... for Countries). Natural disaster implies a impera*ve challenge for the public
finance in ... *mes greater (as a percentage of GDP) in developing countries than.
Strictly
private
&
confiden2al
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
Improving
Public
Finance
in
Developing
Economies
through
Catastrophe
Risks
Management
Strategies
By
Víctor
Cárdenas
Consultant
Specialist
2nd
Conference
of
the
OECD
InternaFonal
Network
on
the
Financial
Management
of
Large‐scale
Catastrophes
Bangkok,
Thailand,
24‐25
September
2009
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
Strictly
private
&
confiden2al
Agenda
1. 2. 3. 4. 5. 6. 7. 8.
Background
The
taxonomy
of
losses
Who
finance
the
losses?
Why
Governments
need
risks
management?
Building
a
risk
management
strategy
Op2mizing
the
sources
of
capital
A
brief
summary
of
the
Mexican
experience
Finals
remarks
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
2
Background
Strictly
private
&
confiden2al
Natural
disaster
implies
a
impera2ve
challenge
for
the
public
finance
in
governments,
par2cularly
in
developing
economies.
• According
to
the
World
Bank,
during
the
last
decade,
more
than
one
billion
people
were
affected
by
natural
disaster.
• Disasters
represent
a
major
source
of
risk
for
the
poor
in
developing
countries.
According
to
the
United
Na2ons
from
2000
to
2006,
the
average
was
365
disasters,
represen2ng
an
increase
of
87%.
• More
than
95%
of
all
deaths
caused
by
natural
disasters
occur
in
developing
countries;
and
losses
due
to
natural
disasters
are
20
2mes
greater
(as
a
percentage
of
GDP)
in
developing
countries
than
in
industrialized
countries.
• According
to
the
World
Bank
with
data
of
Munich
Re
on
average,
92,6%
of
economic
loss
was
retained
by
governments
of
developing
economies
in
the
last
decade.
Risks
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3
Background
Strictly
private
&
confiden2al
Focusing
in
financial
consequences,
in
developing
economies
a
natural
catastrophe
could
be
comparable
with
liquidity
crunch.
GDP
Growth
rate
before
and
a_er
a
“Liquidity
Crisis”
Asia
(1997)
Mexico
(1995)
Russia
(1998)
GDP
Growth
rate
before
and
a_er
a
“Natural
Catastrophe”
Brazil
(1999)
Ecuador
(1998)
Mexico
(1985)
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
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Management
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Countries)
Honduras
(1998)
India
(1990)
4
Taxonomy
of
losses
Strictly
private
&
confiden2al
The
menu
of
financial
alterna2ves
for
risks
financing
is
in2mate
linked
with
the
nature
of
losses,
par2cularly
from
the
policy
maker
perspec2ve.
• Governments
through
regula2on
and
financing
creates
an
implicit
or
explicit
risk
management
policy.
Emergency
costs
(shelter,
food,
medical
help,
etc)
RegulaFon
Business
interrup2on
(e.g.
taxes)
Central
and
sub‐naFonal
Governments
Financing
Private
infraestructure
(housing,
buildings,
etc)
Public
Infrastructure
(buildings,
dams,
electricity
system)
Risks
Management
Services
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Climate
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5
Taxonomy
of
losses:
who
finance
the
losses
Strictly
private
&
confiden2al
In
order
to
understand
who
is
finally
financing
catastrophe
losses,
consider
for
example
the
year
2005,
Mexico
was
affected
for
3
hurricanes:
Emily,
Stan
and
Wilma.
What
is
difference
between
them?
Public
and
Private
parFcipaFon
in
the
risks
financing
during
hurricane
season
of
2005
in
Mexico
Risks
Management
Services
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on
Climate
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Countries)
6
Why
governments
need
risks
management?
Strictly
private
&
confiden2al
Governments
without
an
ex‐ante
strategy
of
risk
financing
could
rise
the
catastrophe
cost
for
themselves
and
the
en2re
economy.
