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Report No. 94474-PK
Fiscal Disaster Risk Assessment
Options for Consideration
PAKISTAN
March 2015
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Contents
Acknowledgements....................................................................................................................................... 5
Abbreviations ................................................................................................................................................ 6
Executive Summary....................................................................................................................................... 7
Chapter 1: Introduction .............................................................................................................................. 10
Chapter 2: Fiscal Management of Natural Disasters .................................................................................. 13
Emergency Response/Relief Phase ..................................................................................................... 18
Recovery Phase ................................................................................................................................... 19
Reconstruction Phase ......................................................................................................................... 20
Chapter 3: Financial Disaster Risk Assessment ........................................................................................... 21
Contingent liability and post-disaster spending needs ....................................................................... 21
Analysis of historical disasters in Pakistan .......................................................................................... 22
Statistical fiscal disaster risk analysis .................................................................................................. 24
Preliminary earthquake risk profile of Pakistan.................................................................................. 28
Chapter 4: Review of the Private Catastrophe Risk Insurance Market....................................................... 32
Background ......................................................................................................................................... 32
Overview of the market ...................................................................................................................... 32
Private property catastrophe insurance ............................................................................................. 35
Chapter 5: Options for a National Disaster Risk Financing Strategy ........................................................... 38
Option 1: Develop a central database for recording disaster losses and expenditures ..................... 38
Option 2: Operationalize the National and Provincial Disaster Management Funds ......................... 39
Option 3: Clarify contingent liability associated with post-disaster cash transfer programs and
enhance financing sources behind the programs ............................................................................... 40
Option 4: Develop financial disaster risk assessment tools ................................................................ 42
Option 5: Develop a national disaster risk financing strategy ............................................................ 44
Option 6: Establish a robust catastrophe risk insurance program for public assets .......................... 46
Option 7: Promote property catastrophe insurance for private dwellings ........................................ 47
Annexes ....................................................................................................................................................... 49
Annex 1. Historical Natural Disaster Database for Pakistan ....................................................................... 50
Annex 2. World Bank Development Policy Loan with Catastrophe Deferred Drawdown Option ............. 54
Key Features........................................................................................................................................ 54
Pricing Considerations ........................................................................................................................ 54
Annex 3. Mexican Natural Disaster Fund FONDEN .................................................................................... 57
The Fund for Natural Disasters (FONDEN) .......................................................................................... 57
Main Features of FONDEN .................................................................................................................. 57
FONDEN Institutional Structure .......................................................................................................... 58
FONDEN Program ................................................................................................................................ 59
FONDEN Trust ..................................................................................................................................... 59
The FONDEN Disaster Risk Financing Strategy for 2011 ..................................................................... 60
Annex 4. Turkish Catastrophe Insurance Pool ........................................................................................... 62
Annex 5. The Post-Disaster Operational Phases ......................................................................................... 64
Annex 6. Operational Framework for Implementing Disaster Risk Financing and Insurance Solutions .... 66
Source of Financing Post-Disaster....................................................................................................... 73
Annex 7. Examples of World Bank Initiatives to build Financial Resilience to Disasters (taken from World
Bank Disaster Risk Financing and Insurance Program review) ................................................................... 78
Acknowledgements
The report was developed in partnership between the Disaster Risk Management (DRM) team in the
South Asia Region (SAR) and the World Bank Disaster Risk Financing and Insurance (DRFI) Program. It
was produced by a team comprised of Marc Forni, Haris Khan, Olivier Mahul, Ben Fox, Rashmin
Gunasekera, Emily White, Shiraz Ali Shah and Ahsan Tehsin. The report also benefitted through inputs
from Muhammad Waheed, Sarwat Aftab, Mahmood Khalid and Muhammad Ali Khan.
The report greatly benefited through consultations, inputs and guidance received from the Ministry of
Finance, the National Disaster Management Authority (NDMA), Securities and Exchange Commission of
Pakistan (SECP), the Provincial Disaster Management Authorities and Punjab Finance Department.
The team is grateful to the peer reviewers, Daniel Clarke, Kelly Johnson and Oscar Ishizawa.
The authors would like to thank Rachid Benmessaoud, Bernice K. Van Bronkhorsht, Francis Ghesquiere
and Reynold Duncan for their guidance in finalizing this report. The team gratefully acknowledges
funding support from the Global Facility for Disaster Reduction and Recovery (GFDRR).
The report is based on data provided by the Federal and Provincial governments for which the authors
would like to express their appreciation.
5
Abbreviations
ADB
AEL
AJK
CAT DDO
CRESTA
DDMAs
DNA
DRFI
FATA
GFDRR
GoP
KPK
MFIs
MoF
NADRA
NDMA
NDMC
NDMF
NICL
PDMA
PDMF
PML
PRCL
PSDP
SECP
Asian Development Bank
Annual Expected Loss
Azad Jammu and Kashmir
Catastrophe Deferred Drawdown Option
Catastrophe Risk Evaluations and Standardizing Target Accumulations
District Disaster Management Authorities
Damage and Needs Assessment
Disaster Risk Financing and Insurance
Federally Administered Tribal Areas
Global Facility for Disaster Reduction Recovery
Government of Pakistan
Khyber Pakhtunkhwa
Microfinance Institutions
Ministry of Finance
National Database and Registration Authority
National Disaster Management Authority
National Disaster Management Commission
National Disaster Management Fund
National Insurance Company Limited
Provincial Disaster Management Authority
Provincial Disaster Management Fund
Probable Maximum Loss
Pakistan Reinsurance Company Limited
Public Sector Development Program
Securities and Exchange Commission of Pakistan
6
Executive Summary
The objective of the report is to raise awareness as to the financial impacts that natural disasters have
on the budget of the Government of Pakistan (GoP), and to form the basis for a continued dialogue
between the GoP and the World Bank on the potential development of a strategy for financing
disaster losses. The study presents a series of complementary options for development of a national
disaster risk financing strategy, based on a preliminary fiscal risk analysis and a preliminary review of the
current budget management of natural disasters in Pakistan. The recommendations provided in this
document are therefore a starting point for a collaborative discussion with the Government of Pakistan
on the potential development of a broad DRFI program that would equip the Ministry of Finance with
additional instruments to manage the contingent liability posed by disasters. This report follows a
request from the Government for advisory services from the World Bank in the areas of disaster risk
identification and the resulting fiscal impacts on the state.
This study presents options for a national disaster risk financing strategy for Pakistan, drawing
significantly from international experience. It benefits from the international experience of the World
Bank, which has provided assistance to several countries on the design and implementation of sovereign
disaster risk financing strategies (e.g. México, Colombia, Peru, Indonesia, Vietnam, Philippines and the
Caribbean island states) and property catastrophe risk insurance programs (e.g. in Turkey, Romania and
Eastern Europe). This experience is necessarily tailored to the institutional, social and economic
characteristics of Pakistan, as well as the availability of relevant data.
On average, approximately 3 million people are affected by natural catastrophes each year in
Pakistan, which equates to approximately 1.6 percent of the total population. According to an analysis
of historical natural disaster data, since 1973 approximately 77 percent of the all the people affected by
natural disasters were impacted by flooding events.
Pakistan faces a major financing challenge arising from natural catastrophes, with flooding causing an
estimated annual economic impact of between 3 and 4 percent of the Federal Budget1. Preliminary
analysis in this report estimates the annual economic impact of flooding at between US$ 1.2 billion and
US$ 1.8 billion, equivalent to between 0.5 percent and 0.8 percent of national GDP2; however
simulations show that a major flood event (occurring, on average, once every 100 years) could cause
losses in excess of US$ 15.5 billion3, which equates to around 7 percent of national GDP4, equivalent to
almost 40 percent of the Federal Budget. To consider in terms of annual probability, there is a one
percent chance in any year that a major event of this size will occur. While the Government tries to
meet the needs arising from the aftermath of natural disasters, the funding gaps especially for
reconstruction of affected infrastructure lead to its deterioration especially the protective capacity
resulting in additional losses in proceeding disaster events.
1
Budget estimate taken from 2014-2015 Budget in Brief (http://finance.gov.pk/) exchange rated fixed at 102
2013 GDP figure used, numbers rounded
3
Upper bound estimate taken from two methodologies. See Chapter 3 for further detail.
4
2013 numbers
2
7
Although progress has been made on the establishment of financing mechanisms for dealing with
disaster losses, significant work still remains to operationalize structures and to ensure that financing
mechanisms are appropriately provisioned. A structure for dedicated federal and provincial funds for
disaster risk management has been established under the National Disaster Management Act 2010.
However, challenges still remain with respect to operationalization of the funds, and standardization of
procedures across provinces. It remains very difficult for the GoP to analyze the financing needs and
gaps for meeting relief, recovery and rehabilitation support to the affected portion of the population.
The heavily de-centralized approach to disaster risk financing in the provinces is a key contributor to
these challenges. The mechanisms through which disasters are financed vary from province to province,
depending on the administrative systems in place and the ready availability of funds. There is a need for
a sustainable plan to ensure that the NDMF and provincial funds are adequately provisioned in the
context of likely needs.
While the federal and provincial governments recognize the need for allocating resources in their
budgets for disaster response prior to a disaster, they lack the technical basis to determine such
allocations. At present post-disaster expenditures are financed from contingent and supplementary
budgets during the relief and recovery phases and from the annual Public Sector Development Program
during the reconstruction phase. The inaccessibility of data on the underlying hazards and their past and
possible future financial implications is one barrier to the process of informed ex-ante provisioning of
funds. A development of technical capacity and necessary tools to quantify likely needs for disasterrelated expenditure would help the government to both: (i) determine appropriate allocations through
the budget; and (ii) to also explore and make informed proposals for possible sources of financing
outside of the budget.
This study presents the GoP with a series of options for consideration that could help the government
increase its immediate financial response capacity against natural disasters and better protect its
fiscal balance. Specifically, there are seven options for consideration spread across the short-, mediumand long-term; these options are listed in Table 1. These options follow the operational framework of: (i)
assess risk; (ii) arrange financial solutions; and (ii) deliver funds to beneficiaries.
Table 1. Options for a national disaster risk financing strategy in Pakistan.
Timeframe
Short term
Short term
Short term
Short/Medium term
Options for disaster risk financing
Develop a central database for disaster losses and expenditures to better
predict future financial costs of disasters
Operationalize the National and Provincial Disaster Management Funds
Clarify contingent liability associated with post-disaster cash transfer
programs and restructure financing sources behind the programs to ensure
efficient access to funds in the event of a disaster
Develop financial disaster risk assessment tools including development of
financial catastrophe risk models for MoF
8
Short/Medium term
Develop a national disaster risk financing strategy that proposes models for
improving financial response capacity to disasters
Medium term
Establish a robust catastrophe risk insurance program for public assets
Medium/Long term
Promote property catastrophe risk insurance for private dwellings
The implementation of a national disaster risk financing strategy would require significant
institutional capacity building, and further work to quantify likely needs for disaster-related
expenditure. Disaster risk financing is just one component of a comprehensive fiscal risk management
strategy, which requires specific financial and actuarial expertise. Major capacity building on disaster risk
assessment and international best practice in financial management of natural disasters would be
required for the development and use of financial tools to guide the GoP in its national disaster risk
financing strategy.
9
Chapter 1: Introduction
Pakistan is vulnerable to a number of adverse natural events and has experienced a wide range of
disasters over the past 40 years, including floods, earthquakes, droughts, cyclones and tsunamis.
These hazards are further exacerbated by growing urbanization, increased vulnerability and shifting
climatic patterns, that can result in the occurrence of increasingly severe natural disasters. Over the past
decade, damages and losses resulting from natural disasters in Pakistan have exceeded US$ 18 billion.
As the population and asset base of Pakistan increases, so does its economic exposure to natural
disasters. A summary of the economic impact of selected natural disasters since 2005 is shown in Table
1.1
Table 1.1: Estimated economic impact of major natural disasters in Pakistan since 2005. Estimated losses (both US$M, and as
percentage of GDP) are as at time of event. Source: Preliminary Damage and Needs Assessments (DNA).
Event
Provinces impacted
Earthquake (2005)
AJK and KPK
Cyclone Yemyin (2007)
Sindh and Balochistan
Floods (2010)
Floods (2011)
Estimated Losses
(US$M)
Estimated Losses as % of
national GDP
2,857
2.6%
322
0.2%
Entire country
10,500
6.0%
Sindh and Balochistan
3,730
1.8%
The World Bank is supporting the Government of Pakistan (GoP) in building capacity in the area of
Disaster Risk Management (DRM) in order to build resilience from both humanitarian and fiscal shocks
associated with natural disasters. The recurring floods of 2010 and 2011 highlighted the need and
importance of developing financial mechanisms to help the government mobilize resources in the
immediate aftermath of a disaster, while buffering the long-term fiscal impact of such events. There is a
need to develop an overarching policy document in the form of a national disaster risk financing
strategy, which could enable the government to make an informed choice on accessing various sources
of funding to respond to disasters, including ex-ante and ex-post financing instruments.
Historically, a reactive, emergency response approach has been the predominant way of dealing with
disasters in Pakistan. To that end, the West Pakistan National Calamities (Prevention and Relief) Act of
19585, which governed disaster risk management activities, was mainly concerned with organizing the
emergency response. Following the 2005 earthquake which affected Azad Jammu and Kashmir (AJK),
and the Khyber Pakhtunkhwa (KPK) Province (the then North-West Frontier Province, NWFP) it became
clear that appropriate policy and institutional arrangements needed to be put in place to mitigate
potential losses of life and property from future disasters, while protecting federal and provincial
budgets.
5
He ei
efe ed to as the Natio al Cala ities A t,
5 .
10
The National Disaster Management Ordinance of 2006 established the National Disaster Management
Authority (NDMA) as an executive arm of the National Disaster Management Commission (NDMC). The
NDMA has been made operational to coordinate and monitor implementation of national policies and
strategies on disaster risk management. This new system is designed to devolve and de-centralize the
mechanisms for disaster risk management. Provincial Disaster Management Commissions (PDMCs) and
Authorities (PDMAs) have been established while similar arrangements have been made in AJK,
Northern and the Federally Administered Tribal Areas (FATA), eventually establishing the Sindh Disaster
Management Authority (SDMA), the Gilgit Baltistan Disaster Management Authority (GB-DMA) and the
FATA Disaster Management Authority (FDMA) respectively. District Disaster Management Authorities
(DDMAs) have been set up across the country and are viewed as the linchpins of the whole system,
playing the role of the first line of defense in the event of a disaster.
A National Disaster risk Management Framework (NDMF) has been formulated to guide the work of the
entire system in the area of disaster risk management. It identifies national strategies and policies for
disaster risk management, with nine priority areas highlighted to establish and strengthen policies,
institutions and capacities: (i) institutional and legal arrangements for DRM, (ii) hazard and vulnerability
assessment, (iii) training, education and awareness, (iv) disaster risk management planning, (v)
community and local level programming, (vi) multi-hazard early warning systems, (vii) mainstreaming
disaster risk reduction into development, (viii) emergency response systems, and (ix) capacity
development for post disaster recovery.
While the necessary legal, institutional and policy measures have been taken by the Government of
Pakistan for DRM, there are a number of entities working on DRM with overlapping mandates at the
federal level in addition to NDMA. These include the Earthquake Reconstruction & Rehabilitation
Authority (ERRA), the Emergency Relief Cell (ERC), and the Federal Flood Commission (FFC), amongst
others. This multiplicity of institutions is also present at the provincial level, which include, PDMAs, the
Provincial Irrigation Departments (PIDs), and the Civil Defence and Rescue Services. Similarly, in addition
to the NDMA Act, there are a number of legal parameters covering disasters and emergency situations
that overlap between government agencies and tiers.
The World Bank is providing technical assistance to the GoP for the development of a national disaster
risk financing strategy. This non-lending technical assistance aims to: (i) assess the fiscal exposure of the
GoP to natural disasters; (ii) propose options for the development of a national strategy to improve
financial response capacity for natural disasters; and (iii) promote property catastrophe risk insurance
for both public and private dwellings.
Disaster risk financing and insurance (DRFI) is one of the five pillars in the proactive and strategic
framework for disaster risk management (DRM) promoted by the World Bank. The World Bank has
been promoting a proactive and strategic framework for DRM based on five pillars: (i) risk identification;
(ii) risk reduction; (iii) preparedness; (iv) financial protection; and (v) resilient recovery. Despite
prevention and mitigation efforts, no country can fully protect itself from the impacts of major natural
catastrophes. Disaster risk financing and insurance allows governments to increase their financial
response capacity in the aftermath of a disaster, and to improve access for affected populations to
11
financial tools to aid recovery. These financial mechanisms can also reduce the impact of disasters on
social and economic development by smoothing financial shocks and preventing governments and
populations from resorting to adverse coping mechanisms that disrupt development initiatives and
productivity. The types of mechanism that this practice area encompasses are detailed in the table
below, along with mechanism beneficiaries.
Table 1.2 Disaster risk financing and insurance policy areas and benefits
•I
SOVEREIGN DISASTER RISK FINANCING
PROPERTY CATASTROPHE RISK INSURANCE
Beneficiaries: Governments
Beneficiaries: Homeowners and SMEs
eases fi a ial espo se and reconstruction capacity
through improvements to:
- Resource mobilization, allocation, and execution;
- Insurance of public assets;
- Social safety net financing.
• Protects the stability of public finances by reducing the
financial volatility in public expenditure generated by
disasters.
• P o ides a ess to compensation for physical property
damage and indirect losses arising from that damage.
• I eases a a e ess a d u de sta di g of fi a ial
vulnerability to natural disasters.
• Helps distribute risk and burden of recovery between public
and private sectors.
• Can incentivize investment in risk reduction by business and
households.
• Cla ifies the go e
e t s contingent liability following
disasters in terms of public assets, the private sector and
state-owned enterprises, and the poor.
• Provides incentives for public investment in risk reduction
measures.
AGRICULTURAL INSURANCE
DISASTER-LINKED SOCIAL PROTECTION
Beneficiaries: Farmers
Beneficiaries: The Poorest
• P o ides a ess to compensation for production losses
and damage to productive assets.
• Mitigates financial shocks by providing compensation for
livelihood or asset losses through flexible social safety nets.
• Helps distribute risk and burden of recovery between
public and private sectors.
•I
• I eases a a e ess a d u de sta di g of fi a ial
vulnerability to agricultural risks.
• Can incentivize investment in risk reduction by the
government or at risk affected population.
• Encourages farmers to invest more in risk reduction
measures.
• Safeguards vulnerable people from falling into poverty.
6
eases a a e ess a d u de sta di g of ul e a ilit to
natural disasters.
• Allows for the adoption of higher yielding, but riskier,
farming methods.
• Increases access to financial services and markets for lowincome households (insurance, banking, savings).
Source: World Ba k Disaster Risk Fi a ci g a d I sura ce Progra
take
fro
Fi a cial protectio
agai st
atural
disasters: from products to co prehe sive strategies
6
There are segments of populations for which market-based instruments are not viable, and this is where disasterlinked social protection becomes a vital tool. Micro-insurance can be used to target some lower-income
households, but may not be suitable for the poorest households.
