Disaster Risk Financing - OECD

ABBREVIATIONS AND ACRONYMSAbbreviations and SEANASFEarthquake and ensuing tsunami that struck Chile on 27 February 2010Chilean insurance association (Asociación de Aseguradores de Chile AG)Annual Average LossAsian Development BankPrime Ministry Disaster and Emergency Management Authority (Turkey)Australian Government Disaster Recovery PaymentAuthorized Institutions (Hong Kong, China)Agriculture Insurance Corporation of India Ltd.Asia-Pacific Economic Co-operationAustralian Prudential Regulatory AuthorityAfrica Risk CapacityAfrica RiskViewAssociation of Southeast Asian NationsPortuguese insurance and pensions supervisory authority(Autoridade de Supervisão de Seguros e Fundos de Pensões)AusAidAustralian Agency for International DevelopmentBCPBusiness Continuity Plan or Business Continuity PlanningBBKFederal Office of Civil Protection and Disaster Assistance(Bundesamt für Bevölkerungsschutz und Katastrophenhilfe) (Germany)BNHCRCBushfire and Natural Hazards Cooperative Research Centre (Australia)BNPBIndonesian disaster management agency(Badan Nasional Penanggulangan Bencana)CASENChilean national socioeconomic charateristics survey(Caracterización Socioeconómica Nacional)CAT-DDOCatastrophe Deferred Drawdown OptionCCRFrench public reinsurer (Caisse centrale de réassurance)CCRIFCaribbean Catastrophe Risk Insurance FacilityCCSSpanish public insurer (Consorcio de Compensación de Seguros)CDDCanadian Disaster DatabaseCEACalifornia Earthquake AuthorityCENAPRED Mexican disaster prevention centre (Centro Nacional de Prevención de Desastres)CENEPRED Peruvian disaster assessment, prevention and reduction centre(Centro Nacional de Estimación, Prevención y Reducción de Riesgos de Desastres)CNSFMexican national insurance and bond commission(Comisión Nacional de Seguros y Fianzas)CODISEItalian continuity of service working group (Continuità di Servizio)CONHAZCosts of Natural Hazards (European Union research project)DISASTER RISK FINANCING: A GLOBAL SURVEY OF PRACTICES AND CHALLENGES OECD 20157

ABBREVIATIONS AND ACRONYMSCONSOBCLIMBSCPICCRAICPCREDIFADCentre for Research on the Epidemiology of Disasters(Université catholique de Louvain, Belgium)Damage and Loss Assessment (methodology)Disaster Financial Assistance Arrangements (Canada)Department for International Development (United Kingdom)Disaster Recovery Allowance (Australia)Disaster Risk FinancingDisaster Risk ManagementDisaster Recovery PlanExtreme El Niño Insurance Product (Peru)Emergency Events Database (CRED)El Niño Southern OscillationEarthquake Protection Insurance Corporation of the PhilippinesEarthquake Commission (New Zealand)European UnionEuropa Reinsurance Facility LtdFood and Agriculture OrganisationFederal Emergency Management Agency (United States)Mexican natural disasters fund (Fondo de Desastres Naturales)Gross Domestic ProductGlobal Environment FacilityGlobal Earthquake ModelGlobal Facility for Disaster Risk ReductionGeographic Information SystemGerman technical co-operation agency(Gesellschaft für Internationale Zusammenarbeit)Global Disaster Identifier NumberGlobal Positioning SystemGovernment Service Insurance System (Philippines)Goods and Services TaxHorn of Africa Risk Transfer for AdaptationHong Kong ExchangeHong Kong Monetary AuthorityIndex Based Livestock Insurance Project (Mongolia)Icelandic Catastrophe InsuranceInstitute of Catastrophe Risk Management(Nanyang Technological University, Singapore)International Fund for Agriculture DevelopmentIGMEInaSAFEIRDAIWESpanish geological and mining institute (Instituto Geológico y Minero de España)Indonesia Scenario Assessment for EmergenciesInsurance Regulatory and Development Authority (India)Industry-wide CEQCEUEuropa HARITAHKExHKMAIBLIPICIICRM8Italian securities and exchange commission(Commissione Nazionale per le Società e la Borsa)Cooperative Life Insurance and Mutual Benefit Services (Philippines)Citizens Property Insurance Corporation (Florida, United States)Climate Risk Adaption and Insurance in the Caribbean ProgrammeDISASTER RISK FINANCING: A GLOBAL SURVEY OF PRACTICES AND CHALLENGES OECD 2015

