’ for agreements
regarding those they can control, e.g. fisheries management, pollution, and conservation activities.
▪ Disaster Risk Reduction (or ‘building back better’) written into contingency plans
14

Resilience Bond: Project Finance + Risk Transfer
Leverage Local Capacities & Authorities
Simultaneously understand risk, reduce it, and build long-term resilience.
Fund the full range of possible mitigation projects, for example:
▪ Single infrastructure asset
▪ Larger-scale flood defences
▪ Watershed-scale projects that may combine multiple structural and non-structural actions to reduce risk and insurance cost
All with protection in the event of a triggering event, e.g. tropical cyclone, with risk-sensitive pricing

Local Private Sector Opportunities
Insurers
▪ Act as a fronting company for international markets, but as become more comfortable with risk, then retain more
▪ If a national catastrophe risk pool is created, manage/administrate/provide services to that pool
▪ Provide quota share capacity to the pool (eg Taiwan)
▪ Add additional cover to wrap around the base protection provided by a governmental pool (eg New Zealand)
▪ Use modelling and/or exposure data created by a national exercise to develop new products
▪ eg if government commissions open source catastrophe modelling for a scheme covering government assets could a local insurers offer
cover to household, individuals and/or companies using this new modelling (eg ARC licence for development?)
Service Providers
▪ Legal, accounting, loss adjusting etc services to new pool companies/schemes
▪ Captive/SPV services
▪ Modelling/data collection opportunities (eg PCDIP)
▪ Broaden and deepen existing insurance and insurance related services, creating a recognised regional insurance hub

Insurance Development Forum (IDF)
Providing practical advice and support to governments to increase resileince
The IDF is a collaboration of leading global insurers, brokers and trade associations, together with UN
agencies (lead by UNDP) and the World Bank, with representation from leading donors
The aim is to:
▪ Share the knowledge in risk analysis and risk modelling developed in the industry over the last 30 years to governments
▪ Help governments identify where risk transfer would be appropriate and practical
▪ Identify the appropriate means to manage/transfer this risk (which may not be insurance)
▪ Identify the potential barriers to a cost effective scheme being implemented (eg data, modelling, legal, regulation, capacity)
▪ Agree strategies to close/eliminate thee gaps
▪ Support scheme implementation
The IDF is working closely with donors:
▪ With the UK government’s recently launched Centre for Global Disaster Protection which has similar aims
▪ With the German government InsuResilience Solutions Fund; providing technical assistanne funding for such projects

Summary
Insuring climate risk
▪ Protects lives
▪ Protects livelihoods
▪ Protects property
▪ Protects profits and jobs
▪ Increases the speed of economic recovery
▪ Increases food security
▪ Builds risk awareness in government, commerce and broader society
▪ Incentivises risk reductive behaviour
▪ Values natural infrastructure and provides a framework to protect it
▪ Encourages the development of a mature, risk responsive insurance sector
▪ Encourages overseas investment in infrastructure by de-risking investment
▪ Encourages development of a thriving centre of insurance related expertise
Everybody wins

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2018 DRR Financing 3.4 David Simmons

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