12
This report contains the main findings and recommendations of this initial technical assistance. There
are five chapters including this introduction. Chapter 2 presents an overview of the budget processes for
the financing of natural disaster losses during each of the three post-disaster phases (see Annex 6):
immediate emergency response, recovery, and reconstruction. Chapter 3 provides a preliminary
financial disaster risk assessment for Pakistan, focusing particularly on the fiscal impact of natural
disasters. Chapter 4 presents an overview of the private catastrophe insurance market; and Chapter 5
reviews the options for future financing of natural disaster recovery and reconstruction expenditures.
This final chapter includes options for sovereign risk financing and for the promotion of commercial
catastrophe insurance for the private property sector. The report is complemented by 7 technical
annexes that provide information on further analyses and results.
This report also includes input from major donors that assist Pakistan in responding to natural disaster
response as well as invest in overall risk reduction interventions. From the time of initiation of the
report, pro-active consultation has been undertaken with a number of donors who have shown interest
in the findings and recommendations of the report. Initial findings of the report have also been shared
with the donors bilaterally as well as through the platform of Partnership for Disaster Resilience in
Pakistan (PDRP), which serves as the donor coordination platform on DRM. The donors have also agreed
to take the key messages from this report and make it part of their dialogue with the Government of
Pakistan on disaster resilience.
Chapter 2: Fiscal Management of Natural Disasters
This chapter provides an overview of the fiscal management of natural disasters in Pakistan. There are
well-defined procedures for the management of disasters from an administrative perspective. A
structure for dedicated federal and provincial funds for disaster risk management has been established
under the National Disaster Management Act 2010. However, challenges still remain with respect to
operationalization of the funds, and standardization of procedures across provinces. It remains very
difficult for the GoP to analyze the financing needs and gaps for meeting relief, recovery and
rehabilitation support to the affected portion of the population. The heavily de-centralized approach to
disaster risk financing in the provinces is a key contributor to these challenges.
The current regulatory framework for post disaster management was established by the GoP under
the National Disaster Management (NDM) Act, 2010. This a t, An Act to provide for (the)
establishment of a National Disaster Management System for Pakistan , as app o ed
the
parliament on 8th December 2010 (Act No XXIV of 2010) and came into force retroactively on 17th
August, 20077. Under clause-1 sub-clause-b of the NDM Act of 2010, a disaste is defi ed as a
catastrophe or a calamity in an affected area arising from natural or a man-made cause or by accident,
hi h esults i a su sta tial loss of life o hu a suffe i g o da age to a d dest u tio of p ope t .
7
Hereafter referred to as the NDM Act of 2010 . For clarification, the Ordinance was approved by the Chief
Executive in 2007, while it was passed by the Parliament as a law in 2010. It came into force from the date of the
promulgation of the Ordinance.
13
Prior to the implementation of the NDM Act of 2010, a reactive emergency response approach was the
predominant way of dealing with natural disasters in Pakistan. This approach, guided by the National
Calamities Act 1958, focused mainly on emergency response. Following the 2005 earthquake, the GoP
recognized the importance of disaster risk reduction for sustaining long-term social, economic and
environment development. As such, the GoP embarked on a program to establish appropriate policy,
legal and institutional arrangements and implemented strategies and programs to minimize national
risks and vulnerabilities. Most notably, the National Disaster Management Authority (NDMA) Ordinance
of 2006 was passed, specifically to be implemented by the National Disaster Management Disaster
Commission (NDMC). The ordinance was later superseded by the National Disaster Management (NDM)
Act in 2010.
Clauses 29 and 30 of the NDM Act of 2010 pertain to the establishment of national disaster funds. The
act established a National Disaster Management Fund (NDMF) administered by the federal government
and separate provincial funds for disaster risk management administered by each of the provincial
governments. Specifically, the act stipulates that the National Disaster Management Fund (NDMF) shall
be administered by the NDMA towards meeting the expense of emergency, preparedness, response,
mitigation, relief and reconstruction. The act also specifies rules on emergency procurement and
accounting (Clause 32 of the NDM Act of 2010), to facilitate the use of the funds post-disaster. For
example, this clause empowers district authorities to authorize respective departments to undertake
procurements for rescue and relief as it deems necessary. Under clause 29 (sub-clause 4) of the NDM
Act of 2010, the NDMF shall be kept in one or more accounts maintained by the NDMA in either local or
foreign currency in any scheduled bank in Pakistan and shall be operated in accordance with the
directions of NDMA.
Clause 118 of the NDM Act of 2010 provides guidance on the types of expenditures incurred by the
federal government following natural disasters. These expenditures include shelter, food, drinking
water, medical cover and sanitation, special provisions for vulnerable groups, ex-gratia assistance on
account of loss of life and also assistance for damage to housing and restoration of livelihoods. In
addition other relief activities and expenditures may be incurred as deemed necessary.
The NDM Act of 2010 explicitly references different sources of financing for the National Disaster
Management Fund (NDMF), but there is a need for a sustainable plan to ensure that the NDMF and
provincial funds are adequately provisioned in the context of likely needs. Clause 29 (sub-clause 2) of
the NDM Act of 2010 describes the following source of financing for the NDMF: (i) grants made by the
federal government, (ii) loans, aid and donations from national or international agencies, (iii) donations
received from any other source, (iv) the Prime Mi iste s Disaste ‘elief Fu d, (v) any other fund related
to natural calamities established at the federal level as the federal government may determine
appropriate. Clause 30 (sub-clause2)9 of the NDM Act of 2010 describes the following source of
financing for the Provincial Disaster Management Funds (PDMFs): (i) grants made by the federal
8
9
Titled guideli es fo i i u sta da ds of elief .
Titled Esta lish e t of Fu ds P o i ial go e
e ts .
14
government or provincial governments, (ii) loans, aid and donations from national or international
agencies provided in the prescribed procedures.
At the time of writing, grants have made by the federal government to the NDMF, but the limited
allocations and legacy issues with respect to the pre-existing system have prevented the NDMF from
being fully operationalized. In the case of the National Disaster Management Fund, the government has
allo ated so e fu ds to it, ut it is ot u e tl ei g used fo disaste espo se. The P i e Mi iste s
Disaster Relief Fund remains the main vehicle being used to channel government funds to those affected
by natural disasters. A sustainable plan is required to ensure that sufficient funds are available in the
NDMF and PDMFs to face disaster losses, examining financing possibilities across a range of sources.
Currently, in the event that allocations to the NDMF were to become exhausted then it is likely that the
Ministry of Finance (MoF) would be approached for extra funds. This demand would likely be met from
reallocation of the existing allocations, such as slow moving development projects or unused/surplus
funds. However, in other cases, supplementary grants could be required to meet exceptional additional
demand.
The authorities and functions of the NDMA are outlined under clause-9, sub clause (b, c and d) 10, of the
NDM Act of 2010. In part IV of their National Disaster Response Plan (NDRP) of March 2010, the NDMA
defines three levels of emergencies which are shown in Table 2.1.
Table 2.1: Definition of emergency levels according to the National Disaster Response Plan (NDRP) of March 2010.
Emergency Level
Level 1 (small events)
Level 2 (medium events)
Level 3 (large events)
Description
Localized emergency events to be dealt with by the DDMA at the district
level. For example small scale fires, landslides, floods, canal or sub-canal
breaches and low level epidemics.
An emergency which overwhelms the capacity of the DDMA. The DDMA
can request PDMC through the PDMA.
In the event of case a disaster beyond the capacity of provincial/regional
government, a national emergency is declared.
Small, level 1, events are limited to a single district and the District Administration, headed by the
Deputy Commissioner (DC)/District Coordination Officer (DCO), is responsible for relief efforts and leads
coordination of all departments. Their staff undertakes the initial situation and needs assessment which
is conveyed to the Provincial Disaster Management Authority (PDMA); in parallel, the Provincial Finance
Department is also informed of the financial requirements that could arise from the disaster.
For medium-sized, level 2 events that are limited to an individual province, on receipt of information of
a disaster covering more than one district, the PDMA coordinates with the DC/DCOs of the affected
districts. In addition the PDMA coordinates with the relevant line departments of the province to assess
the situation and to oversee the provision of relief to the affected population. The PDMA also notifies
10
Titled Po e s a d Fu tio s of the Natio al Disaste Ma age e t Autho it .
15
the Chief Executive of the province for allocation of the resources required. The NDMA is also alerted on
the nature of the disaster and regular situation reports are shared.
For large, level 3, events that extend across provincial boundaries, the NDMA coordinates the efforts of
the various PDMAs and provincial ministries and departments. While the relief assistance is led by the
respective PDMAs, the NDMA stands by to meet any gaps or raise resources through the office of the
Prime Minister and the federal Ministry of Finance. The NDMA also coordinates the donor community
by sharing situation reports, needs assessments and support preparation of relief and response plans for
raising donor resources.
There remains a lack of standardization in procedures related to disaster risk management across
provinces, despite specifications in the NDM 2010 Act. In general, the disaster risk management system
defined in the NDM Act of 2010 and national disaster response plans are not followed in full at the
provincial level. Across the provinces approaches vary, in the case of Punjab disasters are typically
managed following instructions given in war books such as the financial war book; elsewhere
instructions in the Natural Calamities Act, 1958 are followed. At present, there are no institutional
mechanisms to calculate the financial impacts of disasters within the federal or provincial exchequers.
Following a disaster, with the support of the World Bank and Asian Development Bank (ADB), the GoP
undertakes a Damage and Needs Assessment (DNA) which estimates the direct losses as well as the
reconstruction costs by sector and province across both the public and private sector.
The post-disaster financial responsibilities of provincial governments are not well defined. At the
provincial level, although the financial responsibilities of governments are not defined, generally they
conform to the expenditures listed in Table 2.2. In addition to these expenditures, other relief
mechanisms may be provided. In Punjab, for instance, short term waivers on taxes on water and land
are common following a disaster. In certain cases waiver of interest on agriculture loans are allowed as
well as a delay in the repayment of these loans.
Table 3.2: Post-disaster provincial expenditures by operation. Source: Provincial Disaster Management and Contingency
Plans.
Operation
Emergency / Relief
Recovery and reconstruction of
public infrastructure and
buildings
Other assistance to populations
Expenditures
Food supply, provision of medical care (medicines etc.), provision
of drinking water, provision of shelter.
Reconstruction and repair of roads and bridges; reconstruction
and repair of health units, hospitals, schools and other public
buildings.
Provisions of seeds and fertilizer, provision of money (cash) for
reconstruction and repair of houses, provision of compensation
money (cash) for injured/dead.
Since 2005, estimates of the total costs through the three post-disaster phases have exceeded US$5
billion on two occasions. Total estimates for post-disaster costs for the 2005 earthquake and the 2010
16
Millions
floods were approximately $US5.2 billion and US$8.7 billion respectively. Estimates made during the
respective preliminary damage and needs assessments for four selected events since 2005 are shown in
Figure 2.1.
10,000
9,000
8,000
7,000
6,000
Reconstruction
5,000
Recovery
4,000
Relief
3,000
2,000
1,000
2005 Earthquake
2007 Cyclone
Yemyin
2010 Floods
2011 Floods
Figure 2.1: Post-disaster cost estimates by phase for four selected major natural catastrophes in Pakistan. Source: Flash
Appeals, Humanitarian Response Plans and Damage and Needs Assessments.
Donor assistance can represent a significant, although uncertain, part of financing natural disasters,
indeed since 2005 donor assistance has accounted for between approximately 60% and 80% of total
post-disaster expenditures during the relief and recovery phases. For example, following the 2005
earthquake approximately US$520 million (62%) of a total estimated expenditure of US$845 million for
relief and recovery came from international donors. For the 2007 Cyclone Yemyin, international donor
assistance accounted for approximately 59% of total relief and recovery spending (US$21 million of a
total of US$36.2 million). In 2010 and 2011, following the devastating flood events, donors contributed
81% (US$1.37 billion) and 65% (US$157 million) of the relief and recovery spending. This information is
summarized in Figure 2.2. However, it should be noted in the Figure 2.1 above that the total costs of the
events summarized are between 4 and 7 times greater than the expenditures contributed to recovery
and reconstruction. Thus, while donor financing plays an important role in financing recovery and
reconstruction, it accounts for only 5%-16% percent of the financing needs.
17
Millions
Figure 2.2: Government and donor expenditures for relief and recovery for selected natural disasters in Pakistan. Source:
Flash Appeals, Humanitarian Response Plans and Damage and Needs Assessments.
1800
1600
1400
1200
1000
Donors
800
Government
600
400
200
0
2005 Earthquake
2007 Cyclone
Yemyin
2010 Floods
2011 Floods
The remaining part of this chapter is dedicated to describing the roles and responsibilities of the various
public entities for each of the three post-disaster phases. The main sources of post-disaster funding are
summarized in Figure 2.3.
Disaster
phase
Emergency
response/Relief
Recovery
Reconstruction
Budgetary
vehicle
Contingency budget,
supplementary budgets
Contingency budget,
supplementary budgets
Annual public sector
development
programme
Financing
sources
Federal/provincial/
district budget
Federal/provincial/
district budget
Federal/provincial
budget
Figure 2.3 Financing of post-disaster operations in Pakistan. Source: authors
Emergency Response/Relief Phase
Funds for emergency response activities are immediately available from a variety of sources,
depending on the size of the disaster. For small (level 1) events, district governments use their own
financial resources for emergency response through their contingency budget lines. If these funds are
not sufficient (for example in the case of a medium-size, level 2, event) then funds may be provided by
18
the provincial government from their contingency budget lines (where available). This process continues
for level 3 events, crossing provincial boundaries, where, should the respective district and provincial
budgets be exhausted, then additional funding is taken from the federal budget. Any additional
expenditures are adjusted in the following ea s udget th ough the de a d fo supple e ta
grant11.
KPK, Sindh and Baluchistan have allocated a contingency budget in their respective provincial budgets to
meet disaster relief and response requirements as they occur to ensure prompt availability of funds.
However in the case of the Federal government and Punjab province, supplementary grants are typically
used for the provisioning of post-disaster funds and the required contingent funds are initially met by reappropriation from the surplus heads such as unused salary budget. Once these funds are exhausted
and additional grants are required, they are approved by the respective assembly within the following
fis al ea s udget. This procedure is also followed in the case of Baluchistan, Sindh and KPK if the
existing funds are not enough to fund post-disaster expenditures.
Recovery Phase
The recovery phase (also called the rehabilitation phase) starts after the emergency response phase
and typically lasts three to six months. During this specific post-disaster phase, lifeline infrastructure
(e.g. water, electricity, sanitation, etc.) and key public buildings and infrastructure (e.g. hospitals and
bridges, etc.) are repaired. Housing rehabilitation assistance is also provided to the affected households.
Clause 1112 of the NDM Act of 2010 provides some insights into the types of expenditures incurred by
the federal and provincial governments which include compensation on account of loss of life and also
13
assistance on account of damage to houses and restoration of means of livelihood. Clause 12 of the
NDM Act of 2010 allows the NDMA the national authority to direct that, for severe disasters, relief may
be granted in the repayment of loans or that fresh loans may be granted to the affected population with
appropriate concessions.
The NDM Act of 2010 does not stipulate the method through which post-disaster payments are made to
the affected population. However in practice first the affected region is ide tified as a calamity hit
area , and then the data of expected beneficiaries is sent to the NADRA (National Database and
Registration Authority) for verification. Once the beneficiary details are verified then these affected
people are issued ATM cards through which they may obtain the cash compensation in one or more
tranches14.
The funding mechanisms during the recovery phase are currently exactly the same as during the
emergency response phase. Presently funds for financing the post-disaster recovery phase come from
contingency budgets and supplementary budgets at the district, provincial and federal level. Initially
11
Supplementary demand for grants and appropriations represents expenditures which could not be met from
within the budget allocations under various normal annual demands and appropriation.
12
Titled Guideli es fo i i u sta da ds of elief .
13
Titled ‘elief i loa epa e t, et .
14
There are no standard defined procedures for cash transfers to those affected by disasters and the mechanism
could range from providing cross-cheques to ATM cards depending on the situation and the needs.
19
funds are sourced from the district budgets and as these become exhausted additional funding from
provincial budgets are made available. In the case of significant (level 3) natural catastrophes, then
district and provincial budgets are supplemented by funding from the federal budget.
Reconstruction Phase
The reconstruction of public assets (at federal and provincial levels) is mainly financed through the
Annual Public Sector Development Program (PSDP). The PSDP of the federal and provincial
governments consists of a series of projects and programs which are developed according to the long
term development needs of Pakistan. The expenditures spent on PSDP are met from revenue and capital
accounts of the federal and provincial governments.
Line ministries are responsible for the reconstruction of their assets. Each affected ministry at either
the federal or provincial level obtains estimates of the extent of disaster damages and prepares an
appropriate program for the reconstruction of the affected public assets and infrastructure. Typically
these programs are prepared by the relevant line ministries with the consultation of the ministry of
finance of either the federal or provincial governments. The proposed programs are put before the
national or provincial assemblies, as part of the PSDP of the federal or provincial government, for their
approval. As soon as the programs are approved, they are implemented by the respective line
ministries, as des i ed i the Go e
e t of Pakista , A ou ti g Poli ies a d P o edu es Ma ual
for federal and provincial governments.
At this time there is no central mechanism to track the expenditures incurred on relief, recovery and
reconstruction as it is spread across different tiers of governance as well as across the various federal
and provincial ministries and departments. The difficulty in tracking expenditures on relief, recovery
and reconstruction following disasters makes it very challenging for the GoP to assess the needs and
shortfalls for funds for disaster-related expenditure. A system to better track disaster-related
expenditures across all the various implementing agencies would improve future needs assessments,
and also the transparency and accountability of funds spent post-disaster.
20
Chapter 3: Financial Disaster Risk Assessment
The assessment of the economic and fiscal risk related to natural disasters, including contingent
liabilities, is the first stage in developing disaster risk financing strategies. Such an assessment typically
requires both historical damage, loss and expenditure data, along with loss estimates calculated from
natural catastrophe risk models. The World Bank and ADB have supported the GoP in assessing the
impacts of natural hazards through detailed post-disaster Damage and Needs Assessments. These
assessments were prepared following the 2005 earthquake, Cyclone Yemyin in 2008, and the 2010 and
2011 floods. Although data is limited, in this chapter preliminary fiscal risk profiles are developed for the
Government of Pakistan.
A preli i ar assess e t of the go er e t s o ti ge t lia ilit to disasters i di ates that the
government faces a major financing challenge arising from natural catastrophes. Flooding is a major
driver of risk, causing an estimated annual economic impact of between 3 and 4 percent of the Federal
Budget15, (between US$ 1.2 billion and US$ 1.8 billion). This range is equivalent to between 0.5 percent
and 0.8 percent of national GDP16; however simulations show that a major flood event (occurring, on
average, once every 100 years) could cause losses in excess of US$ 15.5 billion17, which equates to
around 7 percent of national GDP18, equivalent to almost 40 percent of the Federal Budget.
