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Parametric Risk Insurance Agriculture, Climate and Disaster Risk


Parametric Risk Insurance

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Parametric (at times ‘index’) risk insurance is a relatively new but innovative approach to provide insurance that pays out benefits on the basis of a predetermined index (e.g. rainfall level, wind speed, Richter Scale) for loss resulting from weather and catastrophic events.

• 

Unlike traditional insurance, parametric insurance uses a model to calculate the payout of the insurance policy

• 

This payout model aims to closely mirror the actual damage on the ground and enables a much more rapid payment as no loss adjusters are required after the event to assess the actual damage.

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Why Index /Parametric Insurance? • 

Not everyone is equally affected by a flood, draught, earthquake, etc.

• 

Conventional insurance indemnifies individuals or companies for financial losses they suffered from insured hazards: no loss – no payment

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Rules for indemnification from some disaster fund or other post disaster mechanism are not always as clear and known

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Individual loss assessment is too expensive for mass insurance of low income populations, so index insurance attempts to approximate the same outcome: payment tied to losses, with clear rules

• 

To do that, index insurance requires the right design (parametric triggers) - and the right data

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What is needed for parametric insurance to work • 

Establish precise data on floods, temperatures, event occurrences, losses and exposures to derive strong correlations of hazard & losses as basis for financial contracts: o  Projected frequencies and intensities of events o  Valuation of property/infrastructure in $$$. o  Projected frequencies and intensities of hazards. o  Determination of probability distribution of loss

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Obtain market quotes for financial instruments (parametric insurance, catastrophe bond spreads) to define cost effectiveness vis-à-vis budget and other sources of financing

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Set up institution for management of funds, verification of triggers, oversight.


Parametric Insurance Model – How does it work Flood Threshold Payment Triggers Based on Weather Station Data

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Flood Height (meters)

40

70

Insurance Payment (inner radius)

40

100

Insurance Payment (outer radius)

20

100

FARM

Radius 60

100 WEATHER STATION


Parametric Insurance Model – How does it work Insurance contract versus bond: Payment trigger is Richter scale magnitude 8.0, Perimeter of epicenter specified, Maximum specified depth, e.g.: 100 km. at epicenter. Quake Magnitude Bind Loss (inner radius)

7

40

75

8 Cities/ Communities

100

Radius Insurance Payment (outer radius)

20

60

100

Quake Epicenter

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Selecting the Appropriate Disaster Risk Financing Products

Insurance Pools

Multi-Cat Program

Facilitate issuance of multi region, multi-peril cat bonds

CAT/Weather Derivative

Insures against weather + geological related losses, based on an index

CCRIF / Pacific

Establishment of regional facilities to pool risks and reduce cost to cover against natural disasters in different countries

Investment DDO

Provides immediate liquidity following a pre-defined weather trend/event (1)

Cat DDO

Provides immediate liquidity following a natural disaster

Contingent Loans

(1) Despite being a risk retention instrument, the disbursement of this credit line can be linked to a parametric trigger (e.g. Uruguay Drought Events’ Impact Mitigating Investment Project Financing) 7

Risk Retention

World Bank direct issuance of Cat Bonds

Risk Transfer

Insurancelinked Securities

World Bank Cat Bonds


Global Index Insurance Facility: Overview

Based on implementation challenges and lessons learned (since its official launch in Dec 2009), the Program gradually put more emphasis on the priority areas below to adjust to ground realities: §  §  §  § 

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Scaling-up, Developing sustainability (commercially) Crowding-in more private sector players Promoting more Public Private Partnerships


Global Index Insurance Facility (GIIF): Objectives •  Develop sustainable local markets for index-based insurance to mitigate weather and natural catastrophe risks in developing countries. •  Improve lending in the agricultural sector through the mitigation of weather risks for farmers and encouraging the adoption of productive inputs. •  Mobilize local private sector / global players to distribute and promote index-based insurance products. •  Establish knowledge management and distribution platform on index insurance.

