December 5, 2007

WMO Expert Meeting on Weather Risk Management

Geneva, Switzerland

South-eastern Europe Disaster Risk Management Project

Eugene N. Gurenko, Ph.D., CPCU, ARe Lead Insurance SpecialistDecember 5, 2007

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ContentsThe rationale for the SEEDRM projectThe project structureRisk transfer solutions for governments, homeowners and SMEsNext steps

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Temperature changes in Europe around 2100 (A1B scenario)Source: D. Jacob, Max Planck Institute; http://www.climate-water-adaptation-berlin2007.org/documents/jacob.pdfA1B scenario is the third worst socio-economic scenario of the six developed by the IPCCTemperatures will be increasing leading to a hotter drier climate

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Precipitation changes in Europe around 2100 (A1B scenario)Source: D. Jacob, Max Planck Institute; http://www.climate-water-adaptation-berlin2007.org/documents/jacob.pdfA1B scenario is the third worst socio-economic scenario of the six developed by the IPCCReduced precipitation patterns but more precipitation extremes

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Recurrence of flood events in Europe, 1998-2005Source: EEA, based on data from Dartmouth Flood Observatory http://reports.eea.europa.eu/technical_report_2007_2/en

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SEE economic vulnerability to the risk of earthquake

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Chart2

0.7351295475

0.1801251158

0.5614271857

0.2172709662

Economic loss from a 250 year earthquake (GDP%)

Chart1

0.7351295475

0.1801251158

0.5614271857

0.2172709662


Economic Loss (GDP%) Figure

Economic loss from EQ and Flood in SEE countries

Earthquake ( mm)

CountryAlbaniaBulgariaMacedoniaRomania

25073.5%18.0%56.1%21.7%

Economic Loss (GDP%) Figure


Economic Loss (GDP%)


Earthquake ( mm)

CountryAlbaniaBulgariaBosnia and Herzeg.CroatiaMacedoniaMoldovaMontenegroRomaniaSerbiaSloveniaTurkey*All Countries Combined

Return PeriodTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_LOSSTOTAL_PORFOLIO LOSS

50083.6%44.3%117.5%26.4%13.1%

25073.5%18.0%56.1%21.7%10.8%

10051.1%6.0%17.0%13.1%7.6%

5032.7%2.2%5.9%7.9%4.8%

AAL3.6%0.1%0.9%0.5%0.2%

Flood ( mm)

CountryAlbaniaBulgariaBosnia and Herzeg.CroatiaMacedoniaMoldovaMontenegroRomaniaSerbiaSloveniaTurkeyAll Countries Combined


5003.2%

2002.0%

1001.5%

250.8%

0.0%

AAL0.0%

Source: *EQ estimates for Turkey provided by EQECAT, for Albania and Macedonia -by AIR

**EQ PML estimates for Bulgaria are for Sofia only, by ENEL, 2003.

Economic Loss


Earthquake ($ mm)

CountryAlbaniaBulgariaBosnia and Herzeg.CroatiaMacedoniaMoldovaMontenegroRomania***SerbiaSloveniaTurkey*All Countries Combined


5007,00811,8006,77026,06847,603

2506,1604,8003,23521,41439,240

1004,2781,60097812,95427,631

502,7405803427,74117,576

AAL3012951481595

Flood ( mm)



5003,165

2001,947

1001,475

25813

AAL27

Source: *EQ estimates for Turkey provided by EQECAT, for Albania and Macedonia -by AIR

**EQ PML estimates for Bulgaria are for Sofia only, by ENEL, 2003.

***Romania estimates are based on the RMSI residential EQ and Flood modelling study in Romania, 2007. To arrive at the total economic loss (both public and private assets), on RMSI advice we assumed that EQ residential loss is 50% of total and residencial

Losses for housing stock only

Losses for housing stock only

Retained Loss

Economic loss from key natural hazards (EQ and Flood) in excess of 0.5% of GDP in SEE countries

Earthquake ( mm)

CountryAlbania**BulgariaBosnia and Herzeg.CroatiaMacedoniaMoldovaMontenegroRomania**SerbiaSloveniaTurkey*All Countries Combined


5006,96611,6676,74125,57545,786

2506,1184,6673,20620,92137,424

1004,2361,46794912,46125,815

502,6984473137,24815,760

AAL3012951481595

Flood ( mm)



500

200

100

25

AAL

Source: *EQ estimates for Turkey provided by EQECAT, for Albania and Macedonia -by AIR -2005

