RISK TRANSFER MECHANISMS: Towards Policy Innovationsin the Philippines

14 May 2014UP NCPAG Center for Policy and Executive DevelopmentUniversity of the Philippines, Diliman, Quezon City

Bases in International PolicyThe Bali Action PlanIn the 13th Conference of Parties of the UN Framework Convention on Climate Change in 2007, one of the climate change adaptations actions pushed was risk transfer mechanisms (RTMs), as part of enhanced adaptation action in the nature of risk management and risk reduction strategies. (1/CP.13, par. (c)(ii))

The Hyogo Framework for Action (HFA) This identified RTMs as part of risk-reducing measures, specifically as part of the 4th priority action which seeks to reduce underlying risk factors.

Entities Working on RTMWorld Bank Global Facility for Disaster Reduction and Recovery (GFDRR) Through its Track II Projects, is already spearheading the preparation of innovative risk finance instruments as part of its work in 31 focus countries (including five in Southeast Asia: Cambodia, Indonesia, Lao Peoples Democratic Republic, the Philippines and Vietnam).

Munich Climate Insurance Initiative (MCII) - Innovative insurance will play a key role in long-term adaptation financing and provide timely finance to recompense loss & damage - Southeast Asia is largely inadequately insured with a property insurance premium of only 1,000 US$ for highly insured countries

What is Risk Transfer?Risk transfer definedprocess of shifting the burden of financial loss or responsibility for risk financing to another party, through insurance, reinsurance, legislation, or other means. - should be distinguished from risk pooling, which is defined as the aggregation of individual risks for the purpose of managing the consequences of independent risks

Features of RTMs - ex ante risk financing mechanisms/innovative insurance - seen as a critical part of a comprehensive risk management strategy that must be inclusive, meaning/should reach the poorHence, microinsurance is seen as part of a sustainable model that targets poor households.

What are the RTM Categories (MCII)?(Traditional) InsuranceInsurance is a contractual transaction that guarantees financial protection against potentially large loss in return for a premium (e.g. fire, theft insurance, automobile liability insurance)MicroinsuranceCharacterized by low premiums or coverage and is typically targeted at lower income individuals who are unable to afford or access more traditional insurance (e..g. weather index-based insurance or parametricReserve fundCatastrophe reserve funds are typically set up by governmentsRisk poolingRisks pools aggregate risks regionally (or nationally (e.g. Caribbean Catastrophe Risk Insurance Facility)Insurance-linked securitiesInsurance-linked securities, most commonly catastrophe (cat) bonds, offer an avenue to share risk more broadly with the capital markets.

What are the RTM Categories (GFDRR)?Sovereign disaster risk financing Financial strategies to increase the financial response capacity of governments in the aftermath of natural disasters, while protecting their long-term fiscal balances. Property catastrophe risk insuranceDevelop catastrophe insurance markets and increase property catastrophe insurance penetration among homeowners, small and medium enterprises, and public entities. Agricultural insuranceDevelop programs for farmers, herders and agricultural financing institutions (e.g., rural banks, microfinance institutions) to increase their financial resilience to adverse natural hazards. Disaster microinsuranceFacilitate access to disaster insurance products to protect the livelihood of the poor against extreme weather events and promote disaster risk reduction in conjunction with social programs such as conditional cash transfer programs.

What is Parametric Insurance?Parametric insurance defined makes indemnity payments based not on an assessment of the policyholders individual loss (proof of indemnity), but rather on measures of a parametric index that is assumed to proxy actual losses. Hence also the similar term index-based insurance; synonymous with innovative insurance (MCII)

Elements of innovative RTMs Immediacy of payout: Once threshold values or parameters are breached, insurance payouts are triggered, doing away with the long claims process for traditional insuranceTargeting of the poor: Properly designed microinsurance targets poor households, which otherwise are shunned by traditional insurance product design

RTM and ASEAN National PoliciesIn the Philippines

The Climate Change Act of 2009 and the Philippine Disaster Risk Reduction and Management Act of 2010 both mandate the appropriate design of risk transfer mechanisms as part of resiliency measures.

Consequently, RTM has been identified as part of the key actions in both the National Disaster Risk Reduction and Management Plan (NDRRMP) and the National Climate Change Action Plan (NCCAP)

RTM has already been piloted in Southern Philippines at the community level through the project Climate Resilient Farming Communities in Agusan del Norte through Innovative Risk Transfer Mechanisms

RTM and ASEAN National PoliciesIn IndonesiaIts National Action Plan Addressing Climate Change (NAPACC) articulates that several funding mechanism should be immediately tried, including market instruments like insurance and reinsurance as part of its climate actions.

Significantly in April 2007, Law 24/07 was enacted on National Disaster Management, creating the National Disaster Management Agency (BNPB). Subsequently, the National Action Plan for Disaster Risk Reduction 2010-2012 was formulated, promoting the implementation of an Indonesian disaster risk financing strategy, including risk transfer instruments like insurance.