GIIF works with local financial institutions, insurance companies, agri-sector institutions and regulatory bodies to build capacity and develop new markets


Examples of Private Sector Partnerships in Africa Country

Data providers

Insurers

Reinsurers

Distributors

Mali

EARS, IRI

Allianz Mali

Swiss Re, Cica Re, Africa Re

COPROCUMA (maize union), UNSCPC (cotton union), BIM (commercial bank)

Burkina Faso

EARS, IRI

Allianz Burkina

Swiss Re, Cica Re, Africa Re

Ecobank, Sofitex (cotton company), RCPB (MFI), SN CITEC

Senegal

EARS, IRI, CIRAD

CNAAS (state insurer)

Swiss Re, Cica Re, Africa Re

CCPA and RNCPS, FEPROMAS (producer organizations), CNCAS, ACEP and PAMECAS (MFIs)

Benin

EARS, IRI

AMAB

Swiss Re, Cica Re, Africa Re

FECECAM (MFI network)

Kenya

IRI (ARC2), Syngenta weather stations

UAP

Swiss Re, Africa Re

Once Acre Fund (MFI); National Bank of Kenya (commercial bank); Kenya Seed (agribusiness – buyer); SeedCo, Syngenta East Africa DFU (agribusiness input); Nuru International

Rwanda

IRI (ARC2), University of Reading (TAMSATT)

Soras

Swiss Re, Africa Re

Tubura, UOB, (MFIs); Kenya Commercial Bank, Banque Populaire du Rwanda (commercial banks); ENAS, RABS (input suppliers)

Tanzania

IRI (ARC2)

Century Insurance

Swiss Re

Once Acre Fund

Zambia

University of Reading (TAMSATT)

Century Insurance

Focus General Insurance

NWK (agribusiness – buyer)

Mozambique

Asia Risk Centre (ARC2)

Hollard, EMOSE (state insurer)

Swiss Re

Cotton Institute (government); Sanam, OLAM (agribusinesses – buyers


Examples of Parametric Insurance for Disaster Risk and Agriculture in Latin America

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Weather Derivatives Case Study: Uruguay Oil and Weather Hedge Development Challenge • 

2008 drought and record high oil prices cost government more than $400M.

• 

In 2012, UTE had to borrow from market and withdrew $150M from Uruguay’s Energy Stabilization Fund, ultimately increasing consumer utility rates.

Financial Solution • 

Customized weather derivative provides coverage against combined risk of drought and high oil prices up to maximum payout of $450M. Coverage was for 18 months.

• 

IBRD acted as intermediary (being the counterparty to UTE and reinsurance companies).

• 

Intermediation strengthens capacity, confidence, and helps to bring participants to the market.

More info: http://treasury.worldbank.org/bdm/pdf/Case_Study/Uruguay_Weather_Derivative.pdf 11


Insurance Pools Case Study: Caribbean Catastrophe Risk Insurance Facility (CCRIF) Development Challenge •  CCRIF was established in 2007 to provide insurance coverage against earthquake, hurricanes and excessive rainfall to 16 Caribbean island countries. •  Since 2007, the WB Treasury has helped transfer the risk of the top layer of its portfolio by intermediating cat swaps between CCRIF and the re-insurance market. •  CCRIF wanted to take advantage of the influx of new capital in the Insurance Linked Securities market to diversify its sources of risk capital.

Financial Solution •  On June 30, 2014, the WB issued a 3-yr cat bond with a principal amount of US $30 m linked to hurricane and earthquake risk in CCRIF member countries. •  Simultaneously, the Bank entered into a swap with CCRIF that mirrors the terms of the bond. The proceeds of the bond are kept in the World Bank’s balance sheet. •  If a natural disaster of the magnitude specified in the terms of the bond contract occurs, the Bank will pass the bond proceeds to CCRIF through the swap. If no such event occurs, investors will receive the principal when the bond matures.

More info: http://treasury.worldbank.org/bdm/pdf/Case_Study/Caribbean_CatastrophebondforCCRIF.pdf 13


Cat Bonds Case Study: Mexico (Multicat Platform) Development Challenge •  Mexico is highly exposed to earthquake and hurricane risks. •  Cost of recovery and reconstruction can be high and funds are needed quickly after a catastrophic event.

Financial Solution •  $315 million catastrophe bond issued under the 2012 Multi Cat Program provides Mexico with financial coverage against earthquakes and hurricanes for 3 years. •  Followed similar transaction in 2009 (Cat-in the Box).

Outcome after Hurricane Patricia (October 2015) •  Investors in the $100m tranche of MultiCat Mexico Ltd (Series 2012 1) Class C catastrophe bond notes lost 50% of principal after calculation agent AIR Worldwide delivered its final report in February 2016 confirming that the triggers for payment were met. More info: http://treasury.worldbank.org/web/documents/Mexico_MultiCatBond_July1_2013.pdf

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Parametric Risk Insurance Pandemic Emergency Financing Facility (PEF)


Pandemic Emergency Facility • 

Following the Ebola crisis in 2014, the G7, World Bank and WHO committed to develop a more robust global pandemic risk management framework including: • 

• 

(a) pre-outbreak preparedness; (b) immediate investigation, assessment, and response; (c) early response; (d) containment; and (e) recovery

An important element to this framework is a public-private financing mechanism that could cover the critical response costs, items (C) & (D), beyond the public funds essential to (A) , (C) and (D)

• 

The World Bank contracted the leading reinsurance and catastrophe modelling companies to create an insurance/investment product to address this funding gap and devise a solution that enables the transfer of this risk to the private markets

• 

Premiums will be supported by donations from some G7 countries

It is the belief of World Bank and WHO that alongside investments in data reporting, surveillance, and preparedness, the PEF can potentially be a game changer in global pandemic response.


