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2018 DRR Financing 3.4 David Simmons

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Towards Resilience - Insuring Climate Risk

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2018 DRR Financing 3.4 David Simmons

  1. 1. Towards Resilience - Insuring Climate Risk David Simmons Managing Director, Capital, Science & Policy Practice, Willis Towers Watson UNDP DRR financing workshop Istanbul, Turkey, 4-5 October 2018 © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
  2. 2. willistowerswatson.com Catastrophe Insurance Moving Beyond Property Risk Caribbean Catastrophe Risk Insurance Facility ▪ Formed in 2007 in aftermath of Hurricane Ivan in 2004 ▪ Aid arrived but too little, too late ▪ CCRIF is an insurance company to allow countries to mutualise risk (capitalised by donors) ▪ Guarantees payment to countries for qualifying events within 14 days ▪ Geared up by reinsurance, CCRIF is safe against the worst year in 1000 modelled years ▪ Huge success in 2017 – but not big enough! African Risk Capacity ▪ Inspired by CCRIF, a mutual of African countries covering drought ▪ Again donor funded, paying far more quickly that tradition aid, save lives and livelihoods ▪ Includes specific capacity building ▪ Early warning software, Risk management process, contingency planning requirements ▪ Recent innovation: policy replication to insure post event efficiency NGO/government The Catastrophe Insurance market is strong: ▪ Big investment in science, modelling, risk/hazard understanding over 30 years ▪ We now have a problem – too much capital chasing too few traditional risks ▪ So catastrophe reinsurance has never been cheaper (despite climate change) ▪ Historically Catastrophe Insurance has focussed on property loss, but the scope is far wider, e.g. disaster response © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 2
  3. 3. willistowerswatson.com Cities / Sub-state Regions A scale for maximum climate risk impact and financial instability 3 Source: Swiss Re, 2015 Source: https://www.lloyds.com/cityriskindex/
  4. 4. willistowerswatson.com Cityspendingneedpermonth(PHP) Time Relief Early recovery Reconstruction Schematic showing an indicative pattern of spending, based on observations from several cities and international experience Requirement for Immediate post Disaster liquidity • < 2 months after a disaster • Humanitarian response • e.g. providing food, medicine, shelter • < 9 months after a disaster • Restoration of basic services • e.g. Re-starting transport, energy supplies, markets • > 4 months after a disaster • Reconstruction or rehabilitation of assets • e.g. Rebuilding infrastructure, homes, build back better PCDIP will provide valuable cash injection quickly after a catastrophe event, before indemnity insurance and/or aid funding arrives, enabling a fast effective disaster response
  5. 5. willistowerswatson.com Risk pooling City A Insurer City B City C City A Risk Pool City B City C
  6. 6. willistowerswatson.com Why does risk pooling reduce costs? Additive Reduces with more members Shared between members Price Expected Loss= Uncertainty+ Expenses+ Profit+ Retained by the pool
  7. 7. willistowerswatson.com Philippines City Disaster Insurance Pool (PCDIP) Cities themselves decide what cover they wish to buy Initially there are two hazards covered: ▪ Tropical cyclone (wind speed) ▪ Earthquake (ground shaking) Flood and excess rainfall will be added when modelling/data is available For each hazard cities can chose: ▪ The probability of events leading to minimum and maximum pay-outs ▪ The required amounts of those minimum and maximum pay-outs ▪ OR they can see how much cover a set level of premium would buy
  8. 8. willistowerswatson.com Tailoring to city-specific needs Note: Premium excludes Documentary Stamp Tax Annual premium Cost of the targeted insurance coverage Event severity How often the policy can be expected to pay, on average Minimum payout Minimum payout if the policy is triggered Insurance limit Maximum payout available under the policy Peril Earthquake and/or Tropical Cyclone
  9. 9. willistowerswatson.com TRIGGER INDEMNITY PARAMETRIC INDEX Speed of pay-out Transparency Cost effectiveness Basis risk Key benefits of parametric insurance FAST OBJECTIVE COST-EFFECTIVE
  10. 10. willistowerswatson.com Proposed Parametric structure – earthquake index Index = SANANGKA * WNANGKA + … + SATANONG * WTANONG Chosen parametric index trigger = 0.3gMarikina barangays NANGKA barangay TANONG barangay
  11. 11. willistowerswatson.com PCDIP Administrative and governance structure * * Discussions about the structure of the scheme are continuing with the Philippines Department of Finance, GSIS and the Insurance Commission
