I n v i r t i e n d o p a r a l a R e s i l i e n c i a

Disaster Risk Financing:I n v i r t i e n d o p a r a l a R e s i l i e n c i a

I n v i r t i e n d o p a r a l a R e s i l i e n c i a

Disaster Risk Financing:The Evolving Role of (Re)Insurance and Financial Markets

Claudia MeloClaudia Melo

Swiss Re

1

Massive gap between total and insured losses highlights potential exposure for the public sectorhighlights potential exposure for the public sector

Natural catastrophe losses 1970-2013 in USD billion (2013 prices)Natural catastrophe losses 1970-2013, in USD billion (2013 prices)

350

400

450Insured losses Uninsured losses

Trendline Trendline

200

250

300

350

50

100

150

Source: Swiss Re Economic Research & Consulting, sigma catastrophe database

01970 1975 1980 1985 1990 1995 2000 2005 2010

2

Risk transfer is key to sustaining economic growth after a disasterafter a disaster

• BIS developed a model from which they can simulate the impact of natural catastrophes on a country's growth path

• Countries generally do not recover their previous growth paths and consequently– Natural catastrophes leave behind a permanent macroeconomic cost, over and above the direct 

loss from the destructionloss from the destruction. • Sluggish growth in each subsequent year after an uninsured disaster brings the 

cumulative permanent loss to nearly 4% of GDP– However, following an insured event, the cumulative output gain is 2.4%

3Source: Bank of International Settlements

A more balanced mix of financing is needed

Post-event financing versus pre-event financing World Bank Policy Research W ki P 5564 "H d

Post event Pre event

Working Paper 5564, "How do Governments Respond after Catastrophes", 2/2011"From an ex-post perspective, the availability of insurance offers the b t iti ti h i t l

Loss Severity

Donor assistance

Tax increases

Risk transfer

best mitigation approach against real and fiscal consequences of disasters"

Severity

Budget reallocation

Raise debt

Reserve Fund

Contingent Financing

LLoss Frequency

4

Risk transfer: efforts required on all frontsMacro micro and poolingMacro, micro and pooling

economic Solution type Description

How to close the gap?

M

loss

Damaged public physical assets

Foregone revenues

Risk transfer solutions for (sub)sovereigns to cover their Macro

gap Clean up costs

( ) gdirect or indirect costs

Emergency relief

Damaged uninsured private assets

Insurance schemes and pools to increase insurance

penetrationPoolinginsured

Simplified products distributed via aggregators such as

MFIs, NGOs, and corporates Micro

insured loss

Livelihood assistance, rehabilitation of thepoor

5

Structure of risk transfer solutions

Reinsurers Capital Markets InsurersReinsurers

Premiums Insurance Policy/Contract

Capital Markets Insurers

Government

Contract

• Policy: Insurance linked securities ("cat bonds") swaps and reinsurancePolicy: Insurance linked securities ( cat bonds ), swaps and reinsurance• Risks: Natural catastrophes, agriculture risk, pandemics, longevity• Use of funds: Emergency costs, long term liabilities, internal funding

6

Macroinsurance expanding to cover new disaster risksnew disaster risks

The list of potential risks that governments can "insure" is growing, including catastrophes, weather and commodity-linked weather

Caribbean: H i d

Beijing:Agricultural risk

Turkey:Earthquake pool

Alabama: Hurricane risk

Vietnam:Agriculture yield

coverPacific Islands: Earthquake

and tropical cyclone risk

Mexico: Earthquake and hurricane risk

Hurricane andearthquake risk

Kenya: Drought insurance

Uruguay: Energy production shortfalls

India:Weather insurance

for farmers

for seed growersgy p

due to drought

7

More holistic public sector risk management

CRO a "recent" development, embraced by enterprise and, increasingly, the public sector

GE Capital appointsGE Capital appoints James Law head Credit, Market & Liquidity risk:

calls himself "CRO"

e S

ecto

r

Economist survey shows ~45% of

S&P / AM Best disclosures establish link between

ERM and Financial Strength Ratings

Lehman

Study suggests ERM adoption reduces cost

of capital1Swiss Re

appoints its

Priv

ate

2002 2004

shows ~45% of companies have a CRO

(61% in Financial Services)

Lehman Brothers files

for bankruptcy

2009 2010 2013 20142006 2012

ppfirst CRO

Euro storms: Lothar, Martin

Sec

tor

1993

Sarbanes Oxley

Basel II

2005 2005-6

Solvency II directive

Basel III

20081997 1999

Rockefeller is funding CROs in

100 cities

Pub

lic S

Mexico becomes first country to transfer risk

to markets with securitised insurance

US treasurycreates CRO

role

New York appoints NY2100 Commission

after Hurricane Sandy; recommendations

include appointing CRO

8

pp gfor NY state

Mensaje final

El sector privado tiene la función de apoyar al Gobierno y la sociedad en la gestión del riesgo

de desastres

9

PROFESSIONAL PROFILE

Claudia Melo has 10 years of experience in the financial sector, which of them six in the national and international insurance and reinsurance markets. Claudia works at Swiss Re since March 2008 when she joined the company as Client Manager for the Brazilian market, serving as well the Southern Cone region. Her responsibility was to develop and manage all reinsurance opportunities across the different countries in South Latin America. Since 2011, as part of Swiss Re Global Partnerships team, she focuses in developing risk management and risk transfer solutions for addressing public sector needs, in order to create a more resilient society and economy. It includes, among others, partnering with Government and its entities, NGOs, Multilaterals

and Development Banks in Latin America. Claudia has completed a Master Degree in Finance and Entrepreneurial Management at Universidade de São Paulo and has a bachelor degree in Business Administration at Fundação Getúlio Vargas, São Paulo. humanitarian relief operations in disaster and conflict areas, and in institution-building to strengthen national capacity for disaster preparedness, response and for risk reduction.

Previous appointments

Client Manager at Swiss Re, 2008 Project Manager at Santander Bank, 2006 Finance Analyst at ABN AMRO Bank, 2004