GDP

2005

Country NameGDP (USD, mm)0.5%GDP

Albania8,37941.90

Bosnia-Herzegovina9,36946.85

Bulgaria26,648133.24

Croatia37,412187.06

Macedonia5,76228.81

Moldova2,90614.53

Romania98,559492.79

Serbia & Mont.27,059135.30

Slovenia34,030170.15

Turkey363,3001,816.50

Sheet3

Sheet4

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SEE governments are fiscally unprepared to deal with catastrophic losses

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Chart3

55.73

497

15.85

662

1327

404

459

2737

1240

8061

661

1255

USD 2006

Losses from natural disasters in SEE countries

Chart4

3.2028735632

90.3636363636

31.7

21.184

576.9565217391

175.652173913

76.5

547.4

248

30.0454545455

31.375

Multiple

Economic Loss from Cat Event/Total Emergency Funds

Chart5

0.0264721921

0.0555239275

0.0325083893

0.0768777653

0.3378809856

Economic loss from major NatCats to Fiscal Revenue 2005

Statistics

USD 2006USD 2006

Loss in 2006 USDTEFLoss/TEFLoss/TEFLoss in 2006 USDTEF

Albania Flood 200255.7317.43Albania Flood 2002355.7317.4

Croatia 1986 EQ4975.590Croatia 1986 EQ904975.5

Bosnia Floods 200115.850.532Bosnia Floods 20013215.850.5

Bulgaria Flood 200566231.2521Bulgaria Flood 20052166231.25

Moldova EQ 198613272.3577Moldova EQ 198657713272.3

Moldova FL 19944042.3176Moldova FL 19941764042.3

Macedonia FL 1995459677Macedonia FL 1995774596

Romania EQ 197727375547Romania EQ 197754727375

Romania FL 200512405248Romania FL 200524812405

Serbia EQ 1979806122366Serbia FL 19993066122

Serbia FL 19996612230Slovenia FL 199031125540

Slovenia FL 199012554031

Revenues 2005Revenues 2005Serbia EQ 1979366806122

Local currencyUSD

Croatia100,544,52118,774,418

Bulgaria17,109.2011,923

Romania87,629.4038,144

Slovenia286994916,325

Moldova14527.61,196

Cat loss/Revenues

Croatia 1986 EQ2.6%

Bulgaria Flood 20055.6%

Romania EQ 19773.3%

Slovenia FL 19907.7%

Moldova EQ 198633.8%

Sheet2

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Liquidity gaps often emerge in the early days after a disasterNeed for an instrument to provide liquidity early on until other sources of funds can be accessed

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Chart3

-14

-18

-13

-7

0

4

10

17

25

30

35

40

Liquidity Vs. Needs

Months after a disaster

Financial resources available minus expenditure needs

Sheet1

Liquidity Vs. Needs

1-14

2-18

3-13

4-7

50

64

710

817

925

1030

1135

1240

Sheet1

-14

-18

-13

-7

0

4

10

17

25

30

35

40

Liquidity Vs. Needs

Months after a disaster

Financial resources available minus expenditure needs

Sheet2

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Sheet5

Sheet6


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SEERMPObjective:To reduce vulnerability of SEE countries to natural disasters by building the capacity and promoting a coordinated approach in disaster risk mitigation, risk transfer, preparedness and response.Rationale for regional cooperationMany hazards are common to a number of neighboring countriesInformation sharing will allow for greater reduction of hazard risk at the national and regional levelIndividual countries may not be able to cope with a major disaster on their ownStand-by, fully equipped emergency response units and relief materials are expensiveCountries are small in size and hazards risk insurance may not be optimal at the country level

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Key Areas of the Initiative

Hydrological and meteorological forecasting and flood early warning;Financing of disaster losses and creation of regional risk transfer mechanisms.Strengthening regional capacities in disaster risk reduction and response

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Hydrological and Meteorological Forecasting, Data Sharing and Early Warning SystemInitiative has been agreed during the ICEED meeting in Dubrovnik in May 2006Strong partnership with WMO Objective of this initiative is to promote a coordinated approach and data sharing in Hydromet services in South Eastern EuropeFeasibility assessment has been completed and was discussed in a regional meeting on October 24-25, 2007 in ZagrebCoverage: Moldova, Romania, Bulgaria, Serbia, Montenegro, Croatia, Albania, Macedonia, Bosnia & Herzegovina

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Flood Forecasting and Early Warning System on Sava RiverInitiative was agreed during Podgorica the meeting of the Directors of Hydromet services for Sava river basin countries in April 2007.Objectives are to build capacity and to re-establish data sharing and collaboration on flood forecasting and early warning system on the Sava river.Feasibility Assessment has been completed and discussed in a regional meeting in Zagreb on October 24-25, 2007.