ABBREVIATIONS AND ACRONYMSJERKNFLAPPLIIPLocalJapan Earthquake Reinsurance Co., LtdPolish financial supervisory authority (Komisja Nadzoru Finansowego)Local Authority Protection Programme disaster fund (New Zealand)Livestock Insurance Indemnity Pool (Mongolia)DRRM FundMASMCIIMINVUNAISNationalDRRM FundNCIFNDMCNDRRANDRRMCNEMANERAGNFIPNHTLocal Disaster Risk Reduction and Management Fund (Philippines)Monetary Authority of SingaporeMunich Climate Insurance InitiativeChilean housing and urbanism ministry (Ministerio de Vivienda y Urbanismo)National Agricultural Insurance Scheme LRBNZREDASSAFRRSBIFSDCSDRFSECOSEEC CRIFSIDASINAPROCSMESMNSSTNational Disaster Risk Reduction and Management Fund (Philippines)National Catastrophe Insurance Fund (Thailand)National Disaster Management Centre (South Africa)Natural Disaster Relief and Recovery Arrangements (Australia)National Disaster Risk Reduction and Management Council (Philippines)National Emergency Management Agency (Korea)National Emergency Risk Assessment Guidelines (Australia)National Flood Insurance Program (United States)Netherlands terrorism insurance facility (NederlandseHerverzekeringsmaatschappij voor Terrorismeschaden)National Oceanic and Atmospheric Administration (United States)Organisation for Economic Co-operation and DevelopmentOffice of Insurance Commission (Thailand)French national observatory for natural risks(Observatoire national des risques naturels)Pacific Catastrophe Risk Assessment and Financing InitiativeProvincial Disaster Management Centres (South Africa)Pacific Disaster Risk Financing and InsurancePhilippine Institute of Volcanology and SeismologyPacific Island EconomiesProbable Maximum LossReserve Bank of New ZealandRapid Earthquake Damage Assessment System (Philippines)Science Application for Risk Reduction (United States)Chilean bank and financial institution superintendent(Superintendencia de Bancos e Instituciones Financieras)Swiss Agency for Development and Co-operationState Disaster Response Fund (India)Swiss Secretariat for Economic AffairsSoutheast Europe and Caucasus Catastrophe Risk Insurance FacilitySwedish International Development Co-operation AgencyMexican national civil protection system (Sistema Nacional de Protección Civil)Small and Medium-sized EnterprisesMexican national meteorological service (Servicio Meteorológico Nacional)Sea Surface TemperaturesDISASTER RISK FINANCING: A GLOBAL SURVEY OF PRACTICES AND CHALLENGES OECD 20159

ABBREVIATIONS AND AUNFCCCUNISDRUSGSWBCISWFPWRSIWSLWTS10Chilean insurance and securities superintendent(Superintendencia de Valores y Seguros)Turkish Agriculture Insurance PoolTurkish Catastrophe Insurance PoolEarthquake Loss Estimation System (Chinese Taipei)Residential Earthquake Insurance Fund (Chinese Taipei)Residential Earthquake Insurance Program (Chinese Taipei)Mexican national autonomous university(Universidad Nacional Autónoma de México)United Nations Economic Commission for Latin America and the CaribbeanSpanish insurance and reinsurance association(Unión Española de Entidades Aseguradoras y Reaseguradoras)United Nations Framework Convention on Climate ChangeUnited Nations Office for Disaster ReductionUnited States Geological SurveyWeather Based Crop Insurance Schemes (India)World Food ProgrammeWater Requirement Satisfaction IndexSwiss Federal Institute for Forest, Snow and Landscape ResearchDutch calamities compensation act (Wet tegemoetkoming schade bij rampen)DISASTER RISK FINANCING: A GLOBAL SURVEY OF PRACTICES AND CHALLENGES OECD 2015