PEF: Value proposition •  Responsiveness – The PEF is timed to complement the WHO’s Contingency Fund for Emergencies (CFE) and will be triggered at or near the onset of an event with pandemic potential. •  Speed of delivery: The PEF is designed to deliver resources quickly and effectively to where they are most needed •  Engagement with Private Sector - The private sector’s involvement will bring the contractual rigor that’s needed to respond quickly. •  Market development – PEF contributes to the long term design and improvement of data around pandemics, and creates a market to help sovereigns manage pandemic risk.

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PEF: Parametric Trigger •  Parametric trigger based on confirmed cases and deaths over a prescribed period of time in at least a specified number of covered countries as reported publicly by the WHO (in some cases with graduated payout functions). •  The exact number of cases differs by disease family. •  As a purely hypothetical example, 1000 cases in a one month period (with cases occurring in at least three covered countries) will trigger for a disease – with 250 confirmed deaths triggering a 25% payout and 2000 deaths triggering a 100% payout.

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PEF Bond Structure Issuer Risk Profile Coverage Area

Outbreak/Epidemic/Pandemics caused by certain viruses 137 Countries (low income and middle income countries globally)

Trigger Type

Parametric trigger

Trigger Data

Confirmed Cases, Probable Cases, Confirmed Deaths, Countries affected

Reporting Source Term Structurers Calculation Agent

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International Bank for Reconstruction and Development (IBRD)

World Health Organization (WHO) – Situation Reports and/or Disease Outbreak News published publically Three years with a one year extension option Swiss Re and Munich Re AIR Worldwide Ltd.


Contacts SECTION TITLE Miguel Navarro

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Head of Banking Products

Washington DC

+1(202)3610418

mnavarromartin@worldbank.org


Annex • 

Global Index Insurance Facility (GIIF)

• 

Agriculture Insurance Development Program (AIDP)

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Parametric Risk Insurance Global Index Insurance Facility (GIIF)


Global Index Insurance Facility: Overview

Based on implementation challenges and lessons learned (since its official launch in Dec 2009), the Program gradually put more emphasis on the priority areas below to adjust to ground realities: §  §  §  § 

23

Scaling-up, Developing sustainability (commercially) Crowding-in more private sector players Promoting more Public Private Partnerships


Global Index Insurance Facility (GIIF): Objectives •  Develop sustainable local markets for index-based insurance to mitigate weather and natural catastrophe risks in developing countries. •  Improve lending in the agricultural sector through the mitigation of weather risks for farmers and encouraging the adoption of productive inputs. •  Mobilize local private sector / global players to distribute and promote index-based insurance products. •  Establish knowledge management and distribution platform on index insurance.

GIIF works with local financial institutions, insurance companies, agri-sector institutions and regulatory bodies to build capacity and develop new markets 24


Examples of Private Sector Partnerships in Africa Country

Data providers

Insurers

Reinsurers

Distributors

Mali

EARS, IRI

Allianz Mali

Swiss Re, Cica Re, Africa Re

COPROCUMA (maize union), UNSCPC (cotton union), BIM (commercial bank)

Burkina Faso

EARS, IRI

Allianz Burkina

Swiss Re, Cica Re, Africa Re

Ecobank, Sofitex (cotton company), RCPB (MFI), SN CITEC

Senegal

EARS, IRI, CIRAD

CNAAS (state insurer)

Swiss Re, Cica Re, Africa Re

CCPA and RNCPS, FEPROMAS (producer organizations), CNCAS, ACEP and PAMECAS (MFIs)

Benin

EARS, IRI

AMAB

Swiss Re, Cica Re, Africa Re

FECECAM (MFI network)

Kenya

IRI (ARC2), Syngenta weather stations

UAP

Swiss Re, Africa Re

Once Acre Fund (MFI); National Bank of Kenya (commercial bank); Kenya Seed (agribusiness – buyer); SeedCo, Syngenta East Africa DFU (agribusiness input); Nuru International

