Sovereign Risk Financing: Introduction to Disaster Risk Transfer - Framing the "Problem"

1. DRR Financing Workshop, Istanbul, 4-5 October 2018
Andy Palmer, Swiss Re Capital Markets
Sovereign Risk Financing:
Introduction to Disaster Risk Transfer
– Framing the “Problem”

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Sovereign Risk Financing – Framing the “Problem”
Introduction to Swiss Re Global Partnerships / Swiss Re Capital Markets
Reinsurance Corporate Solutions
Swiss Re Group
Life Capital
Global
Partnerships
• The Swiss Re Group is a leading wholesale provider of reinsurance, insurance and other insurance-
based forms of risk transfer to insurance companies, mid-to-large-sized corporations and public sector
clients around the world
• Swiss Re Global Partnerships is the global client practice within Swiss Re Group focused on the
public sector
– As the first dedicated public sector team in the reinsurance industry, Swiss Re Global
Partnerships has been responsible for over 250 bound transactions since 2011
• Created in 1997, Swiss Re Capital Markets is the broker/dealer arm of Swiss Re, responsible for the
arrangement of Insurance-Linked Securities transactions for its clients and for Swiss Re itself
– Swiss Re Capital Markets is the leading underwriter in the history of the ILS market, having
placed over $33bn since 1997

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Sovereign Risk Financing – Framing the “Problem”
Examples of Innovative Public Sector Risk Transfer Solutions
India
Weather
insurance
for farmers
Uruguay
Energy production
shortfalls
due to drought
Caribbean
Hurricane,
earthquake and
excess rainfall risk
Pacific Islands
Earthquake and
tropical cyclone risk
Vietnam
Agriculture
yield cover
Beijing
Agricultural risk
Turkey
Earthquake pool
Bangladesh
Flood insurance
African Risk Capacity
Government drought
insurance pool
Florida
Hurricane risk
United Kingdom
Flood risk
Guangdong
Typhoon/rainfall
Thailand
Crop insurance
Mexico
Earthquake/hurricane
and livestock risk
Louisiana
Hurricane risk Heilongjiang
Multiperil disaster risk
Kenya
Livestock
insurance
California/Utah
Earthquake risk
Guatemala
Nat cat business
interruption risk
United States
Flood risk
Philippines
Earthquake and
tropical cyclone risk
IDA countries
Pandemic outbreak

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Source: Swiss Re CatNet, Regional Seismic Hazard Zones
Sovereign Risk Financing – Framing the “Problem”
The Risk is Real…

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Sovereign Risk Financing – Framing the “Problem”
… and can cause Significant Damage

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Sovereign Risk Financing – Framing the “Problem”
Multiple Risks can impact Public Budgets…
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illustrative
A significant portion of the largest
risks ends up with the public sector
1. Risk Landscape
Individuals
Corporates
Insurers
Public
Sector
Banks
2. Impact on Public Budgets

7. DRR Financing Workshop | Istanbul, 4-5 October 2018
Sovereign Risk Financing – Framing the “Problem”
… in a Variety of Ways
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Reconstruction of public
property & infrastructure
Emergency response costs Lower tax income
Costs of replacements
(e.g. alternative energy
production and/or higher imports)
Public Budgets
Lower tourism income
Support for non-insured
households
Reputational damage / loss of
investor confidence
Higher Costs Lower Revenues
Lower export revenues

8. DRR Financing Workshop | Istanbul, 4-5 October 2018
Insured
(Private): 3.7
12%
Insured
(Public): 1.3
4%
Infrastructure
(uninsured): 9.3
31%
GDP loss: 7.6
26%
Emergency
spending: 1.1
4%
Private: 6.7
23%
2m people affected in the six
central provinces, 800’000 lost
their homes
370’000 houses severely
damaged or destroyed
On public sector side: 73 hospitals,
4’000 schools, 221 bridges
damaged
Total reconstruction efforts require
$30bn over a period of 3-4 years
Sovereign Risk Financing – Framing the “Problem”
Example: Chile Earthquake, 2010
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Total cost, including damages to productive
capital stock and real GDP losses, was
estimated to $29.7bn, of which 84% was
uninsured. Governments have to revert to tax
increases, additional borrowing, or assets
sales at the worst moment possible.
In the immediate aftermath of the event, the
state needs to address the direct and
indirect consequences of the disaster. The
country was severely affected by the historic
earthquake, followed by a tsunami:
Fiscal risks and sovereign budget protection| Swiss Re Global Partnerships
On 27 February 2010, an 8.8 moment magnitude earthquake strikes Chile
It was one of the most powerful and expensive in recorded history

