Climate Change & the Bottom Line conference- Keynote, Alex Kaplan, Swiss Re

CONFIDENTIAL | RESTRICTED DISTRIBUTION

Public-Private Partnerships inRisk ManagementAddressing the Costs of Climate Change

Alex Kaplan

October 31, 2013


Swiss Re Global Partnerships | October 31, 2013

Massive gap between total and insuredlosses shows insurance potential

2

Source: Swiss Re Economic Research & Consulting, sigma catastrophe database

Natural and man-made catastrophe losses 1980-2012, in USD billion (2012 prices)

0

50

100

150

200

250

300

350

400

1980 1985 1990 1995 2000 2005 2010

Insured losses Uninsured losses


Swiss Re Global Partnerships | October 31, 2013 3

Insured catastrophe losses, 1970–2012

0

20

40

60

80

100

120

1970 1975 1980 1985 1990 1995 2000 2005 2010

Earthquakes/tsunamis Man-made disasters Weather-related natural catastrophes

1992:

1994:Northridge

EQ

1999:Winter storm

Lothar

2001:Attack on

WTC

2004:Hurricanes Ivan,Charley, Frances

2005:Hurricanes Katrina, Rita, Wilma

2008:HurricanesIke, Gustav

USD bn, at 2012 prices

2011:Japan , NZ EQs

2012:Hurricane

Sandy



Growth of values is the main driver ofincreasing natural catastrophe losses

Increasing values

Concentration in exposedareas

Increasing vulnerability

Growing insurancepenetration

Changing hazard (climatevariability, climate change)

Shanghai 1990 - 2010

Loss history is not a good guide for risk, models are an indispensable tool

Source: weburbanist.com



Total insured value of property along the Atlantic and Gulf coast was$10.6 trillion, with New York and Florida topping the list at $2.9 trillionapiece.

Sea level rise is accelerating, especially along the U.S. East Coast and Gulfof Mexico.

Natural catastrophes (earthquake and weather related) cause averageeconomic losses of $60-100 billion annually. (Hurricane Sandy = ~$70billion)

The US Government spent $96b in 2012 to pay for climate-related events(Source: NRDC).

– If this so-called "Climate Disruption Budget" were included in the actual budget,it would be the largest non-defense discretionary budget item.

– The Government paid more for climate-related losses than it did fortransportation or education.

5

The US has a high level of exposure toclimate change



Closing the Gap: Including ex-anteinstruments into the overall risk financingstrategy

Including ex-ante instruments in the overall risk financing mix helps a governmentto lower its financial exposure to catastrophic risks, natural and man-made.

Smaller gapbetweeneconomic andinsured losses

Reduced financialburden for thegovernment afteran event

Less volatility forthe state budgetand more planningcertainty

Debtfinancing

Tax increases

Donorassistance

Budgetreallocation

Others

Ex-post financing

Reserve funds,parametric

reinsurance,catastrophe bonds

(Re-)insurancepolicies

PrivateCitizens /

Individuals

Corporations /CommercialEnterprises

Government’sexposure

(state budget)

(Re-)insurancepolicies

Ex-ante risk financing



Systematic risk managementapproach for natural disasters

Identification AssessmentPrevention

andMitigation

Adaptation

Likelihood

Severity(in USD)

Pandemic

Coastal flooding

Earthquake

Drought

Typhoon

Tsunami

below1%

1-5% 5-10% 10-20%above20%

<1

00

mill

ion

0.1

-1.0

billi

on1

-3bi

llion

3-1

0bi

llion

>1

0bi

llion

Prevention and mitigation strategies must bethe first priority in order to reduce the extent ofany economic loss

However, public natural disaster managementincludes also the financial preparedness for theresidual risk

Hence the deployment of public funds shouldbe well balanced between prevention/mitigation and adaptation measures

Adaptation measures include ex-ante disasterfinancing instruments, such as reserve fundsand a variety of risk transfer instruments

illustrative



Economics ofClimate Adaptation

88

Please find the full study at www.swissre.com/climatechange



Climate-resilient development needs toaddress total climate risk

Adaptation measures are available to make societies more resilient to theimpacts of climate change and should be an urgent priority for thecustodians of national and local economies, such as finance ministers andmayors.

Decision makers need the facts to identify the most cost effectiveinvestments.

The Economics of Climate Adaptation (ECA) methodology provides decision-makers with a fact base to answer these questions in a systematic way.