The Government of Indonesia has also availed of the technical assistance of the World Bank in improving its financial response capacity after the occurrence of a natural disaster, including post-disaster assistance funding mechanism.In Vietnam, its Government formulated the National Strategy for Natural Disaster Prevention, Response and Mitigation to 2020 in November 2007. The said national plan includes a strategy on the development of catastrophe risk financing solutions (including insurance) to complement other disaster risk management measures. The Government of Vietnam also availed of the technical assistance on disaster risk financing strategy from World Bank. Part of the World Bank recommendations were options on sovereign financial protection against natural disasters, drawing on relevant international including a combination of ex ante and post-disaster financial and insurance instruments, promotion of private residential catastrophe property insurance and agricultural insurance. In Thailand, its Second National Communication to the UNFCCC specifies that in addition to prioritization and integration into local development, financial support, insurance (italics ours), and technology transfer are also highly important. This is in Change Master Plan (currently being finalized) seeks the creation of a financial mechanism to support the implementation of adaptation for coping with the negative effects of climate change.

RTM and ASEAN National PoliciesIn VietnamIts Government formulated the National Strategy for Natural Disaster Prevention, Response and Mitigation to 2020 in November 2007. The said national plan includes a strategy on the development of catastrophe risk financing solutions (including insurance) to complement other disaster risk management measures. The Government of Vietnam also availed of the technical assistance on disaster risk financing strategy from World Bank.

In Thailand Its Second National Communication to the UNFCCC specifies that in addition to prioritization and integration into local development, financial support, insurance (emphasis mine), and technology transfer are also highly important. The Climate Change Master Plan (currently being finalized) seeks the creation of a financial mechanism to support the implementation of adaptation for coping with the negative effects of climate change.

Regional Trends: ASEAN DRFIWorld Bank, the Global Facilityfor Disaster Reduction and Recovery (GFDRR),the ASEAN Secretariat, and UNISDR formulatea comprehensive body of knowledge onthe state of disaster risk financing and insurancein ASEAN Member States to promote thedevelopment of national and regional disaster riskfinancing and insurance strategies in ASEAN Member States within the context of the broader disaster risk management agenda.

ASEAN Finance Ministers n highlighted theimportance of regional cooperation on disaster riskfinancing and insurance in Bali in April 2011.

Regional Trends: ASEAN DRFIWorld Bank, the Global Facilityfor Disaster Reduction and Recovery (GFDRR),the ASEAN Secretariat, and UNISDR formulatea comprehensive body of knowledge onthe state of disaster risk financing and insurancein ASEAN Member States to promote thedevelopment of national and regional disaster riskfinancing and insurance strategies in ASEAN Member States within the context of the broader disaster risk management agenda.

ASEAN Finance Ministers n highlighted theimportance of regional cooperation on disaster riskfinancing and insurance in Bali in April 2011.

Indonesian Strategy on DRFI

Regional Trends: ILO Piloting

RTM has already been piloted in Southern Philippines at the community level through the MDG-F 1656 Joint Program on Strengthening the Philippines Institutional Capacity to Adapt to Climate Change (Outcome 3.4), entitled Climate Resilient Farming Communities in Agusan del Norte through Innovative Risk Transfer Mechanisms.

ILO will scaleup in Asia, starting with Nepal and Bangladesh, with other project sites under negotiation.

Issues and ChallengesOn the operational entity: GFDRR-UNISDR-ASEAN and ILO?

Possible work program: Design of MicroinsuranceInsurance Science and TechnologyDelivery MechanismsFinancing

Capacity development: platform for sharing, especially given the piloting activities at the project/community level (e.g. flood insurance in Thailand, parametric/agricultural insurance in Viet Nam)

THANK YOU!

Presented byDennis G. dela Torredennisdelatorre@gmail.com

**Cat bonds are issued by the risk holder (usually a government or insurance company) and trigger payments on the occurrence of a specified event. This event may be a specified loss or may be a parametic trigger, such as the wind speed at a location (e.g. in 2006, the Government of Mexico issued a cat bond (the Cat-Mex bond) that transfers earthquake risk to investors by allowing the government to not repay the bond principal if a major earthquake were to hit Mexico).Adapted from MCII RTM Classification http://unfccc.int/resource/docs/2009/smsn/ngo/163.pdf

*GFDRR Disaster Risk Financing & Insurance ClassificationSource: Global Facility for Disaster Reduction and Recovery. (2011). Disaster Risk Financing & Insurance in the Disaster Risk Management Framework. Retrieved from http://www.gfdrr.org/sites/gfdrr.org/files/documents/DRFI_DRFI&DRM_Concept_Jan11.pdf *Note: Some countries like Myanmar and Timor-Leste have not yet completed their Initial National Communication*Note: Some countries like Myanmar and Timor-Leste have not yet completed their Initial National Communication*Note: Some countries like Myanmar and Timor-Leste have not yet completed their Initial National Communication*****