  12. 12. willistowerswatson.com Summary of key benefits of PCDIP ▪ The quantum of claim payment is known within days of event ▪ Payment is received shortly after SPEED OF PAYMENT ▪ Less reliance on central government / international generosity ▪ PCDIP pooling reduces exposure to re/insurance market price volatility BUDGET CERTAINTY ▪ A catalyst to improved risk understanding ▪ Supports risk- informed prioritization of disaster risk reduction actions RISK AWARENESS • Schemes can encourage development of detailed, audited contingency plans • Provides a forum for shared expertise, potentially for shared resources PREPAREDNESS
  13. 13. willistowerswatson.com Disaster Risk Insurance for the Poor Protecting the most vulnerable The poor may have least to lose in terms of assets but often are the worst hit in terms of loss of life, shelter and livelihood The poor are invariably uninsured and have limited capacity to pay premium Fiji Sub-bronze scheme ▪ Part of a programme to address market failure to cover sub-standard housing and the families living in them ▪ Bronze scheme: WTW working with Word Bank to define an insurance scheme to cover property not built to code ▪ Sub-bronze scheme: WTW working with IFC covering families in housing with no insurable value, aim for launch on 1st November 2018 ▪ Payments made if a tropical cyclone hits their province: payment increases for winds of categories 3, 4 and 5 by local scale Philippines Catastrophe Insurance Pool (PCIP) ▪ WTW has been working to design a domestic property/SME scheme inspired by the Turkish TCIP scheme, PCIP ▪ Recent political pressure has been to add an insurance for the poor element, work progresses on renamed PCRIP scheme R4 Crop Insurance Scheme ▪ WTW working with World Food Program in Ethiopia to design and protect an insurance scheme to cover small scale farmers ▪ Scheme aims to link insurance to improvements in farming practice and inputs: increasing resilience and prosperity ▪ Includes innovative “work for premium” feature 13 © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
  14. 14. willistowerswatson.com Conservation and Disaster Risk Reduction Insurance: Incentivising sustainable behavior ▪ Insurance premiums are fundamentally risk responsive, i.e. the financial mechanism that rewards investments in resilience ▪ Risk-sensitive financial tools provide funding for recovery after an event and also incentivise the development of contingency plans that wrap around risk transfer solutions ▪ Risk transfer can also create incentives to reduce risk by rewarding investments to mitigate risks through reduced insurance cost, retained market value, and maintained access and use. ▪ Valuing natural capital infrastructure in monetary terms (e.g. as compared to grey infrastructure providing equivalent coastal protection) is critical first step to having protective qualities reflected in insurance pricing ▪ If models are responsive, pricing is responsive ▪ Insurance as reward ▪ E.g. COAST – parametric insurance product within the structure of CCRIF SPC promoting resilience of Caribbean coastal communities and fisheries against natural disaster risk ▪ This type of insurance would protect stakeholders against risk factors they cannot control as a ‘reward’ for agreements regarding those they can control, e.g. fisheries management, pollution, and conservation activities. ▪ Disaster Risk Reduction (or ‘building back better’) written into contingency plans 14 © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
  15. 15. willistowerswatson.com Resilience Bond: Project Finance + Risk Transfer Leverage Local Capacities & Authorities Simultaneously understand risk, reduce it, and build long-term resilience. Fund the full range of possible mitigation projects, for example: ▪ Single infrastructure asset ▪ Larger-scale flood defences ▪ Watershed-scale projects that may combine multiple structural and non-structural actions to reduce risk and insurance cost All with protection in the event of a triggering event, e.g. tropical cyclone, with risk-sensitive pricing © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 15
  16. 16. willistowerswatson.com Local Private Sector Opportunities Insurers ▪ Act as a fronting company for international markets, but as become more comfortable with risk, then retain more ▪ If a national catastrophe risk pool is created, manage/administrate/provide services to that pool ▪ Provide quota share capacity to the pool (eg Taiwan) ▪ Add additional cover to wrap around the base protection provided by a governmental pool (eg New Zealand) ▪ Use modelling and/or exposure data created by a national exercise to develop new products ▪ eg if government commissions open source catastrophe modelling for a scheme covering government assets could a local insurers offer cover to household, individuals and/or companies using this new modelling (eg ARC licence for development?) Service Providers ▪ Legal, accounting, loss adjusting etc services to new pool companies/schemes ▪ Captive/SPV services ▪ Modelling/data collection opportunities (eg PCDIP) ▪ Broaden and deepen existing insurance and insurance related services, creating a recognised regional insurance hub © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 16