It allows decision-makers to integrate adaptation with economicdevelopment and sustainable growth.

The insurance industry is an important partner in future adaptation plansbecause of its experience in risk management and modeling, and indeveloping new insurance products.

9



We've conducted climate adaptationstudies in 17 regions of the world

Samoa

Florida

MaliMali

IndiaMaharashtra

U.K. / HullChina

North, Northeast

Samoa

GuyanaGuyana

TanzaniaTanzaniaAnguilla, Bermuda,Barbados , Jamaica,Antigua and Barbuda,St. Lucia, Dominica

US Gulf coast



Case study methodology

Set of adaptationmeasures

– Identify potentialadaptationmeasures

– Determine societalcosts and benefitsand basic feasibility

– Interviews withexperts

– Economicanalysis

Implementationassessment

– Assess currentprogress againstthe measures

– Understandrequirements toimplementation

– Determine actionsrequired toimplementmeasures

Where andfrom what is

the Statemost at

risk?

What is themagnitude ofthe expected

loss?

What is themagnitude ofthe expected

loss?

Whatmeasuresshould be

considered?

Whatmeasuresshould be

considered?

How canmeasures be

impleme-nted?

How canmeasures be

impleme-nted?

Input intoadaptation

strategy

Input intoadaptation

strategy

Estimate ofpotential loss

– Hazard: Developfrequency andseverity scenarios

– Value: Quantifyassets and incomevalue in area at risk

– Vulnerability:Determinevulnerability ofassets and incomesto the hazard

Map of areasat risk

– Identify mostrelevant hazard(s)in case location

– Identify areas thatare most at-risk, byoverlayinghazard(s) on:

– Population

– Economic value(GDP)



Sea level rise and altered hurricane frequenciessignificantly increase losses in New York City

Source: www.nyc.gov: A Stronger More Resilient New York

Expected annual lossesfrom storm surge and wind(billion USD)

+ 88%

+ 70% + 168%

http://www.nyc.gov/



Quantifying expected losses at zip codelevel (annual expected loss)


http://www.nyc.gov/



Loss frequency curves(the frequency of a loss equaling orexceeding a specific value)


http://www.nyc.gov/



Residential/commercial

1 Improved building codes

Oil and gas

6 Floating productionsystems

7 Replacing semi-subs withdrill ships

8 Levees for refineries andpetrochemical plants

Infrastructure/Environmental 3 Wetlands restoration3

2 Beach nourishment

4 Levee systems3

Electric utility 9 Improving resilience ofelectric utility systems

68

15

14

4

9

10

4

2

2

9

Benefit (lossaverted)2

$ Billions

• There will be a strongneed for leadership inthe gulf coast, in orderfor these actions tooccur

• There may be need forbroad policy support toincentivize private capitalinvestment, e.g.,by subsidizing homes inlow-income areasbuilt to higher buildingcodes

Identifying the most cost effective resiliencebuilding options

1 Total capital and operational costs, discounted, across 20years2 Total loss averted, discounted, across 20 years3 Included despite high C/B ratios due to strong co-benefits,risk aversion

5 Improved standards foroffshore platforms

Total

AverageC/B ratio

x

0.7

1.3

1.6

0.7

0.5

3.3

0.7

3.8

1.0

Cost1$ Billions

64

17

6

1

6

15

5

6

11

10

Gulf Coast case



1.1

0.8

6.0

1.60.4

2.6

1.8

1.44.7

7.1

5.9 3.1

4.2

6.1

2.1

0.0 1.1

0

2

4

6

8

10

12

14

16

18

20

annual expectedlosses as %of local GDP

total expected loss todayresidual loss 2030cost-effectively avertible loss 2030

Significant economic value is at risk –40-65% of losses can be averted cost-effectively

16

high GDP country low GDP country



Insurance is suited for low frequency,high severity events

17

Case study India



The Solutions

18



Case study United States:Alabama – First parametric cover for agovernment in an industrialized country

Solution features Insured peril: Hurricane Payments to offset economic costs of hurricanes Trigger type: Disaster occurring within a defined geographic

area ("box") along coast (“cat-in-the-box”)

– Trigger based on wind speed of hurricane eye as itpasses through pre-determined box

– Payout in as little as two weeks Time horizon: July 2010 – July 2013 First parametric catastrophe risk transfer for a government in

an industrialized country

Involved parties Insured: State Insurance Fund of Alabama Swiss Re: Lead structurer and sole underwriter



