Disaster prevention works
In developing and emerging countries, the vast majority of damage from natural disasters is not insured. The gap between insured and uninsured damage is much bigger than in industrial countries. Between 1980 and 2016, D&E countries accounted for 10% of global uninsured losses but just 1% of insured losses. Following a disaster, lack of insurance cover can delay reconstruction, or even make it impossible, particularly in poorer countries. Many developing countries have inadequate financial resources, and generally rely on external help when a disaster strikes.
Partnerships between governments, supranational organisations and the insurance industry have proved useful in providing better financial cushioning against the consequences of natural disasters. As a risk carrier, Munich Re participates in various risk pools, offering transnational insurance cover against risks from weather-related disasters, and in some cases also against earthquakes and tsunamis. These pools have emerged over the last few years in the Caribbean (Caribbean Catastrophe Risk Insurance Facility, CCRIF), in Pacific island states (Pacific Catastrophe Risk Assessment & Finance Initiative, PCRAFI), and in Africa (African Risk Capacity, ARC).
CCRIF was founded in 2007 as the world’s first risk pool, and has many participating countries in the region. It insures 16 Caribbean states against earthquakes and hurricanes, and operates like a mutual insurance society. The fund retains a portion of the risks insured by the member countries, and transfers the rest to the reinsurance market. Payments are linked to the intensity of a natural disaster using what are called parametric triggers, rather than actual loss figures. This is to ensure payments can be made promptly, thereby providing much-needed liquidity. Thanks to the pool set-up, the risks are spread more effectively, which in turn reduces the total costs.
Between 2007 and 2016, CCRIF paid out almost US$ 68m in disaster aid to its member states. The largest payment was US$ 23m to Haiti in 2016, less than two weeks after Hurricane Matthew had devastated the southwest of the island. In 2016, the pool was extended to Central America, when Nicaragua became the first country from this region to join. The range of cover was also extended to include insurance against torrential rain.
PCRAFI is a programme financed by various donors and administered by the World Bank. Under the insurance programme, the member states (Vanuatu, Solomon Islands, Cook Islands, Marshall Islands, Tonga, Fiji and Samoa) cede risks from tropical cyclones and earthquakes/tsunamis via an insurance derivative to the World Bank , which then passes on these risks to the insurance market.
The parametric triggers used here also facilitate prompt payouts. The funds that are made available can then be used for emergency aid and clear-up operations following a natural disaster. PCRAFI was developed in close cooperation with the participating nations in order to ensure their exact needs were met. This involvement gave the countries a more accurate picture of their own risk exposure, allowing them to coordinate measures for risk prevention and risk reduction.
In 2010, the African Union decided to develop ARC, a drought insurance programme for African countries. During an extreme drought, small farmers use up their provisions within a few months, and are then forced to slaughter their cattle. The drought insurance is intended to prevent this happening. To become a member, a country must have drought emergency aid plans in place. These specify how insurance payments are used in the event of a disaster. In this way, the population receives prompt assistance. People can buy new seed, food for themselves and feed for their cattle. The payments are made automatically once satellite images show that a specified loss threshold has been exceeded.
Another example of an insurance solution to strengthen resilience is FONDEN (Fondo de Desastres Naturales) in Mexico. It was established by the Mexican government in 1999 after it had designated disaster prevention a national priority. Its objective is to ensure that the public infrastructure can be rapidly restored after a natural disaster. All the federal states pay into the fund and if a loss event occurs, a local government can count on prompt payment. The fund is covered by a reinsurance policy.
One of the fund's main features is the detailed settlement or loss protocol, which forms part of the reinsurance treaty. The protocol defines the settlement process, and sets out deadlines and guidelines. As soon as independent sources have confirmed a disaster, the federal state affected draws up an initial loss estimate. After that, settlement follows the procedure defined in the loss protocol. FONDEN is therefore a programme that endeavours to make loss settlement transparent, as well as transferring the risk in question.
Public-private partnership in catastrophe risk financing
Natural disasters usually result in large losses. The destruction of infrastructure and the breakdown in communication systems make it more difficult for the population to overcome the consequences of a disaster. A comparison between Hurricanes Katrina and Sandy illustrates the difference that preparedness and well-devised emergency plans can make. Whereas Katrina caused enormous damage due to inadequate flood protection and insufficient disaster preparation, with the result that the crisis response was slow and sluggish, when Hurricane Sandy struck seven years later, the New York/New Jersey region was spared much more serious consequences thanks to relatively good emergency planning.
The Department of Homeland Security used Katrina as an opportunity to make fundamental changes to its procedures, and take a more comprehensive approach. In future, all areas of society should be prepared to face emergencies of any kind. A Critical Infrastructure Task Force concluded that increasing resilience, rather than strengthening and extending protection measures, should be the top priority. As a result, FEMA, the national response coordination centre, had already initiated key measures before Sandy made landfall. As well as public institutions, private and charitable organisations were also involved in the preparations to identify what people on the ground most urgently required. FEMA set up depots with aid supplies, established emergency centres, and sent more than 900 staff to the region. And its efforts paid off: losses were kept within reasonable limits, and life in New York and New Jersey quickly got back to normal after Sandy.
Bangladesh has also learned from experience. In the early 1970s, the government introduced the Cyclone Preparedness Programme (CPP) after a cyclone had claimed the lives of 300,000 people there. The CPP has over 200 permanent staff, and has recruited almost 50,000 volunteer helpers. At its headquarters in the capital Dhaka, meteorological data on approaching cyclones are analysed and the information is passed on via radio, mobile phones and the internet. Volunteers receive first aid training, take part in exercises, and are equipped with everything they need in an emergency. Thousands of concrete shelters, many of them on stilts, have also been built so that people can take refuge during cyclones. Over the rest of the year, the buildings are generally used as schools. When, in 2007, a cyclone of similar strength to 1970 swept across the same region as, the number of fatalities was around 3,000 – significantly less then decades before.