  17. 17. willistowerswatson.com Insurance Development Forum (IDF) Providing practical advice and support to governments to increase resileince The IDF is a collaboration of leading global insurers, brokers and trade associations, together with UN agencies (lead by UNDP) and the World Bank, with representation from leading donors The aim is to: ▪ Share the knowledge in risk analysis and risk modelling developed in the industry over the last 30 years to governments ▪ Help governments identify where risk transfer would be appropriate and practical ▪ Identify the appropriate means to manage/transfer this risk (which may not be insurance) ▪ Identify the potential barriers to a cost effective scheme being implemented (eg data, modelling, legal, regulation, capacity) ▪ Agree strategies to close/eliminate thee gaps ▪ Support scheme implementation The IDF is working closely with donors: ▪ With the UK government’s recently launched Centre for Global Disaster Protection which has similar aims ▪ With the German government InsuResilience Solutions Fund; providing technical assistanne funding for such projects © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 17
  18. 18. willistowerswatson.com Summary Insuring climate risk ▪ Protects lives ▪ Protects livelihoods ▪ Protects property ▪ Protects profits and jobs ▪ Increases the speed of economic recovery ▪ Increases food security ▪ Builds risk awareness in government, commerce and broader society ▪ Incentivises risk reductive behaviour ▪ Values natural infrastructure and provides a framework to protect it ▪ Encourages the development of a mature, risk responsive insurance sector ▪ Encourages overseas investment in infrastructure by de-risking investment ▪ Encourages development of a thriving centre of insurance related expertise Everybody wins © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 18
  19. 19. willistowerswatson.com 19 About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW ) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 40,000 employees in more than 140 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com. © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only.
  20. 20. willistowerswatson.com Willis Towers Watson Securities Disclaimer Willis Towers Watson Securities (“WTW Securities”) is a trade name used by Willis Securities, Inc., a licensed broker dealer authorized and regulated by FINRA and a member of SIPC (“WSI”), Willis Capital Markets & Advisory Limited (Registered number 2908053 and ARBN number 604 264 557), an investment business authorized and regulated by the UK Financial Conduct Authority and exempt from the requirement to hold an Australian Financial Services License under ASIC Class Order [03/1099] (“WCMAL”) and Willis Capital Markets & Advisory (Hong Kong) Limited, a corporation licensed and regulated by the Hong Kong Securities and Futures Commission (“WCMAL (HK)”). Each of WSI, WCMAL and WCMAL (HK) are Willis Towers Watson companies. Securities products and services are offered through WSI, WCMAL and WCMAL (HK). Reinsurance products are placed through Willis Re Inc. in the United States and through Willis Limited in the UK, both also Willis Towers Watson companies. These materials have been prepared by WTW Securities based upon information from public or other sources. WTW Securities assumes no responsibility for independent investigation or verification of such information and has relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance, WTW Securities has assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates. No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. The information contained herein is not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. WTW Securities is not providing any advice on tax, legal or accounting matters and the recipient should seek the advice of its own professional advisors for such matters. Nothing in this communication constitutes an offer or solicitation to sell or purchase any securities and is not a commitment by WTW Securities (or any affiliate) to provide or arrange any financing for any transaction or to purchase any security in connection therewith. WTW Securities assumes no obligation to update or otherwise revise these materials. This communication has not been prepared with a view towards public disclosure under any securities laws and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without the prior written consent of WTW Securities. Information contained within this communication may not reflect information known to other employees in any other business areas of Willis Towers Watson and its affiliates. © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. 20