Contingent liability and post-disaster spending needs
The contingent liability of the government due to natural disasters can create significant fiscal risk.
However the GoP s o ti ge t lia ilit is ot learl defi ed i la a d akes a fis al risk assess e t
difficult to perform. Beyond its explicit contingent liability and associated spending needs (such as the
reconstruction of public assets and infrastructure), the government may have a moral and social
responsibility (implicit contingent liability) to assist the population in the aftermath of an extreme
disaster event. For example, the government provides not only emergency assistance (e.g. food, shelters
and medical supplies) but it can also finance recovery and reconstruction activities such as assistance for
the rebuilding of low-income housing. Contingent liabilities arising through the establishment of
disaster-linked social protection schemes also need to be considered in such an analysis.
The post-disaster contingent liability of the GoP can be categorized into short-term, medium-term and
long-term spending needs. All financial resources do not need to be mobilized immediately after the
occurrence of a disaster. Indeed, in the aftermath of a disaster, resources must be mobilized quickly to
fund post-disaster emergency and recovery activities. Once the recovery phase is complete, the GoP
must mobilize longer-term resources to meet its reconstruction needs. In general there are three broad
categories of post-disaster spending needs for which governments assume their contingent liabilities: (i)
repair of nationally-owned public assets such as national roads, major water infrastructure, and national
government buildings (typically in the medium-term)); (ii) repair of sub-nationally owned public assets
such as provincial and district roads, health facilities, schools, or local markets (typically in the short-to15
Budget estimate taken from 2014-2015 Budget in Brief (http://finance.gov.pk/) exchange rated fixed at 102
2013 GDP figure used, numbers rounded
17
Upper bound estimate taken from two methodologies. See Chapter 3 for further detail.
18
2013 numbers
16
21
medium term); and (iii) compensation for deaths/injuries, increased payments through safety net
schemes and stimulus grants for livelihood recovery and housing reconstruction (typically in the short
term).
A major challenge for the government in the aftermath of a disaster is to access immediate liquidity to
finance its short-term spending needs. While there are various financial instruments that can be
mobilized for the post-disaster reconstruction phase, including additional credit and tax increases,
financial instruments that ensure access to immediate liquidity after a disaster are more challenging to
access. See Annex 6 which describes the potential financial instruments available.
Assessing the short-term post-disaster spending needs is essential. To devise a cost-effective disaster
risk financing strategy, especially for the funding of short-term post-disaster public spending needs, it is
critical to assess those possible public spending needs that create additional fiscal risk for the
government.
Analysis of historical disasters in Pakistan
A database of the impacts of natural disasters across Pakistan between 1973 and 2012 has been
developed for this report. In this dataset, developed primarily from NDMA and PDMA data sources, the
number of people affected by historical disaster events has been estimated and used as a proxy for the
severity of each event. During this 40 year time period, 102 individual natural disaster events have been
catalogued and analyzed for their impacts on the affected populations (see Annex 2 for more details on
this catalog).
On average, each year approximately 3 million people are affected by natural catastrophes, which
equates to approximately 1.6 percent of the total population. Figure 3.1 shows the number of people
estimated to have been affected by natural disasters since 1973 by peril type.
22
Figure 3.1: Number of people affected by natural disasters in Pakistan since 1973. Source: authors.
Since 1973 approximately 77 percent of the all the people affected by natural disasters were impacted
by flooding events. Flood events have been the type of natural catastrophe responsible for impacting
the most people over the last 40 years with approximately 77 percent of the total affected population
having experienced a flood-type disaster. Drought is the next most damaging peril, followed by
earthquake, windstorm and others (avalanches, landslides, etc.). This information is summarized in
Figure 3.2.
Figure 3.2: Number of total people affected by each peril across Pakistan between 1973 and 2012. Source: authors.
Eighty seven percent of the people affected by natural catastrophes were resident in Punjab and
Sindh. Analysis of the historical data identifies that the two most impacted provinces are Punjab (66.6
percent of all people affected) and Sindh (20.1 percent). The high number of affected people in these
provinces is due to a number of factors including high population density, poor infrastructure, the
geomorphology of the regions and the location of high numbers or residential properties on floodplains.
A further 12 percent were resident in KPK and Baluchistan, with the remaining (less than 2 percent) in
AJ&K, Gilgit Balistan and the region of Federally Administered Tribal Areas (FATA). Figure 3.3
summarizes the geographical distribution of affected people.
23
Figure 3.3: Geographic distribution of people affected by natural perils in Pakistan since 1973
Since 1973 there have been 11 natural catastrophe events that - were they to occur in the present day
- could affect over four million people in Pakistan. Of the 11 disasters estimated to have impacted over
four million people, eight have been flooding events. Furthermore, the top three most impactful events
(the floods of 2010, 1976 and 1973) affected well over 10 million people each. This information is
summarized in Figure 3.4.
Figure 3.4: Number of people affected by natural disasters estimated to have impacted over four million people (trended to
2012). Source: authors.
Statistical fiscal disaster risk analysis
The fiscal disaster risk profile of Pakistan which reflects the gover e t s o ti ge t lia ilities to
natural disasters is built on actuarial analyses of historical disaster impact data collected for this
24
report. Preliminary fiscal disaster risk profiles for the peril of flood only19 are developed for the whole
country and one province (Punjab) due to availability of data. In particular, risk metrics such as the
annual expected loss (AEL) and probable maximum losses (PMLs) have been estimated. The AEL is an
estimate of the long term annual average loss, while the PML gives estimates of possible large losses.
The PML is defined as an estimate of the aggregate annual maximum loss that is likely to arise on the
occurrence of an event or series of events with a certain probability. For example, a PML with a 100-year
return period is the estimated loss caused by an event occurring once every 100 years on average (i.e.
with a one percent probability of occurrence per year on average).
Preliminary fiscal flood risk profiles of Pakistan and Punjab
The fiscal disaster risk profiles of Pakistan and Punjab, related to the public spending needs for postdisaster operations, are estimated by using the number of people affected by disasters as identified in
this report. Post-disaster expenditures financed by the government in the first few months after a
catastrophe are estimated using an indirect approach based upon the number of people identified as
being affected by an event.
Following analysis of the historical impact data it was concluded that a meaningful, robust disaster risk
profile could only be generated for flood risk – the ost sig ifi a t pe il i Pakista s e e t histo . As
such, 40 years of flood events have been used to generate risk profiles for both: (i) the entire country,
and (ii) the province of Punjab. Analyses have been performed to fit statistically-significant distributions
through the actual impact data to allow extrapolation of the 40 years of flood events to make
calculations of the possible severity of events with a low probability of occurrence (e.g. with a 1-in-100
year, or 1-in-250 year probability).
The government post-disaster budget expenditure per person affected by a flood disaster is estimated
at between US$400 and US$600. Based on an analysis of the impacts of natural disasters in Pakistan, it
is estimated that, on average, the GoP allocates between US$400 and US$600 for every person affected
by a significant flooding event. A portion of this cost is the direct financial compensation for the affected
households for reconstruction of damaged housing and livelihoods support and the remaining is for the
reconstruction of critical public assets. Combining these estimates of fiscal cost per affected person,
preliminary fiscal flood risk profiles have been calculated for the country of Pakistan and the province of
Punjab. Option 1 assumes average fiscal cost of a person impacted by a flooding event is $400; while
Option 2 assumes the fiscal cost is $600.
This preliminary analysis indicates that the annual national fiscal disaster losses from flood are in the
range US$1.2 billion to US$1.8 billion; equivalent to 3 to 4 percent of the Federal Budget, or 0.5 to 0.8
percent of GDP20. Once every 100 years these losses are expected to exceed either US$10.3 billion or
US$15.5 billion (depending on the option assumed) which is in the range of to 25 to 37 percent of the
Federal Budget, or around 4 to 7 percent of GDP. Or to consider in terms of annual probability, there is a
19
There are not enough historical records in the data for drought and earthquake events to perform this actuarial
analysis in a suitably robust manner.
20
2013 GDP figures, 2014-2015 budget estimate taken from Budget in Brief (http://finance.gov.pk/), exchange rate
fixed at 102
25
1 percent probability in any year that an event exceeding either US$10.3 billion or US$ 15.5 billion will
occur. Figure 3.4 shows the indicative fiscal loss exceedance curve, the indicative AEL and selected PML
values. In an average year, the fiscal losses are estimated in the range US$1.2 billion to US$1.8 billion.
Every 10 years, they could exceed between US$3.4 billion and US$5.2 billion; and every 100 years they
could exceed, depending on the methodology, US$10.3 billion or 15.5 billion.
Figure 3.5: Estimated national fiscal flood risk profile for Pakistan - indicative exceedence probability curve. Source: authors.
Indicative Risk Metrics
Annual Expected Loss
National
Statistical Flood
Option 1
(US$ million)
National
Statistical Flood
Option 1
(% GDP)
(% Federal Budget)
National
Statistical Flood
Option 2
(US$ million)
National
Statistical Flood
Option 1
(% GDP)
(% Federal Budget)
1,179
0.5% (3%)
1,769
0.8% (4%)
10 year return period
3,476
1.5% (8%)
5,214
2.2% (12%)
25 year return period
6,037
2.6% (14%)
9,055
3.9% (22%)
50 year return period
8,142
3.5% (19%)
12,213
5.3% (29%)
100 year return period
10,344
4.5% (25%)
15,517
6.7% (37%)
200 year return period
12,621
5.4% (30%)
18,932
8.2% (45%)
500 year return period
15,719
6.8% (37%)
23,579
10.2% (56%)
1,000 year return
period
18,094
7.8% (43%)
27,140
11.7% (65%)
Probable maximum
Losses:
26
In the case of Punjab province alone, this analysis indicates that the annual provincial disaster losses
from flood are in the range US$0.8 billion to US$1.2 billion and that once every 100 years losses are
expected to exceed between US$7.4 billion and US$11.1 billion (depending on the option assumed).
Figure 3.5 presents the actuarial results of the analysis for flood events in the Punjab province.
Figure 3.6: Estimated national fiscal flood risk profile for Punjab province - indicative exceedence probability curve. Source:
authors.
Punjab Statistical Flood Option 1
(US$ million)
Punjab Statistical Flood Option 2
(US$ million)
831
1,247
10 year return period
2,456
3,685
25 year return period
4,289
6,433
50 year return period
5,799
8,698
100 year return period
7,379
11,069
200 year return period
9,016
13,523
500 year return period
11,237
16,855
1,000 year return period
12,946
19,419
Indicative Risk Metrics
Annual Expected Loss
Probable maximum Losses:
27
Preliminary earthquake risk profile of Pakistan
The historical disaster impact dataset collated for this study did not contain enough drought, tropical
cyclone or earthquake events to allow a reliable actuarial analysis of the possible fiscal impacts of these
types of natural catastrophes. However, a prototype probabilistic earthquake model was utilized to
demonstrate the value of such a modeling approach, given the availability of appropriate input datasets.
The results from this model are presented as illustration of this approach, but further development and
refinement is necessary.
Probabilistic catastrophe risk models offer the government innovative tools to assess their financial
exposure to natural disasters. Governments in both developed and developing countries are
increasingly using catastrophe risk modeling techniques to guide their disaster risk management and
financing decisions. Such tools allow for the probabilistic assessment of low-frequency, high severity
disasters, such as a major earthquakes and their potential losses. See Box 3.1.
BOX 3.1: Probabilistic catastrophe risk modeling
Fiscal disaster risk assessments for governments can be developed using inputs from probabilistic
catastrophe risk models. Catastrophe modeling techniques were originally developed by the international
(re)insurance industry to assess the risk on portfolios of underwritten assets (e.g. buildings) and are
increasingly being used by governments to analyze their exposure to adverse natural events. Typically
catastrophe risk models comprise the following components:
Hazard Module: This module contains a catalog of thousands of potential natural catastrophe events that
could occur in a region, each one defined by a specific frequency and severity of occurrence. Analyses are
performed on the historical occurrence of catastrophic events to capture the extent of possible events,
based on expert opinions.
Exposure Module: This is a geo-referenced database of assets at risk, capturing important attributes such as
geographical location, type of occupancy (e.g. residential, commercial, industrial, agricultural) and
construction (e.g. wood, steel, masonry), age and number of stories.
Vulnerability Module: This is a series of relationships which relate the damage to an asset to the level of
intensity of a peril (e.g. ground shaking for earthquakes, wind speed for tropical cyclones). The relationships
will vary by peril and by the characteristics of each asset; for example a small wooden house and a tall
concrete building will respond in different ways to a ground shaking caused by an earthquake and as such,
they will be damaged in different ways and to different extents. On a larger scale, for instance when
analyzing an entire neighborhood or city, proxies may be used to capture the overall vulnerability of an area.
Loss Module: This module combines the information in the other three components in order to calculate the
overall losses expected for selected perils impacting a portfolio of assets of interest. Typically there are two
kinds of risk metrics produced: average annual losses (AALs) and probable maximum losses (PMLs). The AAL
is the expected loss, on average, every year for the risks being analyzed; while the PMLs describe the largest
losses that might be expected to occur for a give return period (within a given time period), such as a 1-in-50
year loss or a 1-in-200 year loss.
Risk metrics produced by probabilistic catastrophe risk models can be used to complement historical
analyses and are particularly useful to policy makers in assessing the probability of losses and the maximum
loss that could be generated by major events (e.g. an earthquake affecting a major city or a cyclone affecting
a major port).
28
This preliminary probabilistic earthquake risk modeling approach complements the actuarial historical
impact analysis. A preliminary analysis of the damages caused by earthquake (shake only) to residential
properties only is presented. This earthquake risk assessment produced a national level seismic
probabilistic loss exceedance profile for housing damage at the national level.
A significant amount of research and expertise went to producing the earthquake loss estimation. The
probabilistic earthquake risk modeling was conducted using key input datasets from local experts in
Pakistan that detail the most up to date seismic hazard analysis and housing inventory analyses (at a
spatial resolution of 1 km2) for the whole country. The modelling also evaluated the impact as if the
2005 earthquake were to occur at the present time.
The probabilistic seismic hazard analysis was derived from results of over 30,000 simulated
earthquakes affecting Pakistan. Information about the number of dwellings, construction type (katcha,
brick, concrete etc.) and height were obtained from detailed studies and census information. The
damage and loss functions were based on nine vulnerability functions developed for Pakistan using a
mix of building heights and construction types. The replacement values (or monetary value of the
properties - updated to current values) were obtained after consultations with local engineers and
Pakistan-specific information on unit cost of construction from the World Housing Encyclopedia project
(Ali, 2006; Ali and Muhammad, 2007; Hicyilmaz, 2011; Lodi, 2012a; Lodi, 2012b). The total modelled
replacement value of building stock was estimated at US$ 561 billion in current prices.
This preliminary analysis indicates that the annual expected earthquake loss to residential
properties/housing sector is approximately US$ 1 billion and that once every 100 years these losses
are expected to exceed US$18.7 billion. The loss exceedance curve shows the potential earthquake
losses for key return periods. The results show that earthquake risk in Pakistan is very significant and
should be considered to have a significant fiscal impact. It also shows that in the long term, annually
0.2% of the total value of the building stock in Pakistan is impacted by earthquake loss.
This preliminary earthquake analysis also indicates that a recurrence of the 2005 earthquake would
cause a present day economic loss of approximately US$ 2.8 billion which is almost double as
compared to the losses caused to the housing sector by the 2005 earthquake. One output of the
probabilistic earthquake approach is a dete i isti as-if s e a io a al sis of
5 ea th uake. If this
event were to occur in the present day, the total economic loss to residential properties is estimated at
approximately US$ 2.8 billion, which corresponds to a return period of around 26 years. Given the
increase in number of buildings in Pakistan since 2005, this analysis indicates that the number of
properties affected (i.e. damaged) would be greater than in the present day, but the actual number of
properties destroyed would be lower (having been built better after the 2005 earthquake).
29
Loss in USD (in millions)
60,000
50,000
40,000
30,000
20,000
10,000
0
100
200
300
400
500
Return Period (years)
Figure 3.7: Estimated national earthquake risk profile for residential properties in Pakistan - indicative exceedence
probability curve. Source: authors.
Indicative Risk Metrics
Annual Expected Loss
Pakistan Residential Earthquake
(US$ million)
As % of exposed value
956
0.2%
10 year return period
949
0.2%
25 year return period
2,750
0.5%
50 year return period
7,660
1.4%
100 year return period
18,700
3.3%
200 year return period
35,000
6.2%
500 year return period
60,700
10.8%
1,000 year return period
80,600
14.4%
Probable maximum Losses:
In summary, although the flood fiscal disaster risk analysis should be seen as preliminary, it provides
the GoP with an order- of magnitude estimate of their possible public spending needs for post-disaster
operations. Due to the lack of historical earthquake and tropical cyclone events, it was not possible to
perform an actuarial analysis of the possible fiscal costs of these types of natural catastrophes. This
actuarial analysis should be complemented by more rigorous catastrophe modeling techniques,
particularly for the assessment of future possible losses caused by major disasters. In order to illustrate
the value of probabilistic and deterministic catastrophe models, a prototype earthquake model has been
developed which provides an estimate of the possible losses to private residential properties from this
30
peril, although this model would require additional developments and refinements before the outputs
could be used towards developing a natural disaster financing strategy. In lieu of more robust modeling
estimates, the results of the flood risk profiles for Pakistan and Punjab are used as an input to a series of
options that the GoP may wish to consider towards the development of a preliminary national disaster
risk financing strategy (see Chapter 5).
This report also highlights two different approaches to disaster risk analysis to estimate fiscal impacts
using actuarial and scientific/engineering based methods. However, it also important to recognize that
the financial impacts estimated are for direct losses from independent hazard events. For example, the
losses do not consider impact of landslides after an earthquake in northern Pakistan. This impact could
be further exacerbated if an earthquake occurred during the rainy season further increasing the likely
hood of landslides. Therefore, the preliminary loss estimates generated using these methods may not
necessarily represent the maximum losses possible.
31
Chapter 4: Review of the Private Catastrophe Risk Insurance Market
Background
Global experience has demonstrated that risk transfer chains, such as insurance and reinsurance, can
be a key instrument in absorbing a significant portion of the economic impacts associated with natural
disaster events. This chapter outlines the current insurance market operating in Pakistan, focusing in
pa ti ula o Pakista s o -life insurance market and products, followed by implications for natural
catastrophe insurance.
The insurance market in Pakistan is underdeveloped. Insurance in Pakistan remains underdeveloped
due to a lack of awareness and understanding of the different products and a lack of new products
within the insurance market. From a geographical perspective too, the provinces of Baluchistan, KPK and
FATA have been adversely impacted by civil unrest and associated political security issues. In these
provinces, the outreach of insurers is limited only to the larger cities such as Quetta and Peshawar,
leaving the rural areas un-catered for.
