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									National round table on catastrophe risk management
                                                             World Bank Group
Sofia, Bulgaria


Bulgarian Catastrophe Insurance Pool: From Concept to
Implementation



Eugene N. Gurenko, Ph.D., CPCU, ARe
Lead Insurance Specialist                             December 10, 2007
Contents                                                             World Bank Group



   World Bank role in building catastrophe risk transfer programs

   Actuarial support project for the Bulgarian cat insurance pool

   Next steps
Contents                                                             World Bank Group



   World Bank role in building catastrophe risk transfer programs

   Actuarial support project for the Bulgarian cat insurance pool

   Next steps
World Bank role in catastrophe risk transfer programs

World Bank experience in developing catastrophe risk financing                                    World Bank Group
programs

       The World Bank has thus far helped countries create national risk transfer
        programs
             The World Bank provided advisory and financial support to help create the
              Turkish Catastrophe Insurance Pool (TCIP). The TCIP provides catastrophe
              insurance coverage for residential property in Turkey
             The World Bank collaborated with Mexico, providing advice and trust fund
              financing, in the design and issuance of a catastrophe bond
             Colombian municipalities have established a contingent loan facility for disaster
              risk financing
             There is ongoing work on the establishment of a Romanian Catastrophe Pool
             Created a national livestock insurance program in Mongolia



       The World Bank also has also assisted them in developing regional catastrophe
        risk pooling solutions
             Responding to demand from the Caribbean countries, the World Bank helped
              establish the Caribbean Catastrophe Risk Insurance Facility (CCRIF).
             Currently in the process of developing a regional catastrophe insurance facility
              for South-eastern Europe
World Bank role in catastrophe risk transfer programs

World Bank convening power                                              World Bank Group



   Acts as an “honest broker” by initiating and supporting an
    ongoing dialogue on catastrophe risk transfer issues between
    government, domestic insurance industry and the global
    reinsurers and capital markets.

   Convenes international donors to raise concessional funding
    (grants) for technical assistance work and, possibly, for partial
    capitalization of risk pooling programs.

   Bank catastrophe insurance projects serve as focal points for
    bringing together the best domestic and international
    insurance and scientific expertise -“knowledge aggregation.”
World Bank role in catastrophe risk transfer programs

The World Bank technical assistance products                     World Bank Group



   Country catastrophe risk assessment studies.



   Institutional design of catastrophe insurance programs.
      Overall business concept (ownership, governance,
        management, distribution, underwriting, risk transfer,
        claims settlement).
      Development of national regulatory framework.
      Preparation of program operational guidelines.
      Development of premium ratings guidelines.
      Development of optimal risk financing strategy.
World Bank role in catastrophe risk transfer programs

SEE economic vulnerability to the risk of earthquake              World Bank Group




             Economic loss from a 250 year earthquake (GDP%)


          80.0%      73.5%

                                             56.1%
          60.0%

          40.0%
                                 18.0%                    21.7%
          20.0%

           0.0%
                   Albania    Bulgaria   Macedonia      Romania
World Bank role in catastrophe risk transfer programs

                                                                World Bank Group
  SEE governments are fiscally unprepared to deal with catastrophic losses

                              Economic Loss from Cat Event/Total Emergency Funds

                                  600

                                  500


                                  400
                Multiple




                                  300

                                  200

                                  100

                                   0




                                                       05
                                                      77
                                                     EQ
                                                      02




                                                      99

                                                      90
                                                      01




                                                      95
                                                      05

                                                     86

                                                     94




                                                    20
                                                   19




                                                   19
                                                   20




                                                   20

                                                   19

                                                   19




                                                   19
                                                   20




                                                   19
                                                  86




                                                FL
                                               EQ
                                                od




                                                FL
                                                 d




                                                FL
                                                ds




                                               EQ




                                                FL
                                                FL
                                               19




                                              oo
                              o




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      Currently, the annual amount of the Bulgarian national relief fund is approximately USD32
      million, or 0.6% of the republican budget. Over the last ten years, which have not witnessed
      any major catastrophic events, the fiscal burden of small and mid size events on the central
      budget was of the order of 2.5 percent.
                        0.000
                        World Bank role in catastrophe risk transfer programs



                                        1,000


                                                        2,000


                                                                        3,000


                                                                                 4,000


                                                                                         5,000


                                                                                                     6,000


                                                                                                                     7,000


                                                                                                                                   8,000


                                                                                                                                           9,000


                                                                                                                                                      10,000


                                                                                                                                                                       11,000


                                                                                                                                                                                    12,000


                                                                                                                                                                                             13,000


                                                                                                                                                                                                        14,000


                                                                                                                                                                                                                          15,000


                                                                                                                                                                                                                                            16,000


                                                                                                                                                                                                                                                     17,000
                                    -
                                                Exceedance Probability of Earthquake Damage for Sofia World Bank Group
                                                                                                                             Damage [million $]

                            0.060


                            0.050
                                                                                                                                                                                   Sofia
Probability of exceedance




