UNDP makes case for ILS in Western Balkan disaster risk financing

The countries and territories of the Western Balkans region are highly vulnerable to the majority of natural catastrophe events, underlining the need for increased awareness of the capabilities of various sources of risk financing, including the catastrophe bond and insurance-linked securities (ILS) space.

International organisations, private sector companies and academia for countries and territories in the region recently participated in a workshop organised by the Climate and Disaster Team of UNDP Istanbul Regional Hub, UNDP Country Office in Bosnia and Herzegovina.

The Sub-Regional Workshop on Disaster Risk Reduction Financing was held on April 2^nd 2019, in Bosnia and Herzegovina, and explored disaster risk financing in the regions, in light of increasing costs when disaster does strike.

The Western Balkans region is highly susceptible to earthquake risk, but also flooding, landslides, mudslides, debris flows, avalanches, droughts, and extreme temperatures. Earthquakes are the most hazardous, and often result in secondary events that can be equally, if not more damaging and costly than the actual quake itself, such as landslides and mudslides.

The one-day workshop commenced with a talk from Jelka Milicevic, a representative of Bosnia and Herzegovina’s government, who expressed concern over both the high severity and frequency of disasters in the region, while at the same time praising industry participants for coming together to address the issue.

The day focused on numerous elements and avenues of the disaster risk finance landscape, including the case for resilience, transferring the risk, inclusive insurance, with the day ending with a group session focused on the development of a tailored approach for the sub-region for disaster risk finance.

Armen Grigoryan, Regional Cluster Leader – Climate Change/Disaster Resilience and Global Energy Policy Advisor, Crisis Response Unit, UNDP IRH, explained, “Parametric risk transfer avoids reallocation of government funds away from their intended usage; avoids refinancing at moment of disaster; does not negatively impact sovereign debt rating; available at scale. Risk financing is financing for development.”

Ultimately, it was agreed that countries want to do more and are eager to tackle the issue, with a desire to obtain the technical assistance that is needed to explore risk financing. The identification of hazards and quantification of risks was highlighted as a necessity, as was the need to develop robust risk models.

When disaster does strike, regions that lack insurance penetration, for both individuals and businesses, often suffer a hugely negative set back, both socially and economically.

The loss potential, in terms of finances and lives, is vast across the Western Balkan regions and territories, and when needed, international aid can be too slow and often inadequate, leaving governments, and ultimately taxpayers with the recovery bill.

Insurance, reinsurance, and ILS has the potential to play an important and meaningful role in the regions, and workshop participants explored the potential use of catastrophe bonds and ILS as a viable risk financing tool that works well in many other parts of the world.

Speakers noted that the region is attractive to ILS investors owing to its diversification benefits. Parametric trigger structures, which ensure rapid payout post-event, were suggested as preferential to indemnity structured deals for the region, but participants underlined the need for investor comfort.

However, with parametric protection being touted as the most suitable option, participants raised the potential need for legal amendments surrounding the use of parametric insurance.

Interestingly, it was also noted that a mix of financing options should be explored, so merging catastrophe bonds with loans, domestic budget and aid, for example. In other parts of the world that leverage the private markets to assist with their disaster risk needs, cat bonds are often used alongside more traditional forms of insurance and reinsurance, which serves to diversify the risk capital.

The cost of financing risk products is still high, but participants said that the cost of losses is higher, underlining the benefits of disaster risk financing over the long-term.

Kirill Savrassov, CEO of Bermudian company Phoenix CRetro and focused on parametric cat bond solutions for the ECIS region, said, “To my opinion use of parametric cat bonds seem to be the best solution for Western Balkans when it comes to fast access to post disaster financing needs. Moreover if country had sovereign bonds in its history they are not too complicated to adjust required legalities.”

The fact of the matter is that the region is always going to experience damaging and costly natural catastrophe events, and more needs to be done to both mitigate the impacts and build resilience, as well as being better prepared to recover post-event, without the need of international aid.

Before more meaningful and sustainable risk transfer solutions can play a role in closing the regions’ nat cat protection gaps, participants highlighted a need for more data and expertise to model risks, as well as the need for countries to have a very clear idea of exactly what they need disaster risk finance for.

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