Overview of the market
There are currently 49 insurers, one national reinsurer and some international reinsurers operating in
Pakistan. All of these participants are regulated by the Securities and Exchange Commission of Pakistan
(SECP). The SECP also licenses and regulates insurance brokers, loss surveyors and adjustors. However,
under the current regulatory framework, insurance agents are not required to be licensed by the
regulator, though all their activities are monitored and controlled through the insurance companies who
are required to maintain a register of their agents and held responsible for all acts and omissions of the
agents. The government-owned non-life insurer, the National Insurance Company Limited (NICL),
though fully regulated by SECP, is under the administrative control of the Ministry of Commerce.
In Pakistan, the overall insurance penetration (life and non-life premium as percentage of GDP) has
remained less than 1% over the last few years, which is one of the lowest in the region. The insurance
industry in Pakistan is relatively small compared to its geographical peers, as demonstrated by the low
insurance penetration in comparison to other countries in the SAARC21 region. In 2011 the total
insurance penetration (life and non-life) was approximately 0.7 percent in Pakistan, lower than in
Bangladesh (0.9 percent), Sri Lanka (1.2 percent) and India (4.1 percent). The total life and non-line
insurance penetration in these four countries is summarized in Figure 4.1. Traditionally, the agent selling
network is the dominant distribution channel for the delivery of insurance products in Pakistan. There
are also a small number of insurance brokers operating in the market.
21
South Asian Association for Regional Cooperation or SAARC is an organization of South Asian nations, which was established
in 1985 when the governments of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka formally adopted its
charter providing for the promotion of economic and social progress, cultural development within the South Asia region. It is
headquartered in Kathmandu, Nepal. For details, visit http://www.saarc-sec.org/
32
Insurance Penetration (% Premium to GDP)
4.5
4
3.5
3
2.5
Non-life
2
Life
1.5
1
0.5
0
Bangladesh
India
Pakistan
Sri Lanka
Figure 4.1. Insurance penetration in the South Asia region for selected countries in 2011. Source: Swiss Re: sigma No.
2/2011.
Total annual gross premium revenue of Pakista s o -life insurance sector was approximately US$
0.57 billion at the end of 2013. G oss p e iu e e ues i Pakista s o -life sector have grown from
approximately US$0.33 billion in 2006 to approximately US$0.57 billion in 2012. Over the same time
pe iod g oss p e iu
e e ue i Pakista s life se to g e f o app o i atel U“$ . 3 billion to
approximately US$0.88 billion.
The non-life insurance sector since 2007 has seen annual growth rates decreased by 11% to 2009.
However since 2009 annual growth rates have increased by 6%. In contrast to the life sector has
sustained an average annual growth rate of approximately 25% from 2007 onwards. Fluctuating
growth rates in the non-life sector are primarily due to the economic downturn that commenced in
2007, coupled with a decline in consumer and industrial financing by banks. This was the main driving
force for non-life insurance growth, as non-life insurance is mostly centered on commercial lines.
However, no visible efforts have been made by the insurers to expand the outreach to personal lines of
business; therefore growth has remained relatively stagnant.
The number of non-life insurers in Pakistan is not increasing and in fact nearly 24 non-life insurers
have exited the market since 2009. Typically those companies that have left the market have done so
either due to voluntary factors or regulatory actions owing to compliance irregularities22. According to
the Herfindahl–Hirschman Index (HHI)23, given the small size of the market, the existence of 40 non-life
22
Personal Communication, SECP, 2013
23
The Herfindahl index (also known as Herfindahl–Hirschman Index, or HHI) is a measure of the size of firms in relation to the
industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O.
Hirschman, it is an economic concept widely applied in competition law, antitrust and also technology management. It is
defined as the sum of the squares of the market shares of the 50 largest firms (or summed over all the firms if there are fewer
33
insurers as of 2012, indicates increased competition and decrease in market power. This could have an
impact on technically sound catastrophe rates.
Based on gross written premiums, four insurance companies account for approximately 63 percent of
the non-life market. In 2012, the EFU General, Adamjee Insurance, Jubilee Insurance and NICL insurance
companies enjoyed approximately 63 percent of the total non-life market, NCIL is State owned. Of the
remaining 37 percent, 22 percent was shared by ten mid-size insurers, with the final 15 percent being
split across 25 small-size insurance companies. As a consequence the lower end of the non-life insurance
sector is considered over-competitive with aggressive pricing techniques and pressures on profitability
due to the intense commercial competition
Insurance of public assets: The state-owned NICL insurance company has a 12 percent non-life market
share, with the remaining 88 percent being covered by the remaining private insurers. The NICL nonlife market share has been relatively stable over the past five years as its core business is to insure public
assets of government and semi-government organizations (SECP, 2013). Private insurers occupy
approximately 88 percent of the market with three large insurers having a combined market share of 50
percent in 2012 (i.e. 44 percent of the total market share).
The Regulator: The Insurance Ordinance, 2000 law entrusted the responsibility of supervising
insurance business to Securities and Exchange Commission of Pakistan. I additio , the “ECP s
mandate has grown to include supervision and regulation of the insurance sector, non-banking finance
companies and private pensions. The SECP also provides oversight of various external service providers
to the corporate and financial sectors, including chartered accountants, credit rating agencies, corporate
secretaries, brokers, and insurance surveyors.
The Reinsurer: The majority 51%-state owned Pakistan Reinsurance Company Limited (PRCL) accounts
for approximately 20 percent of the total non-life reinsurance premiums written in 2012. The PRCL, the
only reinsurer in Pakistan, is listed on the Karachi Stock Exchange. However, the domestic insurers also
reinsure with international reinsurers directly or through reinsurance brokers. During 2012, premium of
over (approximately) US$0.28 billion, both in treaty and facultative contracts, was been remitted abroad
to foreign reinsurers which constitute approximately 49.5 percent of the total gross written premium of
non-life insurers, an increase from 37 percent in 2008. For example, from 2008 to 2012 Swiss Re alone
retained approximately, 20 per cent of the overall non-life business and no risk was retroceded. The
reinsurance treaties of Swiss Re in Pakistan normally cover fire & allied perils, business interruption
together with Natural Catastrophe perils.
To address undercapitalization of the market, “ECP alo g ith it s stakeholde s a e u e tl
deliberating a Risk-Based Capital (RBC) model where the minimum capital requirement would need to
be increased. By 2017, it is likely that the minimum capital requirements for non-life insurers would
increase from the current PKR 300 million to PKR 500 million. The solvency ratio of an insurer is the size
than 50) within the industry, where the market shares are expressed as fractions. The result is proportional to the average
market share, weighted by market share. As such, it can range from 0 to 1.0, moving from a huge number of very small firms to
a single monopolistic producer. Increases in the Herfindahl index generally indicate a decrease in competition and an increase
of market power, whereas decreases indicate the opposite.
34
of its premium written relative to the capital. In Pakistan, the solvency regime for the insurance industry
has also been recently revised in 2012 and prescribed under the SEC (Insurance) Rules, 2002. It is a
dynamic solvency regime whereby the assets admissible for the purpose of calculating the solvency of
an insurance company and their respective percentages have also been prescribed. SECP also licenses
and regulates the loss adjustors.
The reinsurance broker s perspective: Large international brokers encourage clients operating in
Pakistan to have appropriate catastrophe insurance covers. This is based on actuarial catastrophe
models, especially for small sized clients, as the large and medium sized ones usually buy the extended
coverage of earthquake and floods along with their fire policies. A small number of direct insurance
brokers exist in the market but very few have expanded from the commercial and corporate market into
serve the retail consumers.
Alternative Insurance Distribution channels: Pakista ’s icrofi a ce i dustry has atured a d
diversified over last 10 years. Although, there has been virtually no development of specific standalone
micro insurance market products in the last few years in Pakistan, Major Financing Banks (MFBs),
Microfinance Institutions (MFIs), multidimensional NGOs and more recently, the commercial banks and
telecom companies through the branchless banking platform have matured. The MFI product range has
also broadened to include products beyond the typical enterprise loan and now include insurance and
alternative credit products such as emergency loans, housing microfinance and remittances.
Bancassurance and mobile banking too are rapidly becoming the mode of choice for the delivery of
financial products, though Bancassurance is a growing and significant distribution channel; there exists
certain pressure due to high commission costs charged by the banks for providing this service. However,
Pakista s i ofi a e se to is ul e a le to fis al sho ks due to atu al disaste s. Discussions with
the MFBs, MFIs, and Pakistan Microfinance Network (PMN) revealed that the microfinance sector
suffered heavily in the floods of 2010 and the catastrophic rains in 2011. Consequently, many of the
microfinance institutions become reluctant to lend or work in areas that are disaster prone despite the
need for creating access to finance and poverty alleviation in these regions.
Private property catastrophe insurance
An analysis of natural catastrophe insured losses indicates there is severe underinsurance in Pakistan.
According to a survey conducted as part of this report, of participants in the Pakistan insurance market
the largest insured loss events were the 2010 floods, followed by the 2011 floods (Table 4.1). Anecdotal
evidences have strongly suggested that during many of the recent natural catastrophe events there was
significant underinsurance. Most properties and assets damaged by recent disasters were either
uninsured or not covered for the perils required.
35
Type of
Hazard
Year
Location
Sum
Insured
Gross
Premium
Net
Premium
Gross
Claims
Net
Claims
Retention
Ratio
Loss
Ratio
Earthquake
2005
Kashmir
107,066
470
377
16
16
80%
4%
Floods
2009
South
53,292
1,233
845
166
126
69%
15%
Floods
2010
South
775,761
2,118
1,071
3,342
303
51%
28%
Floods
2011
South
316,440
708
299
85
17
42%
6%
Floods
2012
South
20,458
46
23
12
5
49%
21%
Floods
2012
North
75,864
38
8
1
0
22%
3%
Table 4.1: Natural catastrophe insurance losses of the insurance industry in Pakistan (PKR in Million). For the policies
affected: Sum insured is the total sum insured by the insurance companies; Gross premium is the premium earned for the
sum insured on a gross basis; net premium is the premium earned for the sum insured on a net basis; Gross claims is the
total value of claims before insurance limitations such as deductibles and limits were applied; Net claims is the net value of
claims after insurance limitations such as deductibles and limits were applied. Retention ratio is net premium as a
percentage of Gross premium; and Loss ratio is net claims as a percentage of net premiums (Source: original research
findings for this report)
In Pakistan, catastrophe insurance cover is by default not included in a Fire policy but available as an
extension to a fire policy. However, this is subject to additional premium rates that cover against the
risks of earthquake (fire and shock) and atmospheric disturbances including flood and other extraneous
or additional perils. Catastrophe insurance coverage usually include buildings, machinery, business
interruption (BI), household contents, stocks, stock-in-process and other contents covered under the fire
insurance policy.
The earthquake and atmospheric disturbance are the most prominent catastrophic products available in
the market, as a bundled product, and the premium rates range from between 0.60 per mille to 1.20 per
mille per annum for both perils with various terms, conditions and deductibles being applied. These
rates are usually applied on the sum insured of the risk; however, in some cases it is written on the first
loss basis as well. Since, commercially available catastrophe risk models for Pakistan are limited24
pricing leading domestic insurance companies tend to be conservative. Moreover, as premium for
natural perils is charged as part of the total premium for a fire and allied peril policies, it is not possible
to assess the premium for national catastrophe covers itself.
NICL, the government-owned insurer has the exclusive mandate under law to provide insurance for
public assets. Section 166 of the Insurance Ordinance, 2000, defines the exclusive role of NICL vis-à-vis
insurance whereby it is required that all insurance business relating to any public property, or to any risk
or liability appertaining to any public property, shall be placed with NICL only and shall not be placed
with any other insurer. The classes being underwritten by NICL includes Fire, Marine, Engineering,
Aviation, Motor, Travel and Crop. Despite, being given this mandate, NICL has not initiated any specific
catastrophe insurance program for public assets (buildings, their contents, and national infrastructure).
As NICL has been entrusted with this specific mandate to insure the public sector property and risks, it is
imperative to review the retention capacity versus reinsurance figures of NICL. NICL s a e age ete tio
24
As of 2012, there is only a windstorm and earthquake model available from EQECAT Inc.
36
during last 3 years has remained around 50% which shows a reasonable risk appetite coupled with
strong backing by reinsurers.
Discussions with the leading insurers as well as the Regulator revealed that there is very limited
understanding of the catastrophe exposure in the domestic insurance market, mainly owing to the
lesser availability of risk mapping data, and therefore the rates charged might be below the level
required considering the earthquake, flood and tsunami exposures. The lack of discipline in the market
and competition is further restricting the required upward revision in premium rates. Further, in
Pakistan, no specific or standardized underwriting guidelines are available to the industry for the
underwriting of catastrophe risks.
The local insurers have shown their strong reservation on the implication of the 72 hours disaster
definition clause25 due to non-availability of the precise data, and it is practically very difficult to enforce
it. Applications of event limits also remain a major concern for the insurers. Some insurers report that
they conduct portfolio analyses to determine the expected distribution of losses from possible events
such as atmospheric disturbances or earthquakes based o
Catast ophe ‘isk E aluatio s a d
“ta da dizi g Ta get A u ulatio s C‘E“TA zo e statisti s. Ho e e , the e is o o siste t risk
zoning approach to classify risks.
The development of catastrophe insurance and reinsurance in Pakistan is currently being limited.
There is no technical awareness and visible appetite for new products as lesser knowledge and noninnovative thinking for catastrophe insurance products is limiting the development of this important line
of business.
With the exception of few larger insurers, generally the insurance companies do not fully understand
natural catastrophe insurance products, which in turn translate into lower awareness among the
consumers or potential policyholders. One consequence of this situation is underinsurance, which many
times is unintentional, as the policyholders are not aware of the possible coverage or (lack of), and need
a catastrophe insurance. One of the most critical, but prevalent, issues is the lower insurance density
(premium per capita) and penetration (premium per GDP) in the country, due mainly to lower
disposable incomes, education and awareness, religious factors and outreach of insurers.
25
An hour s clause is used by the re/insurance industry to define time period of a natural catastrophe event.
The hour s clause aggregates all losses occurred in a time frame (usually 72 hours) as a single event. This has
implications for deductibles, limits and per occurrence liability of policies.
37
Chapter 5: Options for a National Disaster Risk Financing Strategy
A comprehensive national disaster risk financing strategy should be designed to improve the capacity
of the GoP to access immediate financial resources in the event of a national disaster and to ensure
that required funds are efficiently delivered to beneficiaries, while maintaining the fiscal balance.
Seven options for a comprehensive disaster risk financing strategy in Pakistan are presented. Table 5.1
lists a summary of the options for consideration. These options follow the operational framework of: (i)
assess risk; (ii) arrange financial solutions; and (ii) deliver funds to beneficiaries.
Table 5.1. Options for a national disaster risk financing strategy in Pakistan.
Timeframe
Short term
Short term
Short term
Short/Medium term
Short/Medium term
Options for disaster risk financing
Develop a central database for disaster losses and expenditures to better
predict future financial costs of disasters
Operationalize the National and Provincial Disaster Management Funds
Clarify contingent liability associated with post-disaster cash transfer
programs and enhance financing sources behind the programs to ensure
efficient access to funds in the event of a disaster
Develop financial disaster risk assessment tools including development of
financial catastrophe risk models for MoF
Develop a national disaster risk financing strategy that proposes models for
improving financial response capacity to disasters
Medium term
Establish a robust catastrophe risk insurance program for public assets
Medium/Long term
Promote property catastrophe risk insurance for private dwellings
Option 1: Develop a central database for recording disaster losses and expenditures
A centralized database of historical budget expenditures and losses relating to disasters would
support a etter u dersta di g of the ou tr s fis al e posure to atural disasters. In Pakistan the
decentralized, reactive approach to financing disasters which differs province-to-province makes it
extremely difficult to perform a national analysis of the fiscal impact of natural catastrophes.
While this report has compiled a database of natural disaster occurrences since 1973, along with a
measure of their impacts (number of people affected), there is very limited data available on (i) the
actual economic costs of these events, (ii) the public expenditures spent financing these losses, and (iii)
the mechanisms through which these funds were allocated and directed towards post-disaster relief,
recovery and reconstruction activities.
A central database, where historical disaster budget expenditures and losses are compiled, would allow
the GoP to a al ze it s past fis al e posu e to atu al atast ophes a d this i fo atio
ould e
invaluable in helping to understand and predict the future financial costs of disasters to the state. A
development of technical capacity and necessary tools to quantify likely needs for disaster-related
38
expenditure would help the government to both: (i) determine appropriate allocations through the
budget; and (ii) to also explore and make informed proposals for possible sources of financing outside of
the budget. This information can also be used to help the government identify areas where clarification
of policy on types and extent of post-disaster spending may be necessary.
The key agencies for the establishment and maintenance of such a database would be the National
Disaster Management Authority, the Provincial Disaster Management Agencies and the Ministry of
Finance. The development of any such database would look to draw from existing budgetary and
disaster risk management structures and systems rather than to create a new isolated structure.
Option 2: Operationalize the National and Provincial Disaster Management Funds
The NDM Act of 2010 established a National Disaster Management Fund at the federal level and
Provincial Disaster Management Funds in each province; however all of these funds are yet to be
officially operationalized. Presently the main sources of post-disaster funding are contingency and
supplementary budget lines (for relief and recovery) and the annual public sector development program
(for reconstruction). The National and Provincial Disaster Management Funds could be used to
consolidate some of the currently disparate sources of financing for disaster-related expenditures.
Having dedicated funding structures in use could assist with tracking and reporting of post-disaster
spending, and could also help clarify the division of post-disaster responsibilities in advance of event
occurrence through a rules-based approach to access. Dedicated structures with emergency protocols
and clear rules for release of funds can also help improve speed of access to post-disaster financing for
implementing agencies.
There exists already a legislative basis and administrative structure for the NDMF and PDMFs. The next
steps to operationalize these funds would involve development of a sustainable plan for financing the
funds, and work with the relevant authorizing and implementing agencies to integrate the funds into
post-disaster processes. Any additional procedural or policy specification that may be required to make
the funds as efficient as possible could be determined through this exercise.
As regards a plan for financing, these funds could fund some portion of the low risk layers within a
national disaster risk financing strategy (see Option 2). Guided by the preliminary flood risk profiles
developed for this report, financing for disaster losses of between US$ 1.2 and 1.8 billion is required on
an annual basis. Similarly, in the case of Punjab, needs of between US$ 0.8 and 1.2 billion on an annual
basis have been identified through the preliminary flood risk analysis. Additional analyses would be
required for other perils and other provinces, but these figures give a ball-park estimate of the size of
disaster risk management funds required in Pakistan.
In México, the national Fund for Natural Disasters (FONDEN) was set up in 1996 to provide quick funds
following natural catastrophes. Some of the main benefits from the establishment of the fund include
clarification of division between Federal and State post-disaster responsibilities, the encouragement of
insurance purchase by public asset managers, commitment of entities to an audited rules-based
approach in the use of post-disaster disbursements, and the development of a linked financing structure
39
that leverages both public and private capital. For more information on this initiative see Box 5.1 and
also Annex 3.