                            0.040


                            0.030


                            0.020


                            0.010


                            0.000
                                                1,000




                                                                2,000




                                                                                3,000




                                                                                             4,000




                                                                                                             5,000




                                                                                                                                 6,000




                                                                                                                                              7,000




                                                                                                                                                               8,000




                                                                                                                                                                                9,000




                                                                                                                                                                                               10,000




                                                                                                                                                                                                                 11,000




                                                                                                                                                                                                                                   12,000




                                                                                                                                                                                                                                                     13,000
                                    -




                                                                                                                             Damage [million $]



                            •The building inventory exposure of Sofia is US$ 19.2 billion. The PML corresponding to a 150-year
                            return period (0.0067%) is US$ 2.45 billion, of which 1.67 billion is damage to residential buildings.
                            •The Average Annualized Loss (AAL), which is the integral of the loss exceedance curve in the range
                            of exceedance probabilities of 0.05 to 0.00667 divided by 150, is US$ 29.4 million for Sofia.
                            Source: Enel.NewHydro, 2004
World Bank role in catastrophe risk transfer programs

The World Bank risk financing instruments                                             World Bank Group


                                                       Available World Bank instruments

                             200+ year event or in
             Donor aid       excess of 5% of fiscal     Emergency reconstruction loans
                             revenue
                           100-200 year event or
         Catastrophe bonds in excess of 5% of            Catastrophe bonds for sovereigns
                           fiscal revenue




           Reinsurance        30-100 year event or       Financing of reinsurance premium
                              in excess of 5% of
                              fiscal revenue




                              30 year event or up to
            Risk financing    5% of fiscal revenue
                                                          Disaster Draw-Down Option loans



            Risk retention    20 year event or up to
                              3% of fiscal revenue
World Bank role in catastrophe risk transfer programs
A typical risk financing arrangement between the World Bank and a catastrophe
                                                                    World Bank Group
insurance facility
             Catastrophe insurance coverage against the risks of
             flood and quake for homeowners and SMEs


                                                Premium
                                                                                               Reinsurers
                           2
                                                                     Sum Insured

           Home       Premium
                                   Cat Risk                      3
          owners                   Transfer         Protection
                      Protection    Facility


                                                                 Special     Libor+Spread
                           Contingent
                            Credit                               Purpose
          Country           Facility                             Vehicle    Bond principal      Investors
                                               Spread


                                                      IBRD provides a contingent capital facility to a country which is then
                 Contingent                    1.
                Capital Facility                      extended to the Facility.
                                    IBRD
                Commitment                            Households buy a cat insurance policy by paying an annual premium
                   Fee                         2.     for its cover. The facility retains a part of risk relying on IBRD contingent
                                                      capital to pay small claims. In the absence of claims it accumulates
                                                      reserves.
                       1                       3.     The facility transfers most of risk to reinsurance and capital markets
                                                      either through a reinsurance contract or by issuing a cat bond.
Contents                                                             World Bank Group



   World Bank role in building catastrophe risk transfer programs

   Actuarial support project for the Bulgarian cat insurance pool

   Next steps
Actuarial support for the Bulgarian cat pool

Project objectives                                                               World Bank Group



     Provide actuarial support to the Bulgarian Initiative for
      Catastrophe Risk Management (BICRM) with the view of
      facilitating the creation of a national catastrophe insurance
      pool.

     Facilitate an informed public dialogue and provide informed
      policy advice to the Bulgarian government on the optimal
      design of the national catastrophe risk transfer system.




    The project has been made possible by the grant provided by ProVention
    consortium – a foundation whose aim is to reduce the risk and social,
    economic and environmental impacts of natural hazards on vulnerable
    populations in emerging market countries in order to alleviate poverty and
    contribute to sustainable development.
Actuarial support for the Bulgarian cat pool

Expected project outcomes                                              World Bank Group



   Development of the Pool’s organizational and business model;

   Preparation of the Pool’s 5-year strategy;

   Design of the catastrophe insurance cover to be offered by the
    pool;

   Development of a preliminary actuarial pricing model for
    earthquake risk (based on the available data) – including the
    determination of optimal insurable limits, deductibles and rates
    to be charged across different risk zones.

   Increased awareness of government and the civil society
    about the benefits of catastrophe insurance.
Contents                                                             World Bank Group



   World Bank role in building catastrophe risk transfer programs

   Actuarial support project for the Bulgarian cat insurance pool

   Next steps
Next steps

     Project Roadmap                                                                                World Bank Group



      Develop institutional design
       of risk financing strategy


     Business organization
     Role of government and private sector

                           Design catastrophe
                         insurance products and
                        determine premium rates

                          Determine perils covered
                          Obtain hazard risk data
                          Determine coverage parameters (deductibles, limits, scope of coverage)
                          Determine industry-wide costs of distribution and claim-settlement
                          Make penetration assumptions and develop country-wide model risk portfolio
                          Model premium rates by risk zone and types of construction insured

                                              Produce policy
                                          recommendations and
                                         develop rating guidelines

								
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