Disaster Risk Reduction and Financial Protection: What is Missing, - - PowerPoint PPT Presentation

Disaster Risk Reduction and Financial Protection: What is Missing, What Can Work? The Case of Latin America and the Caribbean

Kari Keipi, IDB

London, 15 November 2006

The Imperative of Reducing Risk

• 1. Increasing gap to finance disaster losses

makes traditional focus on emergency response and reconstruction unsustainable:

– Disaster losses annual growth rate of 20% since 1980 while the GNP growth has been only 3-4%/year in Latin America and the Caribbean

• 2. The solution is to improve integrated risk

financing combining the reduction of risk with the ex-ante financing of residual risk

• 3. Prevention investments are needed to break

the vicious cycle of disasters-reconstruction- disasters-new reconstruction

Resource Gap to Finance Reconstruction: The Disaster Deficit Index

• The index deals with the economic loss that the

analyzed country could suffer when faced with the occurrence of a catastrophic event and the implications in terms of needed resources to confront the situation.

• The index has been prepared for the 50, the

100 and the 500 year events.

• Interpretation: When the DDI is greater than

1.0 this means the economic incapacity of the country to cope with extreme disasters even where indebtedness is carried to a maximum. The greater the DDI, the greater the gap.

Resource Gap for Reconstruction for Selected Countries

DDI and probable maximum loss in 100 years

DDI100, 2000

0.1 0.31 0.37 0.41 0.76 0.86 1 .1 4 1 .33 1 .77 1 .90 2.45 3.53 1 2 3 4 ARG GTM CRI CHL TTO M EX ECU COL JAM SLV DOM PER

L 100 (US$ million) 2000

1 87 431 852 800 350 6273 783 3254 845 3773 1 361 4479 1 000 2000 3000 4000 5000 6000 7000

Challenges to Risk Management

Despite rising awareness and some progress, the countries are not sufficiently addressing the risk disasters pose to development. A number of factors generally restrain countries from adopting adequate risk management:

– Disaster prevention is considered a cost, not an investment – Incentives that shape both government and private behavior, do not favor vulnerability reduction – Governments seldom have a well established financing plan for contingent disaster liability – Risk is not transferred through insurance

Country Actors, Regional Organizations and Donors in Disaster Risk Management

INFLUENCING ACTORS IN COUNTRIES DONORS Government -- Ministries of: — Finance and Planning — Interior and Defense — Health, Education and Environment — Tourism, Industry, Energy, Agriculture, Public Works Local Governments — Municipalities and Townships — Humanitarian

• rganizations

— Bilateral entities — Multilateral agencies — South-South Cooperation Power and Trust between Players Civil Society — Community Organizations — General Public — Commercial Private Sector — Financial Sector — Media — Academia, etc REGIONAL ORGANIZATIONS — CDERA — CAPRADE — CEPREDENAC — CCCC — Universities — Others BARGAINING

Avoiding Moral Hazard

• An imperative for risk reduction and ex-ante risk

financing is a clear definition of who assumes what parts

• f risk
• If no such definition exists, every one will have an

incentive to try to “pass on” the reconstruction bill:

– Private sector seeks bailout by the government – Government seeks help from international donors

• There is a moral hazard problem of relying ex-post help

by others: No incentive to mitigate future events

• The government should avoid policies that create or

contribute to the moral hazard problem

• The government should define what part of any risks it

will NOT cover for the private sector as part of an integrated risk financing strategy

Corporate Social Responsibility of Private Businesses

If the risk bearer is clearly identified private businesses will have an incentive to contribute to disaster risk management

• Response

– Employee rescue – Philanthropy with humanitarian entities – Support to emergency action by the state – Participation in reconstruction finance

• Prevention

– Employee protection – Business continuity – Competitiveness – Overall: Maintenance

• f environment

conducive to investment and trade

Government Incentives to Private Risk Reduction

Objective:

• Raise awareness of private decision makers to

impulse their investments in risk reduction, in

• rder to:

– Improve competitiveness and growth – Provide increased safety for the poor – Reduce burden to government

• Criteria:
• Targeted, with public good benefits
• Temporary to avoid permanent dependency
• Effective to demonstrate significant risk

reduction

• Not used for profit seeking

Sources for Disaster Finance

Disaster Prevention Disaster Response

Macro (public sector) Micro(households) Macro (public sector) Micro (households) Ex post Ex post

• Taxes
• Borrowing
• International Aid

__________________

• Government

incentives

• Borrowing
• International

aid

• Savings

______________

• Taxes
• Budget diversions
• Reformulation of

existing loans

• New borrowing
• International aid
• Government support
• Relatives/friends
• Work harder, less

consumption

• Borrowing
• Sell assets
• Domestic and

international aid Emerging Instruments for Low Income Groups Ex ante arrangements Ex ante arrangements