Box 5.1: Mexican Natural Disaster Fund FONDEN
Despite developing an institutional approach to disasters, all levels of government in Mexico were still
regularly required to reallocate planed capital expenditures towards financing post-disaster reconstruction
efforts. Budget reallocations created delays and scaling back of investment programs, while also slowing
deployment of funds for recovery efforts.
In response, in 1994, legislation was passed to require federal, state and municipal assets to be privately
insured. In 1996, the government created the Fund for Natural Disasters in the Ministry of Finance
(FONDEN).
FONDEN is an instrument for the coordination of intergovernmental and inter-institutional entities to quickly
p o ide fu ds i espo se to atu al disaste s. FONDEN s ai pu pose is to p ovide immediate financial
support to federal agencies and local governments recovering from a disaster, and in particular for the: i)
provision of relief supplies; and, ii) financing for reconstruction of public infrastructure and low income
homes. FONDEN is also responsible for carrying out studies on risk management and contributing to the
design of risk transfer instruments See Annex 4 for additional details.
The FONDEN program has also been used by the Federal Government to promote financial discipline at all
levels. A rules-based approach, making access to FONDEN funds conditional on the purchase of insurance for
public assets is one mechanism through which the program seeks to instill financial discipline. Under these
rules, the FONDEN program will only fund up to 50 percent of the reconstruction cost for federal assets that
are not insured and that have received support in the past. For uninsured state assets, the figure is 25
percent. No support is available if the asset is damaged a third time, and remains uninsured. In contrast,
insured assets are eligible for FONDEN funding to cover 100 percent of reconstruction costs for federal assets
and 50 percent for local assets irrespective of past claims through the program. FONDEN also uses its
connection with the private insurance market to commit both the Federal and state governments to an
audited rules-based approach to post-disaster disbursements. An insurance contract is in place between the
program and the international markets, which is linked to loss reporting by state and federal entities covered
under the FONDEN program. Thus the reconstruction requests and implementation are subject to the
transparency standards of the international markets, in addition to the formal process of post-disaster
reconstruction reporting managed by the Ministry of the Interior (SEGOB.
Source: Fonden (2011)
Option 3: Clarify contingent liability associated with post-disaster cash transfer programs
and enhance financing sources behind the programs
The GoP manages cash transfer programs that provide rapid financial relief to vulnerable populations
in the aftermath of disasters. Cash transfer programs were designed in response to the 2005
earthquake, and the 2010 floods (at a national level), and to the large floods in 2011 and 2012 (at a
provincial level). In 2012, the GoP has developed a Disaster Response Action Plan for future cash
40
transfer based responses. The plan, approved by the Prime Minister, gives responsibility for early
recovery cash transfer support to the Cabinet Division, building on the 2010 flood response which was a
partnership between the federal and provincial governments and served as the blueprint for the 2011
and 2012 provincial programs. The plan provides clear mechanisms for administering future early
recovery cash transfer programs including using a combination of geographic and poverty targeting for
beneficiary identification with verification of eligible beneficiaries done by NADRA. However, to date this
plan, while approved, is not being implemented as planned at the federal level. At the provincial level
some efforts have been made, for example in Punjab where the Government is trying to put systems in
place for efficient cash transfer responses, building on their experience from their previous provincial
level cash-transfer responses to flooding disaster. These experiences could help with the set-up for a
systematic post-disaster safety net.
For the poverty based targeting of these cash transfers, the plan recommends utilizing the National
Poverty Registry (NPR) that covers almost the entire population of the country (more than 27 million
households) and facilitates different score cut offs to represent percentiles of the poorest population.
While the country also has a nationwide social safety net - the Benazir Income Support Programme
(BISP, see Box 5.2), that utilizes the NPR to identify its beneficiaries, the cut off for disaster recovery
benefits can be set depending on fiscal space and need – either above or below the cut off used to
identify BISP beneficiaries. Given the frequency of disasters (particularly floods) impacting Pakistan, and
the aggregate value of the transfer payments, such cash transfer recovery programs represent a
material and uncertain fiscal liability for the GoP. While the mechanics of the payment system function
well, there is not a clear understanding of the annual expected payments required from the program or
of the probable maximum payments. Furthermore, there is no financial strategy in place to ensure that
the requisite funds are available on a timely basis without requiring a reallocation of resources from
ongoing and planning government expenditures.
At present, the extent of liability varies with both the severity of the disaster, and available fiscal space.
Discussions could be held with GoP to determine whether the extent and size of cash transfers could be
explicitly defined, clarifying government responsibility in the case of a disaster size. Once the contingent
liability is defined, a risk financing strategy (including options such as reserves, contingent credit
instruments and insurance) could be developed to manage its volatility, and thus look to address the
issue of fiscal space.
In order to adequately plan for likely future demands from this program, the contingent liability needs
to be clearly quantified. A process to perform such quantification would require inputs from risk
assessment tools (informing likely frequency and intensity of natural hazard in Pakistan), retrospective
disaster impact analyses (informing the relationships between geography and intensity of disaster
events and the resulting cash payments), and explicit GoP policy on whether to respond with cash and
responsibility for fiscal liability and the amount of payments (tranches etc.).
Therefore, it could be valuable to explore whether the efficiency of the mechanism could be improved
through:
41
(i)
(ii)
(iii)
Increased understanding of the range of the annual liability that arises from the program;
Explicitly defining the liability as described above;
Developing a risk financing strategy to manage the financial cost of the liability.
Box 5.2: Benazir Income Support Program (BISP)
BISP was set up as an autonomous national Safety Net authority through an Act of the Parliament in 2010.
The program is currently targeting more than 7 million families through a Proxy Means Test based poverty
census. Keeping in view the available fiscal space and the benefit amount to be paid to the beneficiaries, the
program currently targets around 20% of the poorest. The objective of the program is to protect against
sharp rises in inflation and other financial shocks and to allow the opportunity to the poor to come out of
poverty through complementary graduation programs. The cash support is Rs 1,200 per month per family but
paid on quarterly basis (e.g. Rs. 3,600 per quarter). More than 80% of the disbursements are being made
through electronic means (mobile phone and Debit Cards) which allow beneficiaries the facility to draw
money through point of sales and ATMs. The program is also testing intermediate and long term graduation
optio s a gi g f o a Co ditio al Cash T a sfe P og a li ked to P i a Edu atio of the e efi ia ies
children, aiming at breaking the intergenerational poverty; to imparting skills and microcredit for livelihood
suppo t. BI“P s udget is ai l p o ided
GOP th ough its de elop e t udget
% a d the est of the
funds are provided through other sources such as DFID, the World Bank and the Asian Development Bank.
While there is no contingency allocation in this budget to cater specifically to any cash transfer for disaster
response the mechanism is geared to immediately add on any additional cash support to the existing
beneficiaries of BISP if required.
The completion of the Proxy Means Test for BISP resulted in a National Poverty Registry which other
programs are also using to target the poorest. To that end, the GoP approved a plan for the use of cash
transfers in response to future disasters using the poverty registry and geographic location for the initial
identification of emergency recovery cash transfer beneficiaries.
Option 4: Develop financial disaster risk assessment tools
The design of a comprehensive national disaster risk financing strategy begins with a detailed disaster
risk assessment. Presently neither the federal government, nor the provincial governments, performs
assessments of the likely budgetary impacts of natural catastrophes. Catastrophe risk modeling
techniques can complement the actuarial analysis of historical loss data to assess the financial and fiscal
exposure to natural disasters. Catastrophe risk models combine information on the underlying natural
perils (hazard), the assets at risk (exposure) and their potential damageability (vulnerability) to calculate
estimates of economic and fiscal risk (see Box 3.1 for more information).
Hazard modules for the major perils should be developed. In this report, an actuarial analysis of
historical fiscal impacts has been performed to generate preliminary fiscal disaster risk profiles for the
government of Pakistan and the province of Punjab for the peril of flood. These analyses alone were
42
possible due to the data available for flood events across the country and in Punjab. The lack of
historical data for other major perils (in particular earthquakes and tropical cyclones) means that hazard
models should be developed or acquired which will provide preliminary estimates of the frequency and
severity of these additional perils at the federal and provincial levels. Technical expertise residing within
national geoscience and academic entities can be leveraged to help develop specific hazard modules,
with World Bank guidance if required. At the time of writing, efforts are underway to address this
requirement for greater technical understanding of the natural hazards facing Pakistan. A National
Working Group (NWG) has been established, along with sub-Technical Working Groups (TWGs) on
seismic hazard, flood hazard, exposure, vulnerability and risk communication.
A national geo-referenced exposure database could be built. This dataset would include the locations
and attributes of public and private buildings, and infrastructure exposed to natural perils. The public
assets cataloged would include schools, hospitals, water and sanitation facilities, public buildings, roads
and bridges; while private dwellings could also be included, especially those identified as being an
implicit contingent liability to the GoP (i.e. the housing stock belonging to the lowest socio-economic
groups). Agricultural assets such as crops, and geo-referenced socio-economic data on households could
also be included to assess population needs and impacts on farmers. This database could support
immediate needs assessments post-disaster, and would also be used as an input to one or more
catastrophe risk models allowing the economic and fiscal impacts of natural disasters to be better
quantified. In addition, this information would be of great use for the insurance industry to allow it to
offer sustainable and affordable property catastrophe insurance products.
Financial decision-making tools could be developed for the MoF. A catastrophe risk model combining
analyses of flood, earthquake and tropical cyclone hazards could be the basis of financial decisionmaking tools to be used by the MoF. This model would include a financial model that would build on the
modeled losses of the catastrophe risk model and the historical losses. This tool could assist the MoF in
the design of the national disaster risk financing strategy, including the size of the annual budget
allocation to the National and Provincial Disaster Management Funds, the structuring of contingent
social safety net programs, and any disaster risk transfer strategy (such as insurance). Such a financial
model is currently being used by the MoF in México and is described in Box 5.3.
BOX 5.3: R-FONDEN – The financial catastrophe risk model of the Ministry of Finance of México
The Government of Mexico developed, for its national disaster fund FONDEN, a catastrophe risk model called
RFONDEN. This probabilistic risk model offers catastrophe risk analysis for four major perils (earthquake,
floods, tropical cyclones, and storm surge), for infrastructure in key sectors (education, health, roads, and
low-income housing) at the national level, state level and sub-state level. The analysis can be performed on a
scenario-basis or on a probabilistic basis.
R-FONDEN takes as input a detailed exposure database (including details of buildings, roads and other public
assets, and produces) as outputs risk metrics including AEL and PML.
This model is currently used by the Ministry of Finance, in combination with the actuarial analysis of historic
loss data, to monitor the disaster risk exposure of the portfolio of FONDEN and to design disaster risk
transfer strategies, such as the placement of indemnity-based reinsurance and the issuance of catastrophe
43
bonds.
For further information on the Mexican national disaster fund FONDEN see Annex 4.
By developing disaster risk models for the natural hazards impacting Pakistan, the GoP can help
stimulate the development of technical understanding in this field in the private sector. One of the key
highlights of Chapter 4 of this report is the low level of technical understanding in the (re)insurance
sector of Pakistan. Detailed hazard and exposure models developed by the GoP could be used to
improve the knowledge base in the private sector, which in turn could help to improve (i) the quality of
the insurance products offered by the market, (ii) portfolio optimization of the primary insurance
market, (iii) negotiations on reinsurance pricing and rating agency submissions of insurance companies
(ii) the overall level of market penetration of non-life insurance across Pakistan. All of these would help
to reduce the contingent liability on the GoP in the event of a natural disaster occurrence.
Option 5: Develop a national disaster risk financing strategy
A national disaster risk financing strategy could be developed by the Government of Pakistan with the
technical support of the World Bank which articulates how disaster losses will be financed at the
national, provincial, business and household levels. The strategy would articulate policy on postdisaster interventions for different beneficiary groups, and would also present a plan for financing
expected costs. A mix of financing mechanisms would be determined based on expected losses, applied
in a risk layering approach. This approach offers an optimal mix of risk retention (through
reserves/contingency budget and contingent credit lines) and risk transfer instruments, such as
insurance. See Annex 1 for further details and a comparative analysis of risk financing and risk transfer
products. Annex 7 describes an operational framework for implementing disaster risk financing and
insurance solutions.
Disaster risk layers could be financed through an optimal combination of financial instruments. Figure
5.1 shows the three tiered financial as described in the following text.
44
Figure 5.1: Bottom up approach to three-tier financial strategy against natural disasters. Source: Authors
The preliminary flood risk profiles conducted as part of this report indicates that the government faces
average costs of between US$ 1.2 and 1.826 billion every year. Furthermore, a major flood event
(occurring, on average, once every 100 years) could cost upwards of US$ 10 billion. Different financial
instruments will be suitable for financing the smaller, recurrent losses, and the large infrequent losses,
to which Pakistan is exposed. The contingent liability arising from establishment of any disaster-linked
social protection schemes should also be considered within the financing strategy.
For example, the National and Provincial Disaster Management Funds could be operationalized and
funded appropriately to deal with some part of the more frequent, smaller losses using grants from the
annual budget combined with external financing sources. For larger events which are not cost-efficient
to pre-fund, contingent instruments such as insurance and contingent credit become an effective tool. A
number of countries in Central and South America have used the Wo ld Ba k s o ti ge t edit
product – the Development Policy Loan with Catastrophe Deferred Drawdown Option – to access rapid
liquidity in the event of a disaster. The Government of the Philippines also used one of these facilities to
draw down $500 mn to respond to Tropical Storm Sendong which struck at the end of 2011.
Governments are also increasingly using risk transfer instruments, such as insurance, catastrophe bonds
and catastrophe derivatives to deal with infrequent large events. In these ases, the highe pe -dollar
pa out ost of isk t a sfe elati e to etai i g isk th ough ese es o
edit is e ited
the
substantial financial capacity they offer. For example, the Government of Mexico has transferred
catastrophic hurricane and earthquake risk to the international markets via a catastrophe bond, since
2006. The latest transaction in 2012 placed $315 mn of risk via a catastrophe bond.
Box 5.4: World Bank Development Policy Loan with Catastrophe Draw Down Option
The Development Policy Loan (DPL) with catastrophe deferred drawdown options (e.g. Cat DDO) offers a
source of immediate liquidity that can serve as bridge financing while other sources (e.g. concessional
funding, bilateral aid or reconstruction loans) are being mobilized after a natural disaster. Borrowers have
access to financing in amounts up to US$500 million or 0.25 percent of GDP (whichever is less). The Cat DDO
has a soft t igge , as opposed to a pa a et i t igge ; fu ds a e d a
do
upo the o u e ce of a
natural disaster resulting in the declaration of a state of emergency. See Annex 3 for additional details.
In summary, a otto -up disaster risk fi a i g approa h should e o sidered by the GoP. The GoP
should secure financing for recurrent events through risk retention (operationalization of national and
provincial reserves and/or contingent credit) and then deal with the higher risk layers by increasing its
level of financial resilience through the consideration of disaster risk transfer instruments.
26
This represents the annual expected national disaster loss from modelled perils only, and is included for
demonstration of rough magnitude of losses only
45
Option 6: Establish a robust catastrophe risk insurance program for public assets
Public assets such as schools and hospitals, and public infrastructure such as roads and bridges, can be
severely impacted by natural disasters. Cou t ies strategies for sourcing reconstruction financing will
vary depending on many factors including access to capital markets and the size of the event with
respect to the fiscal budget. For example, developed economies with easy access to the capital markets
may choose to self-insure as they can access additional financial capacity to bear the full cost of
recovery/reconstruction when a disaster strikes. Other countries may require by law that public assets
have catastrophe insurance against natural disasters. Even where catastrophe risk insurance is
compulsory, in practice, most public assets remain either uninsured or under-insured. This is in part
because the public managers are reluctant to spend part of their limited budget to pay insurance
premiums, and because they lack information required to select a cost-effective insurance coverage.
Public assets are required to be insured by law in Pakistan and NICL has the mandate to provide
insurance for public assets. However, it is not clear how comprehensive this coverage is and what the
uptake rate of insurance is by managers of public assets. Initial research suggests that public assets and
infrastructure are not comprehensively insured against catastrophic risks in Pakistan, although some
provinces/municipalities have recently insured specific, select public assets. This highlights the need for
a comprehensive database of public infrastructure. NICL could also make use of such a database to
determine the insurability of these assets. Initiatives by the NDMA, the World Bank and other agencies
to collate, share and synthesize geospatial information including property and infrastructure that could
potentially be affected by natural catastrophes could be very valuable for an insurance program of
public assets.
A catastrophe risk insurance program for public assets could be established in Pakistan to promote
disaster insurance of public assets in collaboration with the private insurance industry. Typically, this
program would aim to offer technical assistance to public entities in the design of their catastrophe
insurance coverage of public assets. Standardized terms and conditions for the property insurance
policies would be developed in collaboration with the private insurance industry that would assist public
managers in identifying their risk exposure and their insurance needs. The program could also structure
a national insurance portfolio of public assets to be then placed in the private (re)insurance market. A
national approach to insuring public assets would allow for economies of scale and diversification
benefits, and thus, lower reinsurance premiums.
In preparation of such a catastrophe risk program, a centralized database of public buildings, their
contents, and nationwide infrastructure could be developed (as part of the activity to develop a
national, geo-referenced database of national assets) as well as a database of current insurance policies
in-force27. Analysis of both will help identify current blind-spots and inefficiencies in the overall process
of insuring public assets. In additional to better understanding of inclusions and exclusions of policies
regarding natural catastrophe risk coverage by NICL, a detailed Dynamic Financial Analysis (DFA) of the
portfolio of risks insured by NICL would provide key information and insight regarding portfolio
optimization and evaluation of reinsurance structures.
27
Similar initiatives have recently been undertaken in Colombia and Peru.
46
Option 7: Promote property catastrophe insurance for private dwellings
The current penetration of residential catastrophe property insurance is very low in Pakistan. Less than
1% of the residential property stock is currently insured against natural disasters. This low penetration is
a direct result of the relatively poor development of the private non-life insurance market in Pakistan.
However, other factors such as affordability of families to purchase insurance and general aversion to
the concept of insurance also are key factors in the lower insurance penetration in Pakistan.
The GoP may want to promote catastrophe insurance for private residential properties. A developed
do esti p ope t atast ophe i su a e a ket ould edu e the GoP s i pli it o ti ge t e posu e
to major natural disasters. To help stimulate market development, the GoP could finance and distribute
exposure and loss models to private insurers. The government could also support information and
awareness campaigns.
Turke pro ides a i ter atio al ase stud of the de elop e t of a atio al ho eo ers
catastrophe insurance program. The Turkish Catastrophe Insurance Pool (TCIP) was established in 2000
to help address issues of market failure in the country, specifically a lack of local market earthquake
insurance capacity and lack of demand for policies. The World Bank provided technical and financial
assistance during the design stage of the TCIP to help model and rate the earthquake exposure as well
as making available a contingent loan in the start-up implementation stage to cover claims as part of the
risk financing program. A key feature of the coverage is that it is simple property, earthquake only,
policy that is provided at affordable rates. Given the very low voluntary demand by Turkish homeowners
for insurance, earthquake insurance was made compulsory for registered houses in urban centers. See
Box 5.5 for a short description of the TCIP program.