Rwanda

IRI (ARC2), University of Reading (TAMSATT)

Soras

Swiss Re, Africa Re

Tubura, UOB, (MFIs); Kenya Commercial Bank, Banque Populaire du Rwanda (commercial banks); ENAS, RABS (input suppliers)

Tanzania

IRI (ARC2)

Century Insurance

Swiss Re

Once Acre Fund

Zambia

University of Reading (TAMSATT)

Century Insurance

Focus General Insurance

NWK (agribusiness – buyer)

Mozambique

Asia Risk Centre (ARC2)

Hollard, EMOSE (state insurer)

Swiss Re

Cotton Institute (government); Sanam, OLAM (agribusinesses – buyers

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Knowledge Platform Upcoming GIIF knowledge Platform will serve as a one-stop knowledge and communications hub for all things index insurance

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Parametric Risk Insurance Agriculture Insurance Development Program (AIDP)


The Agricultural Insurance Development Program (AIDP) •  Builds on IBRD experience working with agricultural insurance programs that have achieved scale. •  Its mission is to support countries in implementing sustainable, cost-effective public private partnerships in agricultural insurance that increase the financial resilience of rural households, as part of their broader agricultural risk management strategy.

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The AIDP Strategy is to Solve Five Problems 1. 

Lack of clarity over the respective roles of the public and private sector in promoting agricultural insurance.

2. 

Lack of the risk market infrastructure necessary to support constructive competition.

3. 

Insurance providers and public decision makers often lack technical capacity.

4. 

Many of the products offered through recent pilots have been technically feasible from the insurance provider’s perspective, but have not offered client value.

5. 

Tools and indicators used for monitoring and evaluation are often not fit for purpose, particularly for index insurance programs.

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Six Solution Pillars of AIDP Agricultural risk assessment

•  More systematic use of risk information in agricultural risk management •  Led by ARMT with input from AIDP

Institutional capacity building

•  Identify and clarify roles of the public and private sectors •  Capacity to use insurance principles and tools to achieve social objectives

Data market infrastructure

•  Coordinated investments in collecting, auditing and managing insurable data •  Public support / financing

Technical capacity building

•  Best practice product design •  Risk-based pricing and cost-effective risk financing •  Legal & regulatory framework

Private sector

•  Risk-based pricing •  Efficient delivery, distribution, and claims settlement •  Timely adoption of new technologies

Monitoring and Evaluation 30

•  Gather and disseminate evidence of impact •  Statistical analysis of products and basis risk


Additional slides

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Main Agricultural Insurance Products • 

Named peril crop insurance is the most common product in the world, mainly for hail and freeze;

• 

Multi peril crop insurance is the second most popular type of insurance.

• 

There is increasing interest in index insurance (also known as parametric insurance) including climate (rain, draught, wind) and satellite base (e.g. NDVI)…but its use is relatively limited except in India, Mexico, and certain areas in East Africa.

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Selecting the Appropriate Disaster Risk Financing Products

Insurance Pools

Multi-Cat Program

Facilitate issuance of multi region, multi-peril cat bonds

CAT/Weather Derivative

Insures against weather + geological related losses, based on an index

CCRIF / Pacific

Establishment of regional facilities to pool risks and reduce cost to cover against natural disasters in different countries

Investment DDO

Provides immediate liquidity following a pre-defined weather trend/event (1)

Cat DDO

Provides immediate liquidity following a natural disaster

Contingent Loans

(1) Despite being a risk retention instrument, the disbursement of this credit line can be linked to a parametric trigger (e.g. Uruguay Drought Events’ Impact Mitigating Investment Project Financing) 7

Risk Retention

World Bank direct issuance of Cat Bonds

Risk Transfer

Insurancelinked Securities

World Bank Cat Bonds


Weather Derivative: Bothaville (Free State, SA) Bothaville Maize Yield vs. Maize Rainfall Index (Average of 6 stations in District) 4000

40 Bothaville Yield (kg/hct) 35

3000

30

2500

25

2000

20

1500

15

1000

10

500 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Maize Rainfall Index (mm)

Maize Yield (kg/hct)

Maize Rainfall Index (mm) 3500

High correlation between rainfall windows and historical losses

5 2000

Harvest Year

Rainfall plant water requirement per plant growth cycle window

2%

2%

Source: FAO 34

2%

2% 13% 13% 13% 13% 13% 13% 13% 1%

1%

Profile for Phoenix CRetro

World Bank Parametric Risk Insurance - Feb 2017  

World Bank Parametric Risk Insurance - Feb 2017  

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