9. DRR Financing Workshop | Istanbul, 4-5 October 2018
Sovereign Risk Financing – Framing the “Problem”
Uninsured Losses are Growing…
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Source: Swiss Re Institute, Swiss Re Sigma 1/2018 – Natural catastrophe losses 1970 – 2017 (in 2017 USD billion)
0
50
100
150
200
250
300
350
400
450
500
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Insured losses Uninsured losses 10-year moving average insured losses 10-year moving average total economic losses

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Sovereign Risk Financing – Framing the “Problem”
… and Place a Significant Burden on the Public Sector
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No country can fully insulate itself against extreme natural disasters, despite prevention and
mitigation efforts
Individuals, corporations and governments – both on national and sub-national level – bear the
brunt of economic losses from natural disasters
Public physical assets
Emergency response
Livelihood assistance,
rehabilitation of the poor
Foregone revenue
Uninsured private assets

11. DRR Financing Workshop | Istanbul, 4-5 October 2018
Sovereign Risk Financing – Framing the “Problem”
There is a Growing Consensus on the Macroeconomic Impact of Climate
Change and Natural Events…
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“Insurance confers benefits both before and after disaster strikes. Beforehand, the
underwriters [demand] better planning and higher-quality, more resilient building from
property developers and city planners. Afterwards, insurance helps entire economies to
recover more rapidly.”
The Economist, 13 June 2015
"Major natural catastrophes have large and significant negative effects on economic
activity... However, it is mainly the uninsured losses that drive the subsequent
macroeconomic cost, whereas sufficiently insured events are inconsequential in terms of
foregone output."
Working Paper No. 394, December 2012
"Natural disasters can damage sovereign creditworthiness”
Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness, September 2015
"Climate change is likely to be one of the global mega-trends impacting sovereign
creditworthiness…. Government budgets could come under additional pressure as disaster
recovery and emergency support for affected populations is likely to fall on the state in
most cases."
Climate Change is a Global Mega Trend for Sovereign Risk, May 2014

12. DRR Financing Workshop | Istanbul, 4-5 October 2018
Sovereign Risk Financing – Framing the “Problem”
… and on Governments’ Role in Risk Financing
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"National and subnational governments can develop and implement comprehensive disaster
risk financing strategies to reduce risk and to provide adequate and timely post-disaster
support to strengthen financial resilience."
Investing in Resilience
"Finance Ministries play a pivotal role in DRM strategies [by] ensuring proper fiscal
management of disaster risks by anticipating potential budgetary impacts and planning
ahead to ensure adequate financial capacity and rapid release of funds, thus enabling
emergency response, reconstruction of public assets and infrastructure, and targeted
financial assistance."
Disaster Risk Assessment and Risk Financing - A G20/OECD Methodological Framework
"States, (…) regional and international organizations should develop partnerships to
implement schemes that spread out risks, reduce insurance premiums, expand insurance
coverage and thereby increase financing for post disaster reconstruction and rehabilitation,
including through public and private partnerships."
Hyogo Framework for Action 2005 - 2015
"One way to mitigate the economic and ratings impact of natural disasters [on sovereign
creditworthiness] is catastrophe insurance."
Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness, September 2015

13. DRR Financing Workshop | Istanbul, 4-5 October 2018
Post-Event Pre-Event
Reserve Fund
Contingent
Financing
Risk Transfer
Budget
Reallocation
Raise Debt
Donor
Assistance
Tax Increases
"From an ex-post perspective, the availability of insurance offers the best mitigation approach
against real and fiscal consequences of disasters"
World Bank, Policy Research Working Paper 5564, 2011
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Sovereign Risk Financing – Framing the “Problem”
Governments' Financing Options: Post-Event vs Pre-Event

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gap
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Which Risk?
Governments
Who Carries
the Risk?
Pooling
Insurance schemes and pools
to increase insurance penetration
Macro
Risk transfer solutions
for (sub)sovereigns to cover
their direct or indirect costs
Micro
Simplified products distributed
via aggregators such as
MFIs, NGOs, and corporates
Risk Transfer Solution
Businesses,
homeowners,
farmers
Public physical
assets
Emergency
response costs
Foregone revenue
Uninsured private
assets
Livelihood
assistance
ProtectionGap
Individuals
Sovereign Risk Financing – Framing the “Problem”
Different Risk Transfer Solutions to Close the Protection Gap

15. DRR Financing Workshop | Istanbul, 4-5 October 2018
Sovereign Risk Financing – Framing the “Problem”
Risk Transfer Solutions can take Various Forms
Reinsurers
Government
Risk Premium Risk Transfer Contract
Capital Markets Insurers
• Risk Transfer Contract: Re/insurance, Insurance-Linked Securities ("cat bonds"), derivatives
• Risks: Natural catastrophes, agriculture risk, renewable energy, pandemics
• Use of funds: Emergency costs, long term liabilities, internal funding
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17. DRR Financing Workshop | Istanbul, 4-5 October 2018
Legal Notice
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