BOX 5.5. The Turkish Catastrophe Insurance Pool (TCIP)
The Turkish Catastrophe Insurance Pool (TCIP) is a public sector insurance company which is managed on
sound technical and commercial insurance principles. The TCIP purchases commercial reinsurance and the
Government of Turkey acts as a catastrophe reinsurer of last resort for claims arising from an earthquake
with a return period loss of greater than 300 years.
The TCIP policy is a standalone property earthquake policy with a maximum sum insured per policy of
US$65,000, an average premium rate of US$46, and a two percent of sum insured deductible. Premium rates
are based on construction types (two types) and property location (differentiating between five different
earthquake zones), and vary from less than 0.05 percent for a reinforced-concrete house in a low risk zone to
0.60 percent for a house located in the highest risk zone. Since its inception the TCIP has achieved a
penetration rate of approximately 20 percent, or three million domestic dwellings. See Annex 5 for additional
details.
Should the GoP decide to establish a private residential catastrophe insurance program, a number of
key decisions would have to be made, including whether:
to form a public sector catastrophe insurance fund (as in the case of Turkey) or to promote some
fo of oi su a e pool th ough the i ol e e t of the e isti g o -life commercial insurers.
47
to ake ho eo e s p ope t insurance compulsory or to market the coverage on a voluntary
basis. In the case of Turkey, the demand by homeowners for property insurance was very low due to
the lack of an insurance culture and it was deemed necessary to make coverage compulsory.
to bundle property catastrophe insurance with mortgages at least as an initial step for homeowners
or to keep it as a standalone coverage. Mortgage-linked catastrophe insurance could be made
compulsory; alternatively, coverage could be bundled with property taxes. Since mortgage coverage
usually extends over a longer time period, any short fall later on could be covered by the sufficient
capitalization of an insurance scheme
to target the product at urban property owners alone or to target all households. In Turkey,
earthquake insurance is only compulsory in urban areas. In Pakistan, much of the rural building
stock is unlikely to meet the minimum building standards required by local insurers and their
respective reinsurance markets.
to involve government in the program through public-private partnership. This could include the
provision of start-up funding (such as research and development costs) or early phase risk-bearing
capital.
Improved coverage of insurance supervision would be required to effectively promote catastrophe risk
coverage among private insurers. The quality of insurance supervision in Pakistan could be further
improved through the use of a risk- ased assess e t of i su e s ete tio apa it a d ei su a e
strategies based on catastrophe risk modeling and actuarial tools. To that effect, World Bank, First
Initiative and SECP have begun a project to harmonize the overall insurance legal and regulatory
framework and to incorporate risk-based supervision. Risk Based Capital offers guidance to insurance
companies to better manage risks. For example it requires an insurance company with a higher risk to
hold a larger amount of capital. There are also options for the market to adopt Dynamic Financial
Analysis (DFA) tools which complement actuarial models to further refine the commercial earthquake
p e iu ates a d to assess the i pa t of atu al disaste s o the i su e s po tfolio. A s o i g tool to
assess the ualit a d ade ua of the i su e s ei su a e st ategies ould also e de eloped.
48
Annexes
1.
2.
3.
4.
5.
6.
Historical Natural Disaster Database for Pakistan
World Bank Development Policy Loan with Catastrophe Deferred Drawdown Option
Mexican Natural Disaster Fund FONDEN
The Turkish Catastrophe Insurance Pool TCIP
Post-Disaster Operational Phases
Operational Framework for Implementing Disaster Risk Financing and Insurance Solutions
49
Annex 1. Historical Natural Disaster Database for Pakistan
A historical disaster database has been compiled of the natural disasters that have impacted Pakistan
since 1973. The historical disaster database data was constructed following a review of the available
data at the NDMA and PDMAs across all the provinces and regions in Pakistan. While this data was
available for the major disasters in the recent past, for older events, the records of the Provincial Relief
Commissioner housed in the Provincial Revenue Departments were reviewed and the data extracted
from the archives. The data collector met with the NDMA at the federal level while at the provincial
levels, meetings were held with the PDMAs, provincial finance departments and provincial revenue
departments. In some cases, records of the districts affected by various disasters were also analyzed to
validate the numbers available at the provincial and national levels.
Figure A1.1: Historical natural disaster impact database compiled for this report.
Event
Year
Month
Peril
Region
1
1973
-
Floods
Punjab
Population
affected
(trended to
2012)
12,752,422
2
1975
-
Floods
Punjab
4,848,593
3
1976
-
Floods
Punjab
16,453,384
4
1977
-
Floods
Punjab
1,461,504
5
1978
-
Floods
Punjab
3,967,616
6
1979
-
Floods
Punjab
96,313
7
1980
-
Floods
Punjab
9,859
8
1981
Mar
Windstorm/Tornado
Punjab
9,847
9
1981
-
Floods
Punjab
1,431,192
10
1982
-
Floods
Punjab
54,815
11
1983
-
Floods
Punjab
134,961
12
1984
-
Floods
Punjab
105,594
13
1985
-
Floods
Punjab
37,764
14
1986
-
Floods
Punjab
1,480,123
15
1988
-
Floods
Punjab
5,031,270
16
1989
-
Floods
Punjab
247,290
17
1990
-
Floods
Punjab
24,088
18
1991
Feb
Floods
Balochistan
19
1992
May
Earthquake
KPK
20
1992
Aug
Floods
Punjab, Sindh and AJK
1,087
13,764
6,755,409
50
21
1993
Mar
Avalanche
KPK
619
22
1993
Jul
Floods
Punjab
23
1993
Nov
Windstorm
Sindh
24
1994
May
Windstorm
Punjab
302
25
1994
-
Floods
Punjab
373,103
26
1994
-
Floods and Rains
Sindh
1,020,772
27
1995
-
Floods
Punjab and Sindh
3,088,514
28
1996
Aug
Floods
Punjab
1,786,433
29
1997
Jun
Windstorm
KPK
204
30
1997
Oct
Windstorm
Sindh
177
31
1997
-
Floods
Punjab
32
1997
-
Cyclone Makran
Balochistan
136,695
33
1998
Mar
Floods
Balochistan
36,221
34
1998
Aug
Windstorm
Punjab
842
35
1998
-
Floods
Punjab
1,529
36
1999
May
Cyclone
Sindh
37
1999
-
Floods
Punjab
322
38
2000
-
Floods
Punjab
890
39
2000
-
Drought
Balochistan
1,523,624
40
2001
Jan
Earthquake
Sindh
1,119,180
41
2001
Mar
Windstorm/Tornado
Punjab
34
42
2001
-
Drought
Punjab
10,293,468
43
2001
-
Floods
KPK
44
2002
May
Windstorm
Punjab
45
2002
Nov
Earthquake
GB
46
2002
-
Cyclone
Punjab
20,495
47
2002
-
Drought
Punjab
10,227,242
48
2003
Feb
Rains
Sindh
49
2003
Feb
Heavy Rains
Balochistan
50
2003
Feb
Heavy Rains
AJ&K
41
51
2003
Feb
Heavy Rains
KPK
220
52
2003
Jul
Rains
Balochistan
53
2003
-
Floods
Punjab
9,681
54
2003
-
Drought
Punjab
89,142
55
2003
-
Rains
Sindh
56
2004
Feb
Earthquake
KPK
57
2004
-
Drought
Punjab
58
2005
Feb
Snow Fall and Rains
KPK
400,677
6,285
2,850,899
776,162
1,129
216
104,378
10,999
4,481
283,721
1,030,318
45,463
884,203
3,468,126
51
59
2005
Feb
Snow Fall and Rains
Balochistan
60
2005
Feb
Snow Fall and Rains
AJ&K
61
2005
Jul
Floods
Punjab and KPK
62
2005
Oct
Earthquake
KPK and AJ&K
63
2005
Dec
Avalanche
KPK
64
2006
Jul
Monsoon
Sindh, KPK and AJ&K
65
2006
Sep
Floods
Punjab
66
2007
Mar
Land Slide
AJ&K
235
67
2007
Apr
Avalanche
Gilgit Baltistan
220
68
2007
Sep
Cyclone Yemyin
Sindh and Balochistan
69
2007
Nov
Floods
Punjab
70
2007
-
Heavy Rain
Sindh
318
71
2007
-
Cloudburst
KPK
379
72
2008
Sep
Floods
Punjab
120,621
73
2008
Oct
Earthquake
Balochistan
437,396
74
2008
Oct
Earthquake
KPK
75
2009
Feb
Earthquake
AJ&K
-
76
2009
May
Avalanche
AJ&K
175
77
2009
Jul
Heavy Rains
Balochistan
139
78
2009
Aug
Flash Floods
KPK
79
2009
Oct
Floods
Punjab
223
80
2010
Jan
Gilgit Baltistan
316
81
2010
Feb
Landslides and
Floods
Breach of Zalzal Lake
82
2010
Feb
Avalanche
KPK
83
2010
May
Floods
Gilgit Baltistan
84
2010
-
Cyclone
Sindh
85
2010
-
Floods
86
2011
Mar
Tornado
Punjab, Sindh, GB,
FATA, Balochistan and
AJ&K
Punjab
87
2011
Apr
Landslide
AJ&K
88
2011
Aug
Floods
89
2012
Feb
Avalanche
Punjab, Sindh and
Balochistan
AJ&K
90
2012
Mar
Avalanche
AJ&K
-
91
2012
Mar
Wind Storm
AJ&K
1
92
2012
Mar
Wind Storm
AJ&K
-
93
2012
Mar
Wind Storm
AJ&K
-
94
2012
Mar
Avalanche
AJ&K
35
AJ&K
80,923
118
423,005
4,046,147
189
2,133,403
342,119
2,377,813
5,762
74,576
3,285
14
3,832
13,711
72
19,094,527
62
1,348
9,642,812
97
52
95
2012
Mar
Avalanche
AJ&K
1
96
2012
Apr
Avalanche
Gilgit Baltistan
97
2012
Sep
Lightning
AJ&K
2
98
2012
Sep
Flash Flood
AJ&K
90
99
2012
Sep
Landslide
AJ&K
1
100
2012
Oct
Monsoon
AJ&K
451
101
2012
-
Floods
102
2012
-
Torrential Rain/Flood
Punjab, Sindh and
Balochistan
KPK
936
4,964,154
46,847
53
Annex 2. World Bank Development Policy Loan with Catastrophe
Deferred Drawdown Option
The Development Policy Loan with Catastrophe Deffered Drawdown Otion (Cat DDO) is a contingent
credit line that provides immediate liquidity to IBRD member countries in the aftermath of a natural
disaster. It is part of a broad spectrum of World Bank Group disaster risk financing instruments
available to assist borrowers in planning efficient responses to catastrophic events.
The Cat DDO helps de elop a ou t s apa it to a age the risk of natural disasters and should be
part of a broader preventive disaster risk management strategy. The Cat DDO complements existing
market-based disaster risk financing instruments such as insurance, catastrophe bonds, reserve funds,
etc.
In order to gain access to financing, the borrower must implement a disaster risk management
program, which the Bank will monitor on a periodic basis.
Key Features
The Cat DDO offers a source of immediate liquidity that can serve as bridge financing while other
sources (e.g. concessional funding, bilateral aid or reconstruction loans) are being mobilized after a
natural disaster. The Cat DDO ensures that the government will have immediate access to bridge
financing following a disaster, which is when a gover e t s post-disaster liquidity constraints are
highest.
Borrowers have access to financing in amounts up to US$500 million or 0.25 percent of GDP (whichever
is less . The Cat DDO has a soft t igge , as opposed to pa a et i t igge , hi h ea s that funds
become available for disbursement upon the occurrence of a natural disaster resulting in the
declaration of a state of emergency.
The Cat DDO has a revolving feature; amounts repaid during the drawdown period are available for
subsequent withdrawal. The three-year drawdown period may be renewed up to four times, for a total
maximum period of 15 years.
Pricing Considerations
The Cat DDO carries a LIBOR-based interest rate that is charged on disbursed and outstanding amounts.
The interest rate will be the prevailing rate for IBRD loans at time of drawdown. A front-end fee of 0.50
percent on the approved loan amount and a renewal fee of 0.25 percent also applies.
The Cat DDO provides an affordable source of contingent credit for governments to finance recurrent
losses caused by natural disasters. The expected net present value of the cost of the Cat DDO is
estimated to be at least 30 percent lower than the cost of insurance for medium risk layers (that is, a
disaster occurring once every three years). This ost sa i g a e e e highe he the ou t s
opportunity cost of capital is greater.
54
55
Major Terms and Conditions of the Catastrophe Risk Deferred Drawdown Option
Purpose
Eligibility
Pre-approval
criteria
Loan Currency
Drawdown
Repayment Terms
Lending Rate
Lending Rate
Spread
Front-End Fee
Renewal Fee
Currency
Conversions,
Interest Rate
Conversions, Caps,
Collars, Payment
Dates, Conversion
Fees, Prepayments
Other Features
To enhance/develop the capacity of borrowers to manage catastrophe risk.
To provide immediate liquidity to fill the budget gap after a natural disaster.
To safeguard on-going development programs.
All IBRD-eligible borrowers (upon meeting pre-approval criteria)
Appropriate macroeconomic policy framework.
The preparation or existence of a disaster risk management program.
EUR, JPY and USD.
Up to the full loan amount is available for disbursement at any time within three years from loan
signing. Drawdown period may be renewed up to a maximum of four extensions.
Must be determined upon commitment and may be modified upon drawdown within prevailing
maturity policy limits.
Like regular IBRD loans, the lending rate consists of a variable base rate plus a spread. The lending rate
is reset semi-annually, on each interest payment date, and applies to interest periods beginning on
those dates. The base rate is the value of the 6-Month LIBOR at the start of an interest period for
most currencies, or a recognized commercial bank floating rate reference for others.
The prevailing spread, either fixed or variable, for regular IBRD loans at time of each drawdown.
1. Fixed for the life of the loan: Consists of IBRD's projected funding cost margin relative to LIBOR,
plus IB‘D s o t a tual sp ead of 0.50%, a risk premium, a maturity premium for loans with average
maturities greater than 12 years, and a basis swap adjustment for non-USD loans.
2. Variable resets semi-annually: Consists of IBRD's average cost margin on related funding relative to
LIBO‘ plus IB‘D s o t a tual spread of 0.50% and a maturity premium for loans with average
maturities greater than 12 years. The variable spread is recalculated on January 1 and July 1 of each
year.
The calculation of the average maturity of DDOs begins at loan effectiveness for the determination of
the applicable maturity premium, but at withdrawal for the remaining components of the spread.
0.50% of the loan amount is due within 60 days of effectiveness date; may be financed out of loan
proceeds.
0.25% of the undisbursed balance
Same as regular IBRD loans.
Country Limit: Maximum size of 0.25% of GDP or the equivalent of US$500 million, whichever is
smaller. Limits for small states are considered on a case-by-case basis.
Revolving Features: Amounts repaid by the borrower are available for drawdown, provided that the
closing date has not expired.
Table A2.1: Major terms and conditions of the Catastrophe Risk Deferred Drawdown Option.
56
Annex 3. Mexican Natural Disaster Fund FONDEN
Mexico has a lo g histo of, a d oad e posu e to, atu al disaste s. Lo ated o the alo g the o ld s
fi e elt , he e
pe e t of the o ld s seis i a d ol a i a ti it takes pla e, Me i o is a
seismically active country. The country is also highly exposed to tropical storms and is located in one of
the few regions of the world that can be affected simultaneously by two independent cyclone regions,
the North Atlantic and the North Pacific.
To address its vulnerability to adverse natural events, Mexico has developed a comprehensive
institutional approach to natural disasters. The catalyst to comprehensive disaster risk management
was the Mexico City earthquake of 1985. The earthquake killed 6,000 people, injured 30,000 others and
left a total of 150,000 victims. Total direct losses exceeded US$4 billion.
Mexico established the National Civil Protection System (SINAPROC) in 1986 as the main mechanism for
interagency coordination of disaster efforts. SINAPROC is responsible for mitigating societal loss and
essential functions caused by disasters. Responsibility for SINAPROC lies with the Interior Ministry. Also
within the Ministry of the Interior, the National Center for Disaster Prevention (CENAPRED) was
established. CENAPRED is an institution that bridges the gap between academic researchers and
government by channeling research applications developed by university researchers to the Ministry of
the Interior.
The Fund for Natural Disasters (FONDEN)
Despite developing an institutional approach to disasters, all levels of government in Mexico were still
regularly required to reallocate planed capital expenditures towards financing post-disaster
reconstruction efforts. Budget reallocations created delays and scaling back of investment programs,
while also slowing deployment of funds for recovery efforts. In response, in 1994, legislation was passed
to require federal, state and municipal assets to be privately insured. In 1996, the government created
the Fund for Natural Disasters in the Ministry of Finance (FONDEN).
FONDEN is an instrument for the coordination of intergovernmental and inter-institutional entities to
ui kl p o ide fu ds i espo se to atu al disaste s. FONDEN s main purpose is to provide immediate
financial support to federal agencies and local governments recovering from a disaster, and in particular
for the: i) provision of relief supplies; and, ii) financing for reconstruction of public infrastructure and low
income homes. FONDEN is also responsible for carrying out studies on risk management and
contributing to the design of risk transfer instruments
Main Features of FONDEN
FONDEN was originally established as a budgetary tool to allocate funds on an annual basis to pay for
expected expenditures for disaster losses. In 1999, FONDEN was modified through the establishment
the FONDEN Trust Fund, a catastrophe reserve fund that accumulates the unspent disaster budget of
each year.
Financial support is directed towards public infrastructure and low-income households who, due to their
poverty status, require government assistance. The adverse natural events covered by the FONDEN
57
consist of geological perils including earthquake, volcanic eruption, tsunami, landslide and hydrological
perils including drought, hurricane, excess rainfall, hail storm, flood, tornado, wildfire.
The FONDEN is based on three complementary instruments, the Revolving Fund, the FONDEN Program
and the FONDEN Trust Fund. The first provides monies for disaster relief efforts, the second supports
e o st u tio of i f ast u tu e a d the thi d a ages Me i o s atast ophe isk fi a i g st ateg .
Revolving Fund: This fund finances emergency supplies to be provided in the aftermath of a
natural disaster, such as shelters, food, primary health care, etc. In the case of high probability
of a disaster, or imminent danger, the local governments can declare a situation of emergency
and obtain resources from FONDEN immediately. Doing so allows local governments to take
measures to prepare for immediate relief needs.
FONDEN Program: This program finances rehabilitation and reconstruction projects for public
infrastructure (owned by municipalities, state governments and federal governments), and the
restoration of natural areas and private dwellings of low-income households following a natural
disaster.