Case study Mexico:MultiCat - Funding for immediaterelief efforts after disasters

Solution features Insured perils: Earthquake and hurricane Payments to be used for immediate emergency relief after a

disaster Parametric catastrophe bond: USD 315 million Trigger type: Index

– Earthquake: physical trigger (quake magnitude)– Hurricane: physical trigger (barometric pressure)

Time horizon: October 2012 – November 2015 Renewed cat bond launched through the World Bank’s

MultiCat facility and third cat bond for Mexico

Involved parties Insured: Fund for Natural Disasters (FONDEN) of Mexico Reinsured: AGROASEMEX S.A. Arranger: World Bank Treasury Swiss Re: Co-lead manager and joint bookrunner

Swiss Re Global Partnerships | January 2013



Case study Caribbean:Caribbean Catastrophe RiskInsurance Facility (CCRIF)

Solution features The CCRIF offers parametric hurricane and earthquake insurance

policies to 16 CARICOM governments The policies provide immediate liquidity to participating

governments when affected by events with a probability of 1 in 15years or over

Member governments choose how much coverage they need upto an aggregate limit of USD 100 million

The mechanism will be triggered by the intensity of the event(modelled loss triggers)

The facility responded to events and made payments:– Dominica & St. Lucia after earthquake (2007)– Turks & Caicos after Hurricane Ike (2008)– Haiti , Barbados, St. Lucia, Anguilla and St. Vincent (2010)

Involved parties Reinsurers: Swiss Re and other overseas reinsurers Reinsurance program placed by Guy Carpenter Derivative placed by World Bank Treasury

Swiss Re Global Partnerships | January 2013



Case study Haiti:The Microinsurance CatastropheRisk Organization (MiCRO)

Solution features Insured perils: Hurricane, earthquake and rainfall Payments are made to microfinance borrowers post-disaster to reduce their

loans and provide emergency cash Parametric and basis risk policies are distributed through a local Haitian

microfinance institution, Fonkoze Trigger: Index measured at Fonkoze branches in Haiti Basis risk absorbed by new donor funded company, MiCRO Inception: March 2011

Involved parties Insured: Fonkoze Sole Reinsurer: Swiss Re Other partners: MercyCorps, CaribRM, Guy Carpenter

Background information Haiti is a nation that is susceptible to catastrophes and is unprepared for the

costs of response Prior to the setup of MiCRO, Fonkoze's clients bore 100% of natural disaster

risk MiCRO was named “Company Launch of the Year” at The Review magazine’s

annual Worldwide Reinsurance Awards in September 2011.



Solution features Insured peril: Wildfire Payment to offset wildfire suppression costs of the

Government of the Province of Alberta The insurance cover allows for budget planning certainty Semi-parametric solution: The loss is calculated by

multiplying the area burnt in hectares with CAD 300 perhectare

The Government of Alberta provides Swiss Re with monthlyreports of the suppression costs, number of wildfires, andarea burnt

Annual cover of CAD 100m above CAD 100m retention Inception: 2008

Case study Canada:Wildfire suppression cost insurance



Founding sponsor of Climate WeekNYC

Mind the Risk report

– Calculated affected population and losteconomic productivity for 616metropolitan areas globally.

100 Resilient Cities Challenge

– Support at least 100 cities in the nextthree years to appoint Chief ResilienceOfficers (CRO), create resiliencestrategies, and establish a CRO supportnetwork to share information and bestpractices.

24

Knowledge SharingIncreasing Climate Resiliency



Contact Information

Alex Kaplan

Public SectorSenior Client Manager

Swiss Re America Holding Corp.101 Constitution Ave. NW, Suite 700

Washington, DC 20001USA

Tel +1 (202) 742-4623Fax +1 (202)742-4630

[email protected]


Thank you




Legal notice

©2013 Swiss Re. All rights reserved. You are not permitted to create anymodifications or derivatives of this presentation or to use it for commercialor other public purposes without the prior written permission of Swiss Re.

Although all the information used was taken from reliable sources, Swiss Redoes not accept any responsibility for the accuracy or comprehensiveness ofthe details given. All liability for the accuracy and completeness thereof orfor any damage resulting from the use of the information contained in thispresentation is expressly excluded. Under no circumstances shall Swiss Reor its Group companies be liable for any financial and/or consequential lossrelating to this presentation.

27

Technology

Climate Change & the Bottom Line conference- Keynote, Alex Kaplan, Swiss Re