How can risk-financing advisory firms manage natural catastrophes in ASEAN?
With the growing number of floods in the region, more should be done to ensure the region has sufficient protection against natural catastrophes.
A risk financing advisory should focus on a model which combines the elements of fiscal planning, risk mitigation and risk transfer whilst boosting awareness of the full economic impact of natural disasters.
Highlighting the frequency and severity of disaster losses forces institutions to acknowledge the appropriate hazards and people’s needs and concerns, and potentially create solutions by collaborating and building models which involve data collection relating to hazard assessment,exposure vulnerability and loss histories.
“Asia remains under-prepared and under-protected against natural disasters. Currently, less than 10% of Asia Pacific’s catastrophe losses are insured, compared to 40% in developed countries. The United Nations has estimated that economic losses due to catastrophe events in Asia Pacific are set to rise, and could exceed US$160 billion annually by 2030. Against this backdrop, countries will face a widening protection gap, if no intervention measures are taken. ASEAN and its governments must act today, and chart a sustainable course to ride out the brewing storm.”
The Caribbean Catastrophe Risk Insurance Facility (CCRIF) connects states with global reinsurance and capital markets while excluding local insurers and disaster management agencies. Second, the CCRIF combines risk pooling with parametric insurance techniques to to quickly meet government demands for capital following a disaster.
Exposures refers to ASEAN countries susceptibility to various losses or risks they might encounter when faced with natural catastrophes, and risk-financial advisory firms need to be able to know the level of risks the region faces to set up a premium they must charge to profitably write the business.
Focus areas for Natural Catastrophe insurance :
Infrastructure
Households
Agriculture
Water scarcity
Undocumented migration
Direct impact of natural disasters on investments made by multinational enterprises
Loss of business confidence,consumer confidence
Supply chain uncertainties
Risk amplification of pre-existing problems
Threat to social order,political order
Risks to sustainability
Collecting proper data based on the natural catastrophes that have happened in the last 50 years to help make catastrophe models to simulate the impact of disaster events of varying magnitudes on state revenue to help project the probability of specific loss events and price each ASEAN member’s catastrophe risks accordingly.
This allows for pooling, where the group of ASEAN member states’ catastrophe management costs are combined together to calculate premiums.Pooling risks together allows the higher costs of the less healthy to be offset by the relatively lower costs of the healthy, either in a plan overall or within a premium rating category. In general, the larger the risk pool, the more predictable and stable the premiums can be.
Pooling allows for diversification of disaster risk portfolios at the regional scale, and helps lower the average costs of coverage for individual countries and enables them to transfer their catastrophe risks to global financial markets through the World Bank and European insurers.
CCRIF’s combination of pooling and parametric insurance created allows for recovery financing that connects governments with global reinsurance and capital markets around the problem of ensuring critical infrastructure against catastrophic risks previously thought to be uninsurable.
Exposures
ASEAN is dependent on international trade, so an exposure would be transport infrastructure.Inequity in accessing investment capital makes investment for underdeveloped areas in ASEAN are both issues that concern make ASEAN region more sensitive to issues that negatively affect macroeconomic stability such as natural catastrophes.
Natural catastrophes risk management is important as it posits a country’s ability to manage its population. This is exemplified by Hurricane Ivan’s immediate impact on the state treasuries which birthed a fear of social unrest.
ASEAN is powerful as a collective due to its position as a trading bloc to the European Union,China and the United States, and collective social order is necessary to safeguard the region against potential threats. A good strategy for natural catastrophe risk management helps enforce/tackle systemic drivers of insecurity, including climate change, economic inequality, militarisation and the financial exclusion of the regions underdeveloped member economies.
Natural catastrophes have short term,medium term and long-term effects and affects everyone. Post-catastrophe would demand a need for resources to pay workers,service debt and repairs for critical social and economic infrastructure, and inactivity would risk serious health and further environmental risks and even social unrest if citizens of a nation do not feel like their concerns and needs are being met.
CCRIF develops response strategies according to premeditated visions of the potential consequences of future disasters in order to remove surprises from catastrophic events in order to chart a course for action in the present. They focus on reinsurance,capacity-building strategies, which is defined as CCRIF’s ability to make payouts after a disaster event while remaining solvent. CCRIF generates revenue through parametric insurance contracts that member governments purchase for both hurricane and earthquake risks.
Payouts from parametric policies are triggered once predetermined parameters are met in the CCRIF’s hurricane coverage, these are wind speed and distance from a predetermined measuring point. Parametric insurance is uniquely suited to addressing the security concerns of member governments, since payments only require verification of parameters — for example, that wind speeds met predetermined levels. This differs, and is quicker than indemnity coverage which requires insurers to verify losses.
The amount of remuneration is set by parameters written into the catastrophe insurance contract and determined through negotiations between the CCRIF and member-states.
For example:
Jamaican government may purchase a US$50 million hurricane policy, and set the attachment point at the parameter level that determines when the government receives a payment where coverage is for a Category 2 hurricane that is 50 kilometres from one of the island’s 13 measuring points,such as Kingston’s Norman Manley International Airport. This lowest parameter would be eligible for a 20% payout, equivalent to US$10 million.
Payouts could increase as severity of the hurricane increases, or wind speed increases and as distance grows closer, such as a category 3 storm could generate a 40% payout. There is still a risk that a nation’s catastrophic losses far exceed payouts it may receive from parametric coverage.
