Closing the Protection Gap – Issues and Initiatives Joaquim Levy Closing the Protection Gap
Be mindful of the future despite the blissful ignorance of the present. “Today is the good old times of tomorrow.” Karl Valentin (German actor, writer and comedian, 1882-1948) Joaquim Levy Closing the Protection Gap 2
The impact of extreme weather on poverty is more devastating than previously understood. Source: Hallegatte, Stephane, Vogt-Schilb, Adrien, Bangalore, Mook, and Julie Rozenberg , 2016, “Unbreakable: Building the Resilience of the Poor in the Face of Natural Disasters,” Climate Change and Development Series (Washington, D.C.: World Bank Group). Joaquim Levy Closing the Protection Gap 3
Disaster risk reduction goes hand in hand with poverty reduction. Source: Hallegatte, Stephane, Vogt-Schilb, Adrien, Bangalore, Mook, and Julie Rozenberg, 2016, “Unbreakable: Building the Resilience of the Poor in the Face of Natural Disasters,” Climate Change and Development Series (Washington, D.C.: World Bank Group). Joaquim Levy Closing the Protection Gap 4
Insurance coverage in most emerging market and developing countries remains stubbornly low. Only about 17 percent of people in low- and middle-income countries use financial savings and insurance (45 percent in high-income countries). Even lower penetration of catastrophe risk insurance (<5 percent), except countries where certain insurance is compulsory (Turkey). Households and firms have to bear most losses , esp. in countries with limited fiscal means for post-disaster recovery and reconstruction. Joaquim Levy Closing the Protection Gap 5
WBG has been a staunch advocate of inclusive insuranc e to close the “protection gap” … … not only stifles growth and limit lending opportunities but also makes it harder to implement projects that can benefit from World Bank assistance. World Bank’s dual goal of ending extreme poverty and raising shared prosperity only achievable if countries enhance their resilience to impact of natural disasters and climate risk. Insurance enhances post-disaster financial response capacity Mitigates immediate adverse impact and reduces poverty Long-term benefit on consumption/investment Free up fiscal space for counter-cyclical policies Joaquim Levy Closing the Protection Gap 6
We have developed financial products and advisory services to increase countries’ financial resilience to disasters. Characterized by a strong collaboration with private sector Build donor-funded risk-absorption capacity Mobilize private resources for innovative forms of risk- sharing Disaster Risk Finance and Insurance Program (DRFIP) is donor- funded and emblematic of joint efforts with the private sector Two important aspects of inclusive insurance : • Insurance as key part of recovery effort • Insurance principles promoting better risk management Joaquim Levy Closing the Protection Gap 7
Disaster Risk Financing and Insurance Program (DRFIP) comprises four main areas … Sovereign Disaster Risk Finance Market Development DRF for DRF for DRF for DRF for DRF for Property Cat Rapid Response Resilient Budget Agriculture Financing Insurance Livelihood Protection $ DRF Analytics for Financial Decision-Making DRF Knowledge Management and Global Partnerships Aim • Enhance efficiency from grant-making to executed activities • Move from top-down, parametric insurance coverage for sovereigns to indemnity-based retail distribution Joaquim Levy Closing the Protection Gap 8
Making our efforts more effective and sustainable … Recognition of two major constraints: Institutional impediments to greater sovereign participation Disincentives for investment in prevention/preparedness • Considerable moral hazard of fiscally-constrained governments Strengthen local advocacy and improve economic terms Educating governments and public alike about the benefits of ex ante risk management Regional risk pooling (e.g., Caribbean Catastrophe Risk Insurance Facility (CCRIF)) Joaquim Levy Closing the Protection Gap 9
Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC) First multi-country risk Post-disaster Expanded to countries pool based on parametric financial liquidity in Central America insurance for hurricanes, within 14 days; since through a partnership earthquakes and – since 2007, payouts with COSEFIN (April 2013 – excess rainfall. totaling approx. 2015). US$38 million to 8 members. By pooling catastrophe risks into a single diversified portfolio, countries’ premiums are about half of what it would cost if they were to purchase identical coverage individually from CCRIF. Joaquim Levy Closing the Protection Gap 10
More emphasis on ex ante financial planning to address incentive problems of governments in purchasing disaster risk insurance New contingent financing instruments allow countries to access post-disaster liquidity Loans with catastrophe draw-down option (CAT DDO) Capital-at-Risk Notes Program Pandemic Emergency Financing Facility (PEF) But sustainable expansion of insurance coverage requires indemnity-based, retail-focused insurance products. Joaquim Levy Closing the Protection Gap 11
But insurance is only one tool for financial protection … Insurance as part of a comprehensive and multi-faceted approach to enhance the resilience of countries Enhanced infrastructure helps countries be better prepared to prevent financial damages Particularly important when post-disaster losses have a social component (i.e., positive externality) that cannot be covered by insurance Joaquim Levy Closing the Protection Gap 12
We facilitate infrastructure investments supporting actions against climate change, especially in emerging markets. Lower gap between investor risk appetite and riskiness of infrastructure investment in developing economies. Help governments develop a favorable legal environment and prepare projects, thus, lowering existing informational hurdles → Global Infrastructure Facility (GIF) Make range of World Bank guarantees more understood and understandable; also for political risk (via MIGA), which often dominates investment decisions Expand “climate - smart” financial products (e.g., green bonds) Joaquim Levy Closing the Protection Gap 13
Thank you! Joaquim Levy Closing the Protection Gap
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