• Collective Insurance
• Parametric insurance
• Microcredits
• Systems for loans and savings
• Reserve fund
• Insurance

instruments

• Cat bonds
• Weather

derivatives

• Savings
• Insurance

Financing of Disaster Loss Layers

Prevention and Financing of Low Loss Layer

Prevention and Mitigation Funds Development Funds: Municipal, Social, Rural, Environmental Mitigation Loans Prevention Loans e.g via Disaster Prevention Sector Facility International Aid

• Formal and Informal Risk Coping

through self-Financing Calamity Funds Reserve Funds

• Transfers of Government Budget &

Development Funds Reformulation of Existing loans

Prevention Funding Loss Financing

Financing High Loss Layer

• Disaster Insurance/Reinsurance
• CAT Bonds
• Exchange Traded

Weather Derivatives

• Contingent Credit (e.g. GDL of IDB)

Emergency Loans (e.g IRF of IDB) Reconstruction Loans

Risk Transfer Loans

Residual Loss

Remaining risk that is impractical or not cost effective to transfer or finance through loans

Risk Transfer

Prerequisites for a functioning insurance market:

• Acceptable quality of risks (building

standards, regional planning etc.): A combination of awareness, regulations and

• control. Without basic risk management in

place, the insurance market will abstain from covering risks perceived to have a too high hazard.

• Quantifiable exposures: In the Caribbean,

especially flood and storm surge exposure data and suitable hazard models are missing.

Risk Transfer: Case of Jamaica

• Jamaica and the Caribbean in

general have been more active in transferring private risk to the international insurance markets than Latin America.

• 30% of insured losses after

Ivan (2004) were property damage and 70% related to business interruptions ($2.7Bn total damage)

• However, the majority of

property damage from Ivan

• ccurred to properties that

were either not insured or uninsurable.

• Insurance rate increases

between 200%-300% in the mid 1990’s have discouraged prudent risk hedging both in the public and private sector.

• For many homeowners the

answer has been to reduce or eliminate their coverage.

• Housing stock of low income

communities are often not built according to building codes, which makes them difficult to insure.

Source: Smith-Warner, 2005

Breaking the Vicious Circle

• The imperative of reducing risk through prevention –

choosing right instruments

• The government has to define its own liability and

those parts of risk it will NOT cover

• Mainstreaming management of contingent liabilities of

government in fiscal and budget planning

• Businesses must practice corporate social responsibility
• Strengthening risk transfer through local insurance

industry and making use of opportunities in international insurance and capital markets

IDB Dialogue with Countries

1. Country risk evaluation. Prioritize countries at high risk to disasters. 2. Country programming

• papers. Include disaster risk

management as an important action item for the region 3. Country strategies. Development agenda in countries with high risk must focus on risk

• management. Evaluate

institutional capacity.

Challenge for the IDB

1. Weak demand for disaster prevention by countries 2. Coordination of regional programs to address disaster risk in an inter- related world 3. Use of disaster indicators and country risk assessments for country strategies and programming 4. Provision of financing for prevention and response

IDB Financial Instruments

BEFORE EMERGENCY AFTER

B a n k I n s t r u m e n t s

Immediate Emergency Response Facilty: $20 million Re-orientaction of loans under execution Emergency Technical Cooperation to the Country Offices’ discretion: $200,000 Disaster Prevention Facility: $5 million Operations with risk reduction components

• r activities

Disaster Prevention Fund Technical Cooperations Reconstruction loans Re-orientation of loans under execution Technical Cooperations Possible budget support through Policy Based Loans Possible contingent credit through Guarantee Disbursement Loans

The IDB Disaster Prevention Fund

• This fund has been created by the Bank to facilitate

investments by countries in disaster prevention

• Fund to finance individual non-reimbursable
• perations, including studies concerning the

preparation and design of prevention projects and components of loans in high-risk areas and sectors.

• Each individual grant is capped at US$ 1 million.
• The fund can be used to finance strategic interventions

to improve disaster prevention at local, national and regional level.

• Regional projects may be financed also for the Eastern

Caribbean States through the CDB

Meeting the Challenge

• Financial vulnerability to natural hazards has a strong

development impact

Competitiveness and poverty reduction strategies must address the risk to natural hazards and integrate risk reduction Financial protection instruments must be in place for prevention and loss financing for the public and private sectors Action is needed now. Current demographic trends (with uncontrolled urban settlement) may lead to much increased vulnerability in the future Collaboration is needed at country and regional levels

http://www.iadb.org/sds/env/site_2493_e.htm

Thank you!