FONDEN Trust: This Trust Fund manages the assets of the FONDEN, including its risk transfer
strategy (reinsurance and/or alternative risk transfer instruments). The Federal FONDEN Trust
manages the financial resources provided by the Federal Government, including the annual
budget allocation. The State FONDEN Trusts, set up for each of the 32 states, manage the
financial resources received from the Federal FONDEN Trust after a natural disaster.
FONDEN Institutional Structure
Located within the Civil Protection unit of the Ministry of the Interior, FONDEN is a trust managed by
o e of Me i o s ai de elop e t a ks Ba o as . The st u tu e of FONDEN i ludes a ou te pa t
in each of the 32 Mexican states, including Mexico City, in order to facilitate the assignment and
management of federal transfers. The main advantage of this structure is the ability to provide
resources to state governments immediately, on average five days after the disaster.
The FONDEN Trust receives an annual allocation from the Ministry of Finance to develop and manage its
risk financing strategy. The risk is layered, with some tranches retained and others transferred through
various instruments. To transfer risk to the reinsurance markets for parametric coverage or the capital
markets for Cat bonds, the FONDEN Trust places excess risk first with the public insurer AGROASEMEX.
This entity passes on the risk to the markets.
Figure A3.1. Organizational Structure of FONDEN
Source: FONDEN (2010)
58
FONDEN Program
The purpose of this program is to provide financing to state and local governments that are
overwhelmed by the occurrence of a disaster. The assessment of losses to be co-financed by the
FONDEN is based on a specific procedure involving the local and federal authorities. This procedure
includes six main steps and should not exceed 23 days after occurrence of the disaster:
1. In the aftermath of a disaster, a specialized federal or state agency (e.g., meteorological
department, geosciences department) certifies the occurrence of a natural disaster and informs
the State Government;
2. Within 4 days after the occurrence of a disaster, the State Government sets up a technical
committee to identify and assess the damage caused by the natural disaster;
3. Within 10 days, the technical committee provides the State Government with a technical and
financial evaluation of the natural disaster;
4. Within 15 days, the State Government informs the Federal Government. The Ministry of
Interior issues a declaration of state of natural disaster. Meanwhile, the Ministry of Finance
authorizes the FONDEN to release early partial contribution to the State;
5. Within the following 2 days, the Ministry of Interior should: i) ensure that the requested
assistance is related to the natural disaster; ii) verify that the damaged infrastructure has not
benefited from the FONDEN in the past; if this is the case, the proof of insurance of the damage
infrastructure is requested; and iii) formally approve the co-financing of the reconstruction of
the damaged assets.
6. The claims are authorized to be financed by the FONDEN. In case of federal assets, the Federal
FONDEN Trust pays directly the contractor. In case of state of municipal assets, the Federal
FONDEN Trust transfers the funds to the State FONDEN Trust once the State Government has
transferred its contribution.
FONDEN Trust
The Federal Government aims to promote the private insurance of specific public assets owned by
Federal agencies and State Governments, thus reducing its financing dependence on the FONDEN in
case of a natural disaster. The Federal Government has empowered the FONDEN to develop a
catastrophe risk financing strategy, relying on private risk transfer instruments such as reinsurance and
catastrophe bonds. This helps the FONDEN to increase its financial independence and overcome some
political economy issues.
The financial structure of the FONDEN is depicted in Figure A3.2. The public bank Banogras acts as the
account manager of the FONDEN Trust. The public reinsurer Agroasemex intermediates any financial
transactions with the international reinsurance and capital markets.
59
Figure A3.2. Financial Structure of FONDEN
Pla e e t of
i su a e a d isk
t a sfe p odu ts
e.g., at o ds
Ag oase e
‘ei su a e/ apital
FONDEN T ust
Ma age e t of
the t ust
a ou t
Ba o as
a kets
Source: FONDEN 2010.
The FONDEN Disaster Risk Financing Strategy for 2011
The disaster risk financing strategy of the FONDEN relies on a combination of risk retention and risk
transfer. To execute this strategy, the FONDEN receives an annual budget allocation from the Federal
budget, which is sometimes complemented by an exceptional budget allocation in the case of a major
disaster. In order to purchase insurance coverage the Federal law was modified to allow the FONDEN to
transfer risk to the reinsurance and capital markets, with the insurance premium being defined as a
service in the government budget law. The transferring of risk to the reinsurance and capital markets
are intermediated by the public reinsurance company Agroasemex. Below, Figure A3.3 describes the
FONDEN s disaste isk fi a i g st ateg fo
.
Figure A3.3. FONDEN Disaster Risk Financing Strategy of the Federal Government in 2011
Note: The Mexico MultiCat bond covers only earthquakes in three zones and hurricanes in three zones.
60
To implement the risk financing strategy, the Federal budget includes a budget line of 0.4 percent of the
government expenditures for the financing of public assets and the FONDEN, which corresponds to
MXN10 billion in 2011. In case this annual budget allocation is insufficient, the FONDEN has the ability
to receive an exceptional budget allocation from the Federal government reserve funds (such as the oil
fund).
For the first time, in 2011, the FONDEN is placing an indemnity-based excess-of-loss (XL) reinsurance
treaty on the international reinsurance market. Reinsurance payouts are based on the losses reported
by the FONDEN that are borne by the Federal government (that is 100 percent of the damage to Federal
assets and 50 percent of the damage to state/municipal assets and low-income housing). The losses
reported to FONDEN include replacement costs (on average 75 percent of the total losses) and
improvement costs (on average 25 percent of the total losses). Only replacement losses are covered
under the reinsurance treaty. As of March 2011, the Federal Government is expecting to place a XL
reinsurance treaty of MXN 6 billion in excess of MXN 12.5 billion.
The FONDEN has also secured the protection of a catastrophe bond. In 2006, FONDEN issued a US$160
illio atast ophe o d CatMe to t a sfe Me i o s ea th uake risk to the international capital
markets. It was the first parametric cat bond issued by a sovereign entity. After the CatMex matured in
2009, Mexico decided to further diversify its coverage by pooling multiple risks in multiple regions. In
October 2009 with assistance from the World Bank, it issued a multi-peril cat bond using the World
Ba k s e l esta lished MultiCat P og a . The Fede al go e
e t issued a fou -tranche cat bond
(totaling US$290 million) with a three-year maturity, called MultiCat Mexico. It provides (binary)
parametric insurance to FONDEN against earthquake risk in three regions around Mexico City and
hurricanes on the Atlantic and Pacific coasts. The cat bond will repay the principal to investors unless an
earthquake or hurricane triggers a transfer of the funds to the Mexican government.
61
Annex 4. Turkish Catastrophe Insurance Pool
Bridging the contents of Europe and Asia, Turkey is highly exposed to severe earthquakes. Despite their
o
o o u e e, Tu ke s p i ate i surance market was previously unable to provide adequate
capacity for catastrophe property insurance against earthquake risk. Without adequate commercial
protection of residential buildings, the Government faced a significant contingent financial exposure in
post-disaster reconstruction of private property.
In the aftermath of the Marmara earthquake in 2000, in cooperation with the World Bank the
Government worked to limit its financial exposure to the residential housing market through the
establishment of the Turkish Catastrophe Insurance Pool (TCIP). The pool enables the Government of
Turkey to ensure that owners who pay property taxes on domestic dwellings can purchase affordable
a d ost effe ti e o e age. I doi g so, the go e
e t s o ti ge t fis al exposure to earthquakes is
decreased by the transferring of risk to the international reinsurance markets, which reduces pressure
to provide post disaster housing subsidies.
TCIP is a public sector insurance company which is managed on sound technical and commercial
insurance principles. The Pool operates as a genuine public-private partnership with most, if not all,
operational functions outsourced to the private sector. TCIP purchases commercial reinsurance and the
Government of Turkey acts as a catastrophe reinsurer of last resort for claims arising out of an
earthquake with a return period of greater than 300 years. The full capital risk requirements for TCIP
are funded by commercial reinsurance (currently in excess of US$1 billion) and its own surplus capital
(about US$0.5 billion).
The TCIP policy is a stand-alone property earthquake policy with a maximum sum insured per policy of
US$65,000, an average premium rate of US$46 and a 2 percent of sum insured deductible. Premium
rates are based on the construction type (2 types) and property location (differentiating between 5
earthquake risk zones) and vary from less that 0.05 percent for a concrete reinforced house in a low risk
zone to 0.60 percent for a house located in the highest risk zone.
The TCIP sold more than 3 million policies at market-based premium rates (i.e., 23 percent penetration)
in 2009, compared to 600,000 covered households when the pool was established. To achieve this level
of penetration, the government invested heavily in insurance awareness campaigns and made
earthquake insurance compulsory for home-owners on registered land in urban centers. The legal
framework for the program envisages compulsion enforcement mechanisms in urban settings, while
coverage is voluntary for homeowners in rural areas.
62
Figure A4.1 Operational Structure of the TCIP
63
Annex 5. The Post-Disaster Operational Phases
The role of disaster risk financing and insurance for the post-disaster operational phases is further
detailed in the paper: Financial Protection Against Disasters: An Operational Framework for Disaster Risk
Financing and Insurance (World Bank, 2014). A summary is provided below.
Emergency response/relief operations include emergency assistance provided to the affected
population to ensure basic needs, such as the need for shelters, food and medical attention. This is the
provision of emergency services and public assistance during or immediately after a disaster in order to
save lives, reduce health impacts, ensure public safety and meet the basic subsistence needs of the
people affected. This phase aims at stabilizing the society, with termination of further loss. Such costs
can be difficult to estimate ex-ante, as they depend on the specific characteristics of the catastrophic
event (location, intensity, time of the year (winter or summer), time of day (day or night), etc.), but are
relatively small compared to the subsequent recovery and reconstruction operations. While relief costs
are limited, they need to be financed in a matter of hours after a disaster event. The capacity of
governments to mobilize resources for relief operation at short notice should be a key component of its
risk financing strategy.
Recovery operations following the initial relief efforts are crucial to limit secondary losses and ensure
that reconstruction can start as soon as possible. They are the restoration and improvement, where
appropriate, of facilities, livelihoods and living conditions of disaster-affected communities, including
efforts to reduce disaster risk fa to s. That is, the so iet s fu tio s a e esto ed, su h as e-opening of
schools, businesses, etc, even if only in temporary shelters. They include, among other things, the
emergency restoration of lifeline infrastructure (e.g., water, electricity and key transportation lines), the
removal of debris, the financing of basic safety nets, and the provision of basis inputs (e.g., seeds,
fertilizers) to restart agricultural activities. It is also during this phase that engineering firms can be
mobilized to start the design of infrastructure works that will take place during the reconstruction
phase. Government may also have to subsidize the basic restoration of private dwellings, particularly for
low-income families, before the reconstruction phase starts.
Reconstruction operations generally center on the rehabilitation or replacement of assets damaged by a
disaster. They include repair and rebuilding of housing, industry, infrastructure and other physical and
social structures that comprise that community or society. These include public building and
infrastructure which are the direct responsibility of the state. National or local authorities generally have
to face obligations that go beyond their own assets. In most cases, government will have to subsidize
the reconstruction of private assets and, in particular, housing for low-income families who could not
otherwise afford to rebuild their homes.
Figure A5.1: The three
post-disaster phases.
64
65
Annex 6. Operational Framework for Implementing Disaster Risk
Financing and Insurance Solutions
The Disaster Risk Financing and Insurance (DRFI) Operational Framework developed by the World Bank
Disaster Risk Financing and Insurance Program seeks to provide governments engaging on financial
protection with a framework for the development and implementation of cost-effective, sustainable
DRFI solutions. This framework is laid out in the paper: Financial Protection Against Disasters: An
Operational Framework for Disaster Risk Financing and Insurance (World Bank, 2014). A summary of the
content in this document is provided in this Annex.
The structure of the DRFI operational framework has emerged through a long sustained dialogue and
many years working with governments and the private sector. It builds on more than 15 years of
intensive partnerships with more than 60 countries worldwide, in developing DRFI strategies and
addressing challenges at both the policy and technical level.
This framework aims to answer basic questions and challenges usually faced by governments when they
initiative or further improve their DRFI strategy. Experience has shown that a DRFI engagement is
usually triggered by two main entry points. Often governments are looking to implement a specific
product or financial instrument; here the challenge is to help policy makers situate this instrument in the
larger context of financial protection and disaster risk management. On the other hand, governments
may start from a particular development goal – such as protecting small farmers against drought or
ensuring access to immediate post disaster liquidity for central/local governments – in which case it is
necessary to identify the appropriate solutions. In both cases, the Operational DRFI Framework provides
governments with an initial orientation to start the relevant discussions with all stakeholders and gain
an understanding how the work might evolve over time. As a second step, it helps governments to
identify and prioritize policy options and the needed actions to implement these choices.
While the overall goal of DRFI - to increase the financial resilience of society to disasters – is common
across all countries, a government has many options to achieve this goal, depending on its
circumstances and timeframe. The Operational DRFI Framework helps governments and policy makers
identify and prioritize solutions appropriate for their country. Introducing a common language also
enables and strengthens the international cooperation often required between governments and their
partners, as well as amongst governments to exchange experiences and good practice. A structured,
consistent way of approaching disaster risk financing helps governments better identify and implement
their priorities, and enables international development partners and the private sector to better support
them in doing so.
The Operational Framework is not, however, a blueprint for action, meant to provide detailed guidance
on how to carry out each step. This requires sustained engagement and commitment of the countries
and their partners. Countries are diverse and so are their disaster risk financing and insurance needs and
solutions. Low-income countries constrained by a lack of capacity may not utilize financial instruments in
the same way that middle-income countries yield and fine-tune them. Small Island Developing States
subject to financial shocks that can reach multiples of GDP face different challenges than large middleincome countries trying to safeguard low-income populations against disasters.
66
The Operational DRFI Framework is presented in three components which should be seen as one
package and applied in an iterative way: (i) a decision tree for governments engaging in DRFI (Figure
A6.1); (ii) an overview of actions taken by governments to increase financial resilience of defined
beneficiaries (Figure A6.2); and (iii) illustrative examples from international experience (Figure A6.3).
The decision tree guides policy makers through a set of fundamental questions to guide the process of
identifying the appropriate policy, and de elopi g the e ui ed a tio s to i ple e t it. Go e
e ts
DRFI engagement can be seen in three main phases: Diagnostic, preparation and implementation. As a
first step governments need to identify and prioritize the problems they want to address. Second, policy
makers – in line with their priorities – need to define a set of solutions and develop a DRFI strategy.
Finally, to implement the strategy, the government needs to design and execute an action plan (Figure
A6.1).
Figure A6.1. Operational DRFI Framework: Decision tree for Government to engage in DRFI
Source: World Bank Disaster Risk Financing and Insurance Program
At each step of the decision process, policy makers can consult the second component of the
Operational DRFI Framework, the matrix of policy objectives and actions (Figure A6.2), to help answer
the questions and develop and implement the DRFI Strategy. The steps in the decision process are:
i.
Identify and prioritize overarching goals and beneficiaries of planned DRFI engagement (Column
in Matrix).
ii.
Carry out risk assessment to identify the impacts that are of concern and the problems driving
those impacts (Top row in Matrix).
iii.
Identify and prioritize sources of funds to mitigate financial impacts (Middle row in Matrix).
iv.
Identify delivery channels of those funds to beneficiaries (Bottom row in Matrix).
67
v.
At each step identify policy goals and actions needed, consolidate into a Strategy and Action
Plan, and begin implementation.
vi.
Monitor and evaluate implementation, refine policies and actions.
68
Figure A6.2. World Bank DRFI Program Operational Framework: Actions taken by Government for financial protection
Actions by Governments for
financial protection of the state
Beneficiaries
Government – National & Local
(Sovereign DRFI)
Actions
•
•
Assess Risks
•
•
•
Arrange Financial
Solutions
•
•
Deliver Funds to
Beneficiaries
Linkages to DRM
Actions by Government for financial protection of society
•
Collect and manage risk and loss data
Quantify potential disaster related losses
from fiscal and budget perspective
Assess potential post-disaster (short
term and long term) funding gaps
Develop Financial decision making tools
Develop national strategy for financial
protection
- Secure immediate liquidity for
budget support following disasters:
risk layering including reserves,
contingent credit, and catastrophe
risk transfer
- Secure longer term reconstruction
financing, e.g., insurance program
for public assets
Establish national disaster fund
Establish transparent, timely and
effective post disaster loss reporting
mechanisms
Establish post disaster budget execution
mechanisms to transfer funds from
national to subnational level and from
MoF to line ministries
Homeowners and SMEs
(Property Cat Risk Insurance)
Farmers and Herders
(Agricultural Insurance)
Low income population
(Social Protection)
•
•
•
•
•
Collect and manage risk and loss data
Quantify potential disaster related losses from property damage
Identify proportion of losses incurred by public and private stakeholders
Assess capacity of domestic insurance markets
•
•
Promote domestic demand for insurance
- Financial incentives through premium subsidies and/or tax breaks
- Compulsory vs voluntary schemes
- Awareness/education of consumers on insurance products
Develop domestic supply of insurance
- Assess legal and regulatory environment to allow private sector to
develop/test private insurance solutions while protecting consumers
- Risk data collection, management and sharing
- Product development (indemnity and index based)
- Insurance pools
•
•
•
Develop risk market infrastructure to support delivery channels
- Underwriting and claims settlement process
- Delivery channels through insurance agents
- Alternative delivery channels: Banks, micro-finance Intermediaries, input
providers, NGOs, etc.
Reduce Underlying Drivers of Risk
•
•
•
Collect and manage disaster risk
and loss/impact data
Quantify potential disaster related
losses on low-income population
Quantify fiscal impact of potential
disaster related losses through
social protection programs
Secure contingent funding for
social protection programs
against disasters
Complement/enhance social
protection programs with
insurance principles and marketbased products including use of
transparent for payouts
Improve beneficiary targeting and
assessing eligibility for postdisaster payouts
69
Finally, the third component of the Operational DRFI Framework presents illustrative examples of how
governments are implementing DRFI solutions (Figure A6.3). While this decision process is presented
sequentially, governments usually begin engagement in DRF in order to address an acute challenge. It is
important to develop a comprehensive strategy but governments need not put off implementation for
many years. Many actions can – and should – start immediately while a full diagnostic is carried out and
a strategy is developed.
70
Figure A6.3. World Bank DRFI Program Operational Framework: Illustrative examples of financial protection
Beneficiaries
Government - National & Subnational
(Sovereign DRFI)
Homeowners and SMEs
(Property Catastrophe Risk
Insurance)
Agricultural Producers and Herders
(Agricultural Insurance)
Low Income Population
(Social Protection)
The Government of Colombia included the assessment of
contingent liabilities from disasters in the government’s
fiscal risk management strategy.
In Mexico, R-FONDEN a probabilistic catastrophe risk
modeling tool, creates probabilistic simulations of
potential material and human losses from disasters.
Assess Risks
Morocco has developed a probabilistic catastrophe risk
modeling tool to assist the government in prioritizing
their risk mitigation investments.
The Philippines is developing a catastrophe risk model to
evaluate options for risk transfers and insurance to
reduce the fiscal burden of disasters.