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Risk transfer componentCreation of a regional catastrophe insurance pool that would offer affordably-priced catastrophe insurance coverage to homeowners and SMEs in SEE countries. Development of standardized tradable weather risk hedging instruments to protect businesses against loss of revenue due to adverse weather conditions.Structuring and issuance of a catastrophe risk bond for governments of the region.Contingent loan facilities for natural disasters A Cat DDO

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Schematic allocation of sovereign catastrophe risk by sources of risk financing and available World Bank instrumentsRisk retentionRisk financingReinsuranceCatastrophe bondsDonor aid20 year event or up to 3% of fiscal revenue30 year event or up to 5% of fiscal revenue30-100 year event or in excess of 5% of fiscal revenue100-200 year event or in excess of 5% of fiscal revenue200+ year event or in excess of 5% of fiscal revenueAvailable World Bank instrumentsDisaster Draw-Down Option loansCatastrophe risk insurance pools Catastrophe bonds for sovereignsEmergency reconstruction loans

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Disaster Risk Reduction and ResponseObjective is to promote and implement investment priorities for strengthening the capacity and promote a coordinated approach to disaster preparedness and responseWill be built on existing agreements: Civil-Military Emergency Planning Council and the Disaster Preparedness Initiative of the Stability PactVulnerability Assessment is completedMore detailed assessment of disaster response is needed.

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Deferred Draw-Down Option Loan for Natural Disasters (DDO)Will provide immediate liquidity to fill the budget gap in the aftermath of natural disasters.Disburses under pre-defined conditions such as declaration of national emergency by government. Certainty of disbursement.Highly affordable pricing.Prerequisites:Sustainable debt levelSatisfactory macroeconomic frameworkSatisfactory emergency budget appropriation legislation/system in placeCompletion of a risk assessment program and preparation of a hazard risk mitigation strategyCould be used to support govt recovery programs or govt backed insurance

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Toward a multi-layered risk financing strategy for governments

Disaster Deferred Draw Down Option (DDO) and a catastrophe bond combined SEEcountriesIBRD(TRE)IBRD(ECA)Special Purpose Vehicle

InvestorsCommitment FeeContingent Capital FacilityProtectionSpreadLibor+SpreadBond principal123IBRD (ECA) provides a contingent capital facility ( DDO) to SEE countries which can be drawn to address immediate government liquidity needs after a disaster. IBRD (TRE) offers SEE countries a catastrophe insurance bond. IBRD (TRE) transfers all the risk to capital markets by issuing a cat bond through an SPV. ProtectionPremiumRisk transfer solutions for governments

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Sovereign Catastrophe Bonds: Illustrative Summary Governments of developing countries; Government-sponsored institutionsInsuredMay include Earthquake, Hurricane, Tropical wind and other catastrophe risksCovered PerilsParametric insurance, with pre-defined amounts of coverage per country/peril TriggerUp to three years when appropriate, to contribute toward better price stabilityTerm$ [ ] mmThe event limit will be selected based on projected post disaster fiscal liquidity needsLimits of CoverageTransaction Size

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Proposed South Eastern Europe Regional Catastrophe Insurance Facility

SEEcountriesSERCIFIBRDSpecial Purpose Vehicle

InvestorsReinsurersCommitment FeeContingent Capital FacilityContingentCredit FacilityProtectionSpreadLibor+SpreadBond principalSum Insured123IBRD provides a contingent capital facility to SEERCIF member countries which is then extended to the Facility. Alternatively, non-IBRD countries with investment grade ratings can extend their own sovereign guarantee to the facility structured similarly to IBRDs credit line. The line can be drawn to pay facilitys claims. SEE households buy a SEERCIF insurance policy by paying an annual premium for its cover. The facility retains a part of risk relying on IBRD contingent capital to pay small claims. In the absence of claims it accumulates reserves.The facility transfers most of risk to reinsurance and capital markets either through a reinsurance contract or by issuing a cat bond. PremiumProtectionPremiumSEEHomeownersCatastrophe insurance coverage against the risks of flood and quake for homeowners and SMEsRisk transfer solutions for homeowners and SMEs

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Hedging weather exposure of businesses to weather in SEESellers of weather risk protectionBuyers of weather risk protectionElectronic portalWeather reference indices(temperature, precipitation, wind)Risk management advisor to SMEsSEE metservices

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Next steps

Develop weather data reporting protocolsInstall the missing parts of essential weather data generating infrastructure (weather stations, radars, satellite imagery, etc.).Develop weather data bases and access policies.Carry out a feasibility study to determine the demand for weather risk hedging products based on the most common weather risk exposure of businesses in the region.Develop reference weather risk indices.Create an on-line risk underwriting platform.Hire a weather risk hedging advisor for local SMEsCarry out a marketing campaign.Get it ALL DONE!

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Documents

December 5, 2007