  21. 21. willistowerswatson.com Willis Limited Analytical Disclaimer © 2018 Willis Towers Watson. All rights reserved. Proprietary and Confidential. For Willis Towers Watson and Willis Towers Watson client use only. This analysis has been prepared by Willis Limited on condition that it shall be treated as strictly confidential and shall not be communicated in whole, in part, or in summary to any third party without written consent from Willis Limited. Willis Limited has relied upon data from public and/or other sources when preparing this analysis. No attempt has been made to verify independently the accuracy of this data. Willis Limited does not represent or otherwise guarantee the accuracy or completeness of such data nor assume responsibility for the result of any error or omission in the data or other materials gathered from any source in the preparation of this analysis. Willis Limited, its parent companies, sister companies, subsidiaries and affiliates (hereinafter “Willis”) shall have no liability in connection with any results, including, without limitation, those arising from based upon or in connection with errors, omissions, inaccuracies, or inadequacies associated with the data or arising from, based upon or in connection with any methodologies used or applied by Willis Limited in producing this analysis or any results contained herein. Willis expressly disclaims any and all liability arising from, based upon or in connection with this analysis. Willis assumes no duty in contract, tort or otherwise to any party arising from, based upon or in connection with this analysis, and no party should expect Willis to owe it any such duty. There are many uncertainties inherent in this analysis including, but not limited to, issues such as limitations in the available data, reliance on client data and outside data sources, the underlying volatility of loss and other random processes, uncertainties that characterize the application of professional judgment in estimates and assumptions, etc. Ultimate losses, liabilities and claims depend upon future contingent events, including but not limited to unanticipated changes in inflation, laws, and regulations. As a result of these uncertainties, the actual outcomes could vary significantly from Willis Limited’s estimates in either direction. Willis makes no representation about and does not guarantee the outcome, results, success, or profitability of any insurance or reinsurance program or venture, whether or not the analyses or conclusions contained herein apply to such program or venture. Willis does not recommend making decisions based solely on the information contained in this analysis. Rather, this analysis should be viewed as a supplement to other information, including specific business practice, claims experience, and financial situation. Independent professional advisors should be consulted with respect to the issues and conclusions presented herein and their possible application. Willis makes no representation or warranty as to the accuracy or completeness of this document and its contents. This analysis is not intended to be a complete actuarial communication, and as such is not intended to be relied upon. A complete communication can be provided upon request. Willis Limited actuaries are available to answer questions about this analysis. Willis does not provide legal, accounting, or tax advice. This analysis does not constitute, is not intended to provide, and should not be construed as such advice. Qualified advisers should be consulted in these areas. Willis makes no representation, does not guarantee and assumes no liability for the accuracy or completeness of, or any results obtained by application of, this analysis and conclusions provided herein. Where data is supplied by way of CD or other electronic format, Willis accepts no liability for any loss or damage caused to the Recipient directly or indirectly through use of any such CD or other electronic format, even where caused by negligence. Without limitation, Willis shall not be liable for: loss or corruption of data, damage to any computer or communications system, indirect or consequential losses. The Recipient should take proper precautions to prevent loss or damage – including the use of a virus checker. This limitation of liability does not apply to losses or damage caused by death, personal injury, dishonesty or any other liability which cannot be excluded by law. Acceptance of this document shall be deemed agreement to the above. 21