The Pacific Risk Information System, under the Pacific
Catastrophe Risk Assessment and Financing Initiative,
includes a database of over 3.5 million geo-referenced
buildings and infrastructure in 15 Pacific Island Countries.
It was used to develop the Pacific catastrophe risk
insurance pilot.
Contingent lines of credit provide developing countries
with funds immediately following disasters. Products are
offered by the World Bank, IDB and JICA.
Arrange
Financial
Solutions
The first multi-country risk pool, the Caribbean
Catastrophe Risk Insurance Facility, established in
2007, offers 16 small island states countries over US$150
million in hurricane and earthquake coverage.
In 2006, Mexico transferred US$450 million of
earthquake risk to financial markets by combining the
world’s first government catastrophe cat bond Cat MEX
– US$160 million) and parametric reinsurance (US$290
million).
In Colombia, the government uses standardized terms
and conditions informed by international best practices to
purchase catastrophe insurance for its public buildings.
In Chinese Taipei, the Residential
Earthquake Insurance Fund (TREIF)
has developed an earthquake risk
model
to
strengthen
the
independence and professionalism of
its earthquake risk assessments.
The preparation of the Southeast
Europe and Caucasus Regional
Catastrophe
Risk
Insurance
Facility includes extensive multihazard country risk assessments for
climate and geological hazards.
The Turkish Catastrophe Insurance
Pool
(TCIP),
a public-private
partnership with the domestic
insurance
industry,
provides
compulsory, affordable earthquake
insurance to homeowners, increasing
catastrophe insurance coverage from
less than 3 percent to over 40 percent
of residential buildings in urban
areas.
The
Japanese
public-private
earthquake insurance program for
homeowners relies on the Japan
Earthquake Reinsurance Company
(JERC), an earthquake reinsurance
pool backed by the Government.
India has developed detailed agricultural risk
assessment tools to help policymakers to
better understand the economic consequences
of drought, quantify such impacts, and
investigate the impacts of risk coping
strategies, at both the farm and state levels.
In Mongolia, livestock census/surveys are
used to inform the government about the
economic and fiscal impact of adverse weather
events, and in the design and pricing of index
based livestock insurance policies.
The Index-Based Livestock Insurance Pilot in
Mongolia protects the livelihoods of 11,000
herders or 22 percent in piloted provinces in
2012.
India’s weather based crop insurance has been
in place since 2007 for 11 growing seasons,
with 11.6 million farmers and $370 million
covered in the most recent season. While the
national crop insurance program since 2010
offers more than 1.1 million farmers a total of
$67 million coverage in yield crop insurance.
In Morocco, the government and the
agricultural mutual insurance company have
established a crop insurance program for
cereals which currently covers 700,000 ha and
will soon be extended to fruit trees.
In the Philippines a survey is mapping
out the poorest communities, enabling
better targeting of social welfare support
to communities, including assistance
related to disaster risk.
The Productive Safety Net Programme
(PSNP) in Ethiopia is aimed at enabling
the rural poor facing chronic food
insecurity to resist shocks, create assets
and become food self-sufficient.
In 2011, reinsurance company MiCRO
(Microinsurance
Catastrophe
Risk
Organization) was established to provide
insurance coverage to women-owned
microenterprises in Haiti.
Insurance products of the Center for
Agriculture and Rural Development
Mutual Benefit Association (CARD MBA)
in the Philippines are mandatory for
members of a network of institutions
including CARD NGO and CARD Bank,
providing scale and preventing adverse
selection.
71
Deliver Funds
to
Beneficiaries
The Government of Mexico established a post-disaster
loss reporting mechanism managed by FONDEN.
Affected states can therefore access timely payments from
the Natural Disaster Fund (FONDEN), reducing timeconsuming coordination problems.
In the Cook Islands, the establishment of the Disaster
Emergency Trust Fund has served to reduce delays in
emergency response.
Linkages to
DRM
Mexico’s natural disaster fund FONDEN has evolved to
include financial accounts to finance investment in risk
reduction. It promotes informed decision by requiring
states to complete a risk assessment (including
development of a risk atlas) before being eligible for
financing for risk mitigation projects
As a public private partnership the
Turkish Catastrophe Insurance
Pool relies on the domestic insurance
market for the distribution and
claims settlement.
After setting up the TCIP, the
Government of Turkey legally
abolished its obligation to fund the
reconstruction
of
residential
dwellings following earthquakes,
strengthened building construction
codes, and enhanced supervision
thereof.
Distribution in the Moroccan multi-peril crop
insurance program takes place either by
linkage to loans made by Crédit Agricole or by
direct marketing of MAMDA, the sole provider
of agriculture insurance in the country,
structured as a mutual.
The national crop insurance program in India
uses GPS enabled mobile phones and video
recording technology to enhance crop cutting
experiments, improving the accuracy of claims
assessments while reducing fraudulent claims.
Claims settlement takes place through direct
payment to bank accounts.
HARITA was launched in Ethiopia in
2007 as a pilot program to address the
needs of small-scale farmers through
drought insurance, credit, and risk
reduction, allowing farmers to pay for
insurance through labor, an idea based on
food-for-work programs.
MiCRO’s coverage in Haiti is bundled
with loans from Fonkoze, the country’s
largest microfinance institution.
Members of PSNP households must
participate in productive activities that
will build more resilient livelihoods, such
as rehabilitating land and water
resources and developing community
infrastructure, including rural road
rehabilitation and building schools and
clinics.
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Source of Financing Post-Disaster
Governments have access to various sources of financing following a disaster. These sources can be
categorized as ex-post and ex-ante financing instruments. Ex-post instruments are sources that do not
require advance planning. This includes budget reallocation, domestic credit, external credit, tax
increase, and donor assistance. Ex-ante risk financing instruments require pro-active advance planning
and include reserves or calamity funds, budget contingencies, contingent debt facility and risk transfer
mechanisms. Risk transfer instruments are instruments through which risk is ceded to a third party, such
as traditional insurance and reinsurance, parametric insurance (where insurance payouts are triggered
by pre-defined parameters such as wind speed of a hurricane) and Alternative Risk Transfer (ART)
instruments such as catastrophe (CAT) bonds.
The analysis of the fiscal management of natural disasters in Indonesia has identified possible postdisaster resource gaps. This time-sensitive analysis supports the design of a cost-effective disaster risk
financing strategy, as different financial instruments are available at different periods after a disaster
(Figure A6.4).
Figure A6.4. Availability of Financial Instruments Over Time
Short term
Medium term
Long term
(1-3 months)
(3 to 9 months)
(over 9 months)
Ex-post financing
Contingency Budget
Donor assistance (relief)
Budget reallocation
Domestic credit
External credit
Donor assistance (reconstr.)
Tax increase
Ex-ante financing
Reserve fund
Contingent debt
Parametric insurance
Traditional insurance
Source: Ghesquiere and Mahul (2007)
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Among the ex post (post-disaster) financing tools, contingency budget is the first to be immediately
available after a disaster. Other ex-post financing tools usually take more time to mobilize and are
mainly available for the reconstruction phase. These include emergency recovery loans and postdisaster reconstruction loans from international financial institutions, such as the World Bank.
Ex ante financing instruments can provide immediate liquidity after a natural disaster. These
instruments are designed and implemented before a disaster occurs. These instruments include
national disaster reserve funds, contingent credit and insurance. Small but recurrent losses can be
retained through reserves and/or contingent credit. More severe but less frequent events, occurring for
example once every 7 years or more, can be transferred to the insurance or capital markets. Finally,
international post-disaster donor assistance plays a role after the occurrence of an extreme natural
disaster.
Catastrophe risk layering can be used to design a risk financing strategy (see Figure A6.5). Budget
contingencies together with reserves are the cheapest source of ex-ante risk financing and will
generally be used to cover the recurrent losses. Other sources of financing such as contingent credit,
emergency loans and possibly insurance should enter into play only once reserves and budget
contingencies are exhausted o a ot e a essed fast e ough. A
otto -up app oa h is
recommended: the government first secures funds for recurrent disaster events and then increases its
post-disaster financial capacity to finance less frequent but more severe events. The level of fiscal
resilience to natural disasters, which drives the optimal financial strategies against natural disasters, is a
decision to be taken by the government based on economic and social considerations.
Figure A6.5. Catastrophe risk layering
High severity
International Donor
Assistance
Insurance Linked
Securities
Insurance/Reinsurance
Contingent credit
Reserves
Low severity
Low frequency
Risk
Transfer
Risk
Retention
High frequency
Source: Authors from World Bank Disaster Risk Financing and Insurance Program framework.
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A comparative analysis of the ex ante risk financing and risk transfer instruments is provided in Table A6.1.
Table A6.1. Contingent financing instruments for natural disaster.
Product
Risk Transfer
Indemnity CAT
(Re)Insurance
Benefits
Parametric
(Re)Insurance
No moral hazard, and more transparent for risk-assuming
counterparty
Rapid disbursement of funds
Multi-annual protection may be feasible28
Less insurance market infrastructure required (e.g. claims
verification)
Works better in mature markets with solid local delivery
systems and insurance regulatory framework
Market focused on asset based approach (concepts of
interest for sovereigns like emergency relief, low income
housing, safety nets are considered usually non insurable)
Difficult to create investor confidence on potential moral
hazard when sovereign risk is involved
Up front premium
One year protection is the norm
Counterparty credit risk
Settlement of claims can take a long time
Basis risk
Extensive and high-quality data sets are required to model
the hazard and quantify probability of a loss to the contract
High up-front costs (including cost of product development
and premium)
Counterparty credit risk
CAT Bonds
Limited credit risk. Vehicle is fully collateralized, but collateral is
invested introducing some credit risk.29
Access to a broader source of funding (Capital Markets +
Insurance)
Basis risk for parametric and modeled loss CAT bond triggers
High up-front costs
I esto s appetite fo o l e lo p o a ilit e e ts a el
below 1 in 75 year triggering events)
28
29
No basis risk
Less technical work/investments involved in product design
(follow the fortune approach)
Technology transfer expertise from international markets being
replicated worldwide for decades
Less restriction of geography/peril for a specific contract
Lia ilit is t a sfe ed f o go t ala e sheet to fi a ial
markets
Costs/Risks/Constraints
Parametric insurance is a relatively new concept, demonstrated for example by the Caribbean Catastrophe Risk Insurance Facility (CCRIF) established in 2007. These covers are more bespoke,
and counterparties may be open to multi-year contracts such as that seen between Swiss Re and the Dominican Republic. The CCRIF paid out within 2 weeks of the devastating earthquake that
hit Haiti in 2010.
The Total Return Swap structure, and permitted asset rules for collateral investment, in widespread use prior to the financial crisis exposed a number of bonds to credit issues during the crisis
(largely due to the collapse of Lehman brothers). Since then, rules on permitted investments have tightened considerably and the current trend is to invest all proceeds in US Treasury Money
Market funds.
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CAT Derivatives
(ex. Industry Loss
Warranties)
Weather
Derivatives
Risk Financing
Contingent Credit
Multilaterals
(Ex. Cat DDO)
30
No moral hazard (depending on trigger type – indemnity trigger
cat bonds still present moral hazard)
Multi-annual protection (lock pricing for a period of 3 years
usually)
Variety in options for triggers (indemnity, modeled loss,
parametric and industry-loss linked products are possible)
Parametric and modeled loss triggers can disburse rapidly
Lia ilit is t a sfe ed f o go t ala e sheet to fi a ial
markets
Limited basis risk for large diversified portfolios of assets (settled
on third party industry loss indices or tailor made indices)
Attractive to risk-assuming counterparty as there is no moral
hazard, and product is easy to understand
Lia ilit is t a sfe ed f o go t ala e sheet to fi a ial
markets
Flexibility with regards to incorporate tailor made indices
Multi-annual protection available
Flexibility with regards to perils/geography of protection
Rapid payout
Lower costs
No basis risk (Use of softer triggers that a e li ked to go t
actions like Declaration of Disaster)
Flexibility on financial terms (including a longer term than any of
the other risk financing alternatives)
Funds are ring-fenced and are not at risk of depletion as a result
of political pressure for purposes other than disaster response
No counterparty credit risk (where the counterparty is the World
Limited geography/perils by transaction
Historically has traded above CAT Reinsurance for similar risk
layer
It is regulated as an investment security (not insurance) and
therefore the legal framework can be complicated for
sovereigns
Works only when there is a mature, credible methodology to
generate an aggregate industry loss estimation which is not
currently available outside of developed insurance markets30
Typically only annual protection is offered
Counterparty credit risk (depending on where trade occurs –
many contracts are negotiated directly between
counterparties)
Sufficient historic data and ground measurement tends to be
limited in LIC
Basis risk
High up-front costs
Counterparty credit risk
Fi a ial i pa t is etai ed i go t ala e sheet
Institutions like the World Bank have an absolute size limit of
0.25% of GDP, which is very limiting in LIC because the
potential impact of natural disasters can usually be
substantially higher
ILWs trade for US perils, European windstorm and to a lesser extent Japanese earthquake. Third party industry loss providers recognized and accepted by the market include US Property Claims
Services (PCS) and European companies (PERILS AG, Swiss Re Sigma, Munich NatCat services)
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Bank as per the Cat DDO)
Limited credit risk (fully funded vehicles)
Possibility to generate positive cost of carry (service of debt
repaid through the vehicle)
Multi-annual availability
Structured Risk Financing
Finite Risk
Can be used to combine risk retention (through reserving), risk
Contracts
financing and risk transfer elements into the program
Provides flexibility to include a wider spectrum of risks (from
lower to higher probability events) and flexibility in how much of
the risk is transferred versus retained
Can combine both soft and tighter parametric triggers
Multi-annual contracts (5 year terms are not uncommon)
Contract includes cancellable clauses
Structured
Financing
Vehicles
Basis risk (triggers/risks are usually limited on a similar
fashion as done in the CAT Bond space)
Fi a ial i pa t is etai ed i go t ala e sheet
These a e e t ge e atio i st u e ts i te ded to
complement existing risk retention and transfer strategies.
Therefore instruments are only suitable for institutions that
already have a sophisticated risk financing strategy in place,
and that have technical capacity to accurately assess their risk
in detail
Few countries have legislation in place to regulate these
instruments
Lack of supervision has led some financial intermediaries in
developed countries to use these tools to hide liabilities
Legal language is sophisticated
Source: World Bank Disaster Risk Financing and Insurance Program
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Annex 7. Examples of World Bank Initiatives to build Financial Resilience to Disasters
(taken from World Bank Disaster Risk Financing and Insurance Program review)
Sovereign Disaster Risk Financing and Insurance for middle-income countries
SECO Initiative supporting Colombia, Indonesia, Morocco, Peru, South Africa, Vietnam, Azerbaijan
Supported by the Swiss State Secretariat for Economic Affairs (SECO), a sovereign DRFI initiative through the World Bank-GFDRR Disaster Risk Financing and Insurance
Program (DRFIP) is supporting selected middle-income countries to strengthen financial resilience and protect fiscal balance. With the help of the program, Colombia, for
example, implemented international best practices insuring its investments worth US$38 billion in road infrastructure concessions.
Disaster risk financing and insurance for small island states
Pacific Catastrophe Risk Insurance Pilot
In response to requests from 15 countries, the World Bank, GFDRR, and other partners formed the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) in
2007 to help mitigate disaster and climate change risk. Under this initiative the countries worked together to implement the Pacific Catastrophe Risk Insurance Pilot, the first
parametric catastrophe risk transfer transaction in the Pacific region. In early 2014 Tonga was the first country to benefit from a payout (US$1.2 million) following cyclone Ian.
Developing large scale PPPs in agriculture insurance for smallholders
Kenya
The Government of Kenya (GoK) has confirmed its intention to develop and launch a large scale PPP in agricultural insurance, building on appraisal work finalized in 2014 with
the support of the World Bank-GFDRR DRFIP. This program will have two components: (i) an area-yield index insurance program linked to crop credit for small semicommercial and commercial maize and wheat growers, and; (ii) a livestock drought index insurance program for vulnerable pastoralists in four counties of northern Kenya.
Expected to start by October 2015, the program is expected to reach on average 140,000 producers over the first five years. GoK committed fiscal and human resources to the
program. The DRFIP is also supporting the government to consider the integration of these agricultural liabilities in an overall sovereign disaster risk financing and insurance
strategy.
Supporting enhancements to ongoing PPPs in agriculture insurance
India
Since 2006, the World Bank-GFDRR DRFI team has provided advisory services to the Government of India to move from a largely publicly implemented compensation scheme
for farmers towards a public private partnership in agricultural insurance. The initial scheme suffered from slow claims settlement, high basis risk due to challenges with data
collection, and unintended disincentives distorting agricultural production decisions. The World Bank GFDRR-DRFIP has worked with the relevant ministries and the public
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crop insurance company to provide technical and policy advice in support of transitioning towards a public private partnership. This has significantly reduced the basis risk,
claims settlement time, and improved actuarial risk pricing leading to more equitable subsidies distribution to farmers.
Improving insurance of public assets and insurance supervision in middle income countries
Philippines
In the Philippines the World Bank-GFDRR DRFIP is helping build capacity in local insurance markets through improving the insurance of local government assets. Working with
GSIS the state owned monopoly insurer for public assets the program will also help to introduce insurance policies based on international best practice, support access to
reinsurance at better terms, and improve risk information and risk based pricing. The project will also investigate the possibility of setting up a risk pool for homeowners and
small business, an initiative strongly backed by domestic insurance companies.
Developing Property Catastrophe Risk Insurance Markets
Countries: Albania, Macedonia, Montenegro, and Serbia, to be expanded to the whole SEEC region
South East Europe and Caucasus Catastrophe Risk Insurance Facility (SEEC CRIF):
SEEC CRIF is a catastrophe and weather-risk re-insurance program with the objective of increasing the number of homeowners, farmers, enterprises and government
organizations that are insured against weather-related risks and climate change. To implement the SEEC CRIF program, Europa Reinsurance Facility Ltd. (Europa RE), a nonprofit, government-owned organization, has been established as a specialized regional reinsurer. The Facility targets the entire SEEC region, but with an initial focus on the
Balkans and the Caucasus. The Program will continue to support the technical work for countries to join the facility and will work with the Bank and other donor partners to
finance country membership contributions.
Disaster Linked Social Protection
Kenya
The Hunger Safety Net Program (HSNP), implemented by the Government of Kenya with support from the UK DFID, provides unconditional cash transfers to chronically food
insecure households in the four poorest and most vulnerable counties in Kenya (Turkana, Marsabit, Mandera and Wajir). Under Phase 1 of the program, approximately
100,000 households throughout these counties receive regular bi-monthly payments to enable them to meet their daily consumption needs. In 2013 the program began
looking into adding a disaster linked component to the HSNP to enable rapid scale-up of transfers to a possible 400,000+ households during acute drought crises. Alongside
Social Protection colleagues, the World Bank-GFDRR DRFIP has been advising key counterparts in GoK on the key benefits, including more rapid response and increased
transparency, and investments required including insurable quality data, in order to use insurance principals to execute the scale up of the cash transfers.
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