Disaster Risk FinancingA global survey of practices and challenges OECD 2015Executive summaryRecent years have seen a range of natural and man-made catastrophes affecting a largenumber of both developed and developing economies around the globe. These catastropheshave generated a broad range of direct and indirect impacts on all parts of society, includingloss of life and damage to public and private property and infrastructure as well as fiscalimpacts arising from recovery and reconstruction expenditures and decreased taxrevenues. In many economies, particularly low income economies, annual disaster lossesaccount for a significant share of Gross Domestic Product (GDP).Restoring livelihoods and rebuilding economic and social infrastructure requiressubstantial financial resources, necessitating the development financial strategies tomanage disaster risks. Disaster Risk Financing: A Global Survey of Practices and Challengesprovides an overview of the disaster risk assessment and financing practices of a broadrange of economies relative to the guidance elaborated in G20/OECD Framework for DisasterRisk Assessment and Risk Financing. Based on survey responses provided by 29 economies, aswell as research undertaken by the OECD and other international organisations, this reportprovides a global overview of the approaches that economies facing various levels ofdisaster risk and economic development have taken to managing the financial impacts ofnatural and man-made catastrophes.This report reviews the main components of a comprehensive strategy for thefinancial management of catastrophe risks. Disaster risk assessment and risk modellingprovide the necessary information on hazards, exposures and vulnerabilities to disasterrisks required for the development of disaster risk financing strategies. The elaboration ofrisk maps and collection of the necessary data on hazards, exposures, vulnerabilities andlosses is well advanced in many economies - often with the support of dedicated researchinstitutions and the private sector, particularly the insurance sector.Supporting comprehensive and affordable insurance coverage of disaster risks acrosseconomies with varying levels of insurance market development remains a challenge inmany economies. A number of economies have established various forms of public-privateco-operation to support the coverage of disaster risks involving varying levels of governmentintervention to support the disaster insurance market. In some economies, the focus ofgovernment intervention has been on risk mitigation measures that support the insurabilityof high-frequency or high-impact events by the private sector. In other economies, taxincentives, subsidies and/or various form of compulsion have been used as means to ensureadequate coverage. Building public awareness of disaster risks and the need to secure financialprotection against those risks is a key priority for many economies and is critical forproviding the level of demand for insurance that is necessary for the economic viability ofinsurance coverage for many types of risks.11

EXECUTIVE SUMMARYIn many economies, insurance or reinsurance is provided directly by governments tosupport coverage of specific catastrophe risks or a broad range of disaster risks. Indeveloping countries with limited insurance penetration (or a lack of insurance culture), anumber of innovative initiatives have been established to provide targeted coverage tovulnerable segments of society such as agricultural producers or small entrepreneurs.Where insurance coverage for disaster risks is limited, financial assistance andcompensation to individuals, business and/or local levels of government affected by largescale catastrophes is often provided by governments as a means to support recovery andrestore economic activity. Securing a fair, timely and efficient disbursement of financialassistance and compensation can provide the necessary financing to support economicrecovery.Catastrophes can also result in significant fiscal impacts, necessitating the use ofvarious risk financing and transfer tools as a means to manage those impacts. Governmentsare using a broad range of tools to manage their own exposures to disaster risks, includingreserve funds, contingent credit arrangements and insurance of public assets. A feweconomies are making use of risk transfer mechanisms, such as catastrophe bonds andinsurance for the management of fiscal risks.Surveyed economiesThe report benefitted from survey responses from 29 economies, including both OECDand APEC member economies as well as other economies: Australia; Belgium; BruneiDarussalam; Canada; Chile; China; Czech Republic; Germany; Hong Kong, China; Hungary;Iceland; Indonesia; Japan; Korea; Malaysia; Mexico; New Zealand; Peru; The Philippines;Poland; Portugal; Russian Federation; Singapore; South Africa; Switzerland; Chinese Taipei;Thailand; the United States; and Viet Nam.Key findingsA wide range of approaches to the financial management of disaster risks have beenimplemented across economies, reflecting differing levels of disaster risk and economicdevelopment. However, a number of common challenges were identified across economieswhich suggests the need for further investment in developing comprehensive approachesto disaster risk financing.Significant impediments remain to collecting and analysing the data on hazards and exposuresthat is necessary for the development of disaster risk financing strategiesThe technical and institutional capacity for risk assessment and modelling in manyeconomies needs to be strengthened in order to provide a comprehensive, co-ordinatedview of disaster risk across levels of government and segments of society.Improving the quality, consistency and availability of data on hazards, exposures,vulnerabilities and losses is critical for the functioning of disaster insurance markets.Regional and international harmonisation of definitions and methodologies couldsupport further international co-operation on the financial management of disasterrisk and improve access to international (re)insurance markets.Comprehensive coverage of disaster risks remains a challenge in many economiesEnhancing the financial capacity of insurance companies to cover disaster lossesrequires the establishment of a supportive legislative and regulatory framework.12DISASTER RISK FINANCING: A GLOBAL SURVEY OF PRACTICES AND CHALLENGES OECD 2015