•
•
A_er
a
disaster
popula2on
expects
a
quick
answer
from
the
government,
typically
through
post‐disaster
subsidies,
however
these
are
cost
inefficient,
because:
– they
are
not
targeted,
allocated
in
haste
under
poli2cal
pressure
without
proper
oversight.
– require
considerable
administra2ve
costs
to
deliver.
– finance
post‐disaster
projects
with
low
economic
return.
Addi2onally
these
type
of
help
is:
– ineffec2ve
as
they
take
too
long
to
deliver
and
result
in
prolonged
wai2ng
periods
for
disaster
vic2ms.
– insufficient,
as
the
government
never
has
enough
resources
to
help
everyone
in
need,
hence
they
are
allocated
on
first‐come‐first‐served
basis.
– inequitable
as
the
poorest
segments
of
popula2on
most
affected
by
disasters
receive
only
a
small
frac2on
of
assistance.
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
7
Why
governments
need
risks
management?
Strictly
private
&
confiden2al
A
na2onal
catastrophe
risk
financing
strategy
improve
the
public
finance,
minimizing
all
the
costs
and
liabili2es
related
to
the
catastrophe.
• From
government
perspec2ve,
beside
the
current
risk
poriolio
that
includes:
currency
risk,
interest
rate
risk,
oil
price
and
commodi2es
prices
among
others.
Natural
catastrophe
cost
should
be
include
within
the
na2onal
budget.
– Government
fiscal
exposure
to
natural
disasters
is
more
and
more
viewed
as
an
integral
part
of
overall
government
con2ngent
liabili2es.
– A
growing
recogni2on
of
differen2al
social
and
economic
impacts
of
natural
disasters
(
the
adverse
effect
on
the
poor).
• An
ex‐ante
strategy
allows
to
op2mize
the
sources
of
capital
for
risks
financing
minimizing
the
financial
vulnerability
of
the
public
finance.
• A
financial
ex‐ante
strategy,
as
part
of
integral
strategy
minimizes
casual2es
and
deaths.
Therefore,
financial
solu2ons
for
natural
disasters
become
more
prevalent
public
policy
in
many
developing
economies.
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
8
Building
a
risk
management
strategy
Strictly
private
&
confiden2al
Governments
should
work
in
parallel
in
two
fields:
as
regulator
and
as
risk
manager
of
its
own
risks.
• Regula2on
should
develop
an
ins2tu2onal
frame
for
risk
management
strategies
performance.
– Recognize
within
the
na2onal
budget
poten2al
liabili2es
that
comes
from
catastrophes.
– Promote
insurance
development
as
well
as
promote
new
financial
products.
– Create
teams
inside
the
government
with
skills
in
risk
management
• As
risks
manager,
the
government
in
its
different
levels
of
government
(na2onal
and
sub‐na2onal)
should
create
an
integrated
system
defined
by
four
elements:
Risks
iden2fica2on
Risk
assessment
Risk
mi2ga2on
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
Risk
Financing
9
Building
a
risk
management
strategy
Strictly
private
&
confiden2al
Governments
should
work
in
parallel
in
two
fields:
as
regulator
and
as
risk
manager
of
its
own
risks.
Prob.
Losses
Develop
a
na2onal
inventory
of
assets
and
data
collec2on
of
hazards
Develop
or
apply
analy2cal
models
of
assets
vulnerability
Improve
by
retrofijng
assets
against
natural
hazards
Build
a
broad
menu
of
source
of
capital
for
risk
financing
Risks
iden2fica2on
Risk
assessment
Risk
mi2ga2on
Risk
Financing
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
10
Op2mizing
the
sources
of
capital
Strictly
private
&
confiden2al
A
op2miza2on
of
the
mix
of
capital
sources
for
risks
financing
implies
combine
the
current
na2onal
budget,
capital
of
insurance
companies,
the
capital
markets
and
con2ngent
debt,
consequently
minimizing
the
cost
of
risks
financing.
RetenFon
RetenFon
Cat‐Bond
Insurance
Policies
Insurance
Policies
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
RetenFon
Agencies
RetenFon
Central
Gov.
Insurance
Policies
of
Agencies
Cat‐Bonds
Insