Innovation, engagement, risk transfer boosts disaster resilience: World Bank

by Artemis on August 25, 2016

The World Bank has again stressed the importance of innovative products from, and engagement with, the risk transfer industry, the World Bank’s message brings to mind the benefits of insurance-linked securities (ILS) structures.

World Bank logoHighlighting the need for widespread and effective disaster risk preparedness in order to strengthen global disaster resilience, the World Bank urges engagement with risk transfer markets in order to help stimulate innovation for new products and ensure access to efficient risk capital.

With climate change reportedly threatening to increase the frequency and severity of natural catastrophe events across the globe and the world’s insurance protection gap (difference between economic and insured losses post-event) seemingly widening, global organisations have placed disaster resilience at the forefront of international sustainability discussions.

In recent times, organisations such as the World Bank, the United Nations, international and local governmental departments, and a range of private sector entities have met to discuss the importance of risk transfer and re/insurance in building global resilience.

A recent article on the World Bank website again stresses the need for pre-crisis financial risk management in order to ease recovery post-event and, while it fails to mention specific features of the insurance-linked securities (ILS) space it’s important to note that common ILS and capital markets structures, such as catastrophe bonds and the parametric trigger, play an important role.

“The private sector is indispensible in helping countries and communities manage risk in advance of disasters. Private reinsurers and investment banks have innovative products that offer sovereign financial solutions to countries against natural hazards,” says the World Bank.

The undeniable truth is that natural catastrophe events such as hurricanes, earthquakes, tsunamis and so on, will occur year-after-year and, while the first-half of 2016 saw large events impact more developed parts of the world, emerging regions such as Asia often experience devastating events.

Numerous factors, including a lack of awareness and education, inadequate risk modelling and a reduced understanding of exposures, means that places like Asia that are highly susceptible to a range of catastrophe events often have some of the lowest insurance penetration rates globally.

This means that when a disaster strikes, emerging regions are often faced with high levels of economic losses of which only a small percentage is covered by insurance, resulting in heavy costs to local governments and the need for foreign aid, which can take time and sometimes be inadequate.

One way to reduce the need for foreign aid and ensure post-event finance is readily available as soon as disaster strikes, can be achieved with insurance solutions that are structured using a parametric trigger.

Instead of paying out based on the loss of the event, for example, a parametric trigger pays out when a predetermined event, such as a hurricane, passes through a pre-set zone at a pre-set intensity. As soon as the hurricane intensity, location and so on occurs, the product is triggered and funds can be dispersed to the country in need at a far faster rate than a more traditional insurance product.

The article highlights how catastrophe risk insurance pools are a good example of public-private partnerships, and ventures such as the African Risk Capacity (ARC), the CCRIF SPC, and the Turkish Catastrophe Insurance Pool (TCIP), are examples of successful risk pools.

Furthermore, the above-mentioned schemes utilises parametric insurance products, as they understand the need for member countries/regions to rapidly receive funds post-event in order to mitigate the potential impacts.

What’s more, catastrophe bonds, which are one of the main features of the ILS space, are utilised by the TCIP to diversify and strengthen its capabilities, as seen with its Bosphorus Ltd. (Series 2015-1) deal.

The World Bank stresses that in order for disaster resilience to improve many developing countries must improve local insurance laws grow local capacity and adopt a culture of risk management.

“However, to be truly effective globally, a strong partnership with the insurance industry can further strengthen countries’ resilience and reduce human vulnerability, while keeping hard-won development gains on track,” said the World Bank.

The World Bank continues to work with organisations around the world to create plans that promote sound financial planning and risk management before an event, and not just after it strikes.

The need for disaster resilience improvements throughout the world, but especially in emerging regions continues to be at the forefront of global sustainability discussions.

And while insurance and reinsurance solutions clearly have an important role to play, the innovative features and efficient capital markets backed capacity of the ILS space can too assist with the goals of the World Bank and others to strengthen resilience in the face of extreme and intensifying catastrophe events.

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