Climate Risk Adaptation and Insurance in the Caribbean Project - PowerPoint PPT Presentation

Climate Risk Adaptation and Insurance in the Caribbean Project (CRAIC II) Enhancing resilience to natural disasters through financial innovation and insurance at the microinsurance level…

Structure of Session Module 3 – Weather- Module 2 – Disaster Module 1 – Natural related Risk Financing Disasters and the Microinsurance and (Sovereign and Caribbean Landscape the Livelihood Microinsurance) Protection Policy Module 4 – Role of Module 5 – Social Stakeholders in the Protection and Public and Private Disaster Risk Sectors Reduction 2

CRAIC Project Partners ▪ MCII is a leading think tank and NGO on climate change adaptation, disaster risk management and financing, specialized in insurance-related solutions. We provide insurance-related expertise on climate change impacts and explore ways how to develop sustainable approaches for risk reduction in vulnerable countries. ▪ CCRIF is the world's first multi-country multi-peril risk pool based on parametric insurance and provides insurance to 19 Caribbean and 2 Central American governments. CCRIF allows countries to increase their financial response capacity in the aftermath of natural disasters by quickly providing short-term liquidity when a policy is triggered. CCRIF products are for tropical cyclones, earthquakes, excess rainfall and for the fisheries sector. ▪ The ILO’s Impact Insurance Facility is enabling the insurance sector, governments, and their partners to embrace impact insurance to reduce households’ vulnerability, promote stronger enterprises and facilitate better public policies. ▪ Munich Re is the world´s largest reinsurer and supporter of the Munich Climate Insurance Initiative (MCII). Munich Re contributes its expertise on product structuring and risk modelling, ▪ DHI supported the trigger design, risk modelling and satellite data monitoring for the microinsurance products under CRAIC. 14

Module 1: Natural Disasters and the Caribbean Landscape 4

Disasters have crippled Caribbean economies and budgets Higher fiscal deficits and $52 public debt ratios Challenges in key industries billion PART II C A R I B B E A N E C O N O M I C R E V I E W A N D Total damages to O U T L O O K Larger trade deficits the region from 148 disasters (1950 – 2014) Population migration

The economic costs of natural disasters have been significant Economic Costs of Storms in the region 2004 Ivan 1989 Hugo 200% 434% of Grenada’s of Montserrat’s GDP GDP 2017 Maria 2015 Erika 225% 96% of Dominica’s of Dominica’s GDP GDP Economic Costs of Storms in the region

Economic costs of natural disasters for Latin America and the Caribbean have increased dramatically over the past century… • The frequency of hazards and disasters is increasing • Mortality resulting from disasters seems to be decreasing • Economic costs of disasters are rising precipitously 7

In the Caribbean, adverse climatic conditions have affected over 1.5 million people directly and caused over USD 52 billion in total damage from 148 disasters over the last three decades from 1950 – 2014 2017 was yet another defining moment for the Caribbean after suffering the devastation caused by two category 5 hurricanes within 14 days of each other. Damage and loss due to these storms has been estimated at approximately US$130 billion and affected 18 countries, including CARICOM member countries

Some Other Examples – Caribbean and Central America Tropical cyclones in 2017 caused losses in the Caribbean estimated at US$93,455 million, the highest level ever reported Hurricane Ivan in 2004 had a devastating impact on Grenada causing damages valued in excess of 200% of the country’s GDP The average cumulative (1970-2002) damage of natural disasters in the Eastern Caribbean was equivalent to 66% of annual GDP The 7.0 magnitude earthquake in Haiti in 2010 caused over 300,000 deaths, displaced over three million people and made more than a million homeless Hurricane Mitch, a category 5 hurricane devastated Central America in November 1998. A United Nations report estimated that the destruction caused by Hurricane Mitch in Central America would set back development in this region by 20 years 9

The Impact of Natural Disasters in the Caribbean Vulnerability • According to Moody’s, the average annual damage from natural disasters over 1980-2015 was 1.5% of GDP in emerging markets vs. 0.3% of GDP in developed economies. The average share of affected population over the same period was Low Coverage 3.0% in emerging markets vs. 0.4% in developed economies. • Among the 20 most vulnerable countries globally, more than half represent small island states across Liquidity the Caribbean and Pacific Regions. These 20 countries bear average losses between 20.1% and 2.1% of their respective GDP every year. The countries in the Caribbean that are referenced include Belize, Jamaica, The Bahamas, St. Vincent Debt Burden and the Grenadines. • Immediate access to liquidity is critical for governments and individuals post disaster 10

A Note on Insurance Penetration in the Caribbean and Central America In developed countries, insurance and capital markets are widely used to hedge the immediate adverse impacts of natural disasters. According to MunichRe, more than 40% of the direct losses from natural disasters are insured in developed countries. Less than 10% of losses are covered by insurance in middle-income countries and less than 5% are covered in low-income countries. Climate risk insurance for individuals is mostly absent in the region, except for very few agricultural insurance schemes. 11

Climate Change and Disasters • Climate Change changes the magnitude and frequency of extreme events • Climate Change changes average climatic conditions and climate variability, affecting underlying risk factors • Climate Change generates new threats, which a region may have no experience in dealing with 12

Linking Fiscal Policies with DRM • Natural disasters and financial crises are typically exogenous events that represent covariate shocks across a country and households • Economic damages from natural hazards can jeopardize the health of national economies at a level comparable to or greater than that of financial crises • Natural disasters also destroy human and physical capital stocks of countries – something that financial crises do not 13

Including Disaster Risk in Fiscal Policy It is becoming increasingly While these commonplace for CCRIF has payments are governments to demonstrated relatively small consider the that disaster risk The Facility compared to the inclusion of insurance can quickly provides overwhelming financial liquidity disaster risk in effectively cost of rebuilding, fiscal policy as provide a level of when a country’s all recipient this provides an financial policy is triggered governments efficient way for protection for – providing have expressed countries to countries payouts within 14 appreciation for financially vulnerable to days after an the rapid infusion protect tropical cyclones, event. of liquidity, which themselves earthquakes and they are able to against events excess rainfall. use to address that cannot be immediate prevented. priorities. 14

Module 2: Ex-Ante and Ex-Post Risk Financing – Sovereign and Micro Levels 15

Disaster Risk Management Strategies Disaster risk management strategies include risk reduction by increasing investment in mitigation and prevention – commonly referred to as disaster preparedness – but also include a series of alternative instruments for loss financing – commonly referred to as risk financing instruments Risk Financing Instruments Ex-Post Ex-Ante Ex-post instruments are sources Ex-ante risk financing instruments that do not require advance require proactive advance planning planning. and really involves investing in These instruments include budget national catastrophe risk reallocation, domestic credit, management prior to a natural external credit, tax increase, and disaster occurring. donor assistance. Ex-post strategies provide emergency response, rescue and emergency relief services in the aftermath of natural disasters and really is an example of a pure public good. 16

After A Disaster: Sovereign Liquidity Gap Sovereign Liquidity Gap

Disaster Risk Financing Layering Approach Governments should build a financial protection strategy that combines a number of instruments that address different layers or types of risk. Such a strategy incorporates budget allocations and reserves, contingent credit, and risk transfer instruments. 18

Examples of Ex-Ante Financing Instruments Dedicated reserve fund Examples of Ex-Ante Instruments Contingent credit facility Traditional Insurance Catastrophe bond, other catastrophe-linked instruments / alternative risk transfer instrument 19