EXECUTIVE SUMMARYPromoting awareness of the financial impacts of disasters and the need for insuranceprotection and investing in disaster risk prevention and risk reduction can makeimportant contributions to the insurability of disaster risks.Risk transfer tools to manage the fiscal impacts of disasters have been employed in only a feweconomiesThe complexity of financial instruments, such as catastrophe bonds and parametricinsurance products, as well as constraints on access to international insurance andcapital markets, have limited the broad use of risk transfer instruments bygovernments.Research into the potential benefits of international co-operation on the managementof fiscal exposures, including the use of regional risk pooling, is required to provide thenecessary analysis of the effectiveness of different approaches.The economies that provided input into this report identified a number of priorities foraddressing the challenges related to the development of effective strategies for thefinancial management of catastrophe risks, including the need to:Strengthen risk and financial vulnerability assessment in order to better understand theimpact of disasters (including interlinkages and interdependencies across economies),better target financial assistance and improve the cost-effectiveness of recoveryassistance;Promote awareness of the need for financial preparedness to manage disaster risks basedon a clear understanding of the allocation of responsibility for disaster costs;Encourage the development of disaster risk financing tools and markets, alongsideenhanced prevention of disaster risks; andEnhance technical and institutional capacities and co-ordination among domesticstakeholders involved in the management of disaster risks.DISASTER RISK FINANCING: A GLOBAL SURVEY OF PRACTICES AND CHALLENGES OECD 201513

Disaster Risk FinancingA global survey of practices and challenges OECD 2015Chapter 1Financial managementof disaster risksThis chapter provides an introduction to the financial implications of catastrophesand guidance available to support economies in their efforts to manage thosefinancial risks, including the OECD Recommendation on Good Practices forMitigating and Financing Catastrophic Risks and the G20/OECD MethodologicalFramework for Disaster Risk Assessment and Risk Financing. It also outlines thesignificant responsibilities of Finance Ministries in the financial management ofdisaster risks.15

1.FINANCIAL MANAGEMENT OF DISASTER RISKSRecent years have witnessed a concentration of disaster events causing major human,social, economic and financial impacts. Seven of the ten most costly disasters since 1980have occurred in the last decade including: the Great East Japan Earthquake in 2011 whichcaused USD (US dollar) 210 billion in overall losses and close to 16 000 fatalities; HurricaneKatrina in 2005 which caused USD 125 billion in losses and over 1 300 fatalities in theUnited States; and the 2008 Sichuan earthquake in the People’s Republic of China whichcaused USD 85 billion in damages and an estimated 84 000 fatalities (Munich Re, 2015).OECD and APEC economies are particularly vulnerable to the impacts of naturaldisasters. In 2014, six of the ten costliest disaster events of the year, measured by overalllosses, occurred in OECD and/or APEC economies. At the top of the list were the severewinter storms that affected Japan in February, causing USD 5.9 billion in overall losses.Severe winter conditions also led to USD 2.5 billion in damages in the United States andCanada in early 2014 while severe storms and hail imposed significant losses in the UnitedStates in May and France, Belgium, and Germany in June. The Ludian earthquake in Chinain August led to USD 5 billion in losses and over 600 fatalities while Typhoon Rammasuncaused USD 4.5 billion in overall losses and 195 fatalities across China, the Philippines andVietnam (Munich Re, 2014). In March 2015, the small island economy of Vanuatu wasdevastated by a category 5 tropical cyclone that impacted half of the population, while inApril 2015, Nepal suffered a devastating earthquake that caused damages equivalent toapproximately 25% of GDP.In view of the high economic costs incurred by many economies due to disasters in therecent past, as well as significant and growing risk exposures going forward (given theexpected impacts of climate change as well as the continued accumulation of assets indisaster-prone regions), strengthening financial resilience to disasters has become a policypriority in many economies – across emerging and less developed markets as well asdeveloped economies. The OECD has played a leadership role in supporting the developmentof strategies for the financial management of natural and man-made disaster risks, underthe guidance of the High-Level Advisory Board of the OECD International Network onFinancial Management of Large-scale Catastrophes and the Insurance and Private PensionsCommittee. This work has included the elaboration of an OECD Recommendation on GoodPractic

Disaster Risk Financing: A Global Survey of Practices and Challenges builds on this work by providing an overview of the disaster risk asse ssment and financing practi ces of a broad range of economies relative to the guidance elaborated in G20/OECD Framework for Disaster Risk Assessment and Risk Financing. This report is based on input .