How CCRIF creates catastrophe models to calculate represent risks that potential disasters pose to government revenue
First layer : Hazard module Utilizing 150-year old historical data to model a particular event’s effects as the location of the natural disaster moves further away from a specific geographical pinpoint
Second layer : Exposure module Analyzing the values of the built environment exposed to a particular peril, estimate building and infrastructure coverage using satellite imagery, calculate exposure levels by using a grid over a terrain selected
Third layer : Vulnerability module, within each block, exposure is calculated by multiplying the area of total building inventory by the inventory’s average replacement cost. This grid allows modelers to classify the exposure of each one-square-kilometer block on the basis of the value of physical assets itencompasses, and thus produce a detailed representation of each island’s exposure.
Fourth layer : Damage module involving the calculation of the projected losses involves multiplying the percentage of a structure’s replacement costs that will be required to repair it after an event of a specific magnitude with the value of risk determined in the exposure module.
Fifth module : Loss module which aggregates the damage projections for each asset class in order to determine the overall impact of an event on the government’s revenue. This model is then run through thousands of simulations in order to generate probability functions for particular loss level.
Risk modeling developed for risk financing products not only provide information about risk exposures on an analyzed economy. The conversation surrounding the given information on the need for financial protection also helps decision makers make informed choices on the need to deal with increasing losses from adverse natural events, such as prevention of new risks in the form of territorial planning, enforcing building standards, strengthening of infrastructure, and protective measures.
Key takeaways : ASEAN should prioritize repairing critical infrastructure after a natural catastrophe as disasters frequently maroon marginalized communities and leave them without relief supplies for many days.
Catastrophe risk pooling across the region in a cost-efficient way for ASEAN countries to access quick liquidity following a natural catastrophe, where insurance serves to mobilize additional capital from outside the country, which leads to reduction between of the gap between a government’s contingent liability to catastrophic events and the amount of readily available resources within governments that can be mobilized.
Partial risk transferral to reinsurance markets national emergency budget allocation and fiscal planning systems to achieve greater disaster resilience. Countries who use more disaster risk financing instruments and efficiently implement risk-layered strategies, tend to be wealthier, less indebted, and more likely to enjoy higher government capacity than peers who deploy fewer instruments. They also experience fewer economic and human losses from disasters and traditionally receive less humanitarian aid per capita than those countries that deploy fewer instruments.
Insights
About CCRIF :
● Named The Caribbean Catastrophe Risk Insurance Facility
● Purpose : limits the financial impact of catastrophic hurricanes, earthquakes and excess rainfall events to Caribbean and Central American governments
● Purpose : providing short term liquidity relief when a parametric insurance policy is triggered
● World’s first regional fund utilizing parametric insurance allowing member governments the unique opportunity to purchase earthquake,hurricane and excess rainfall catastrophe coverage with lowest-possible pricing
How does it work :
● First multi-country risk pooling
● Parametric policies backed by traditional and capital markets
● As of 2014, they expanded into new products and geographic areas, renamed to CCRIF SPC
● This led to a range of new products and geographic areas covered, where products are offered through number of segregated portfolios, to allow for risk segregation
● Network of service providers covering areas of risk management, risk modelling, captive management,reinsurance, reinsurance brokerage, asset management, technical assistance, corporate communications and information technology
● Helps mitigate short-term cash flow problems small developing economies suffer after major natural disasters through their parametric insurance mechanism which provides rapid payouts to help members finance their initial disaster response and maintain basic government functions after a catastrophic event
Coverage areas :
● Financial impact of catastrophic hurricanes,earthquakes,tropical cyclone and excess rainfall
● Coverage for fisheries sector
● Coverage for electrical utilities
More details about how CCRIF works :
● CCRIF covers estimated liquidity needs for the first three to six months after a major catastrophe.
● A critical mass of country participation in CCRIF is required for the member nations to benefit from risk pooling and diversification, which potentially results in joint reserves and improved reinsurance rates2
● Increased risk retention alongside reserves, while increasing their reinsurance limit,increasing the total claims without jeopardizing long term solvency
● Usage of catastrophe risk transfers to protect itself against insolvency because claims could exceed financial capacity.
● Purchased “ aggregate excess of loss” reinsurance, linked to the total level of claims made on CCRIF during a policy season.
● Reinsurance consist of a “swap” intermediated by World Bank Treasury in capital markets and contracts with traditional reinsurers
● Invests in a range of currencies, fixed income instruments and derivatives
Keywords :
Attachment Point — the point at which excess insurance or reinsurance limits apply. For example, a captive’s retention may be $250,000; this is the “attachment point” at which excess reinsurance limits would apply.
Reinsurance: When the total exposure of a risk or group of risks presents the potential for losses beyond the limit that is prudent for an insurance company to carry, the insurer may purchase insurance from another insurance company (the reinsurer) for the purpose of spreading risk and reducing the insurer’s losses from catastrophic events.
Sources:
https://documents1.worldbank.org/curated/en/319251467999348409/pdf/97469-BRI-Box391476B-PUBLI C-study-CCRIF-Final.pdf
https://drive.google.com/file/d/1sYAo_0vCiL_whpBBgXH91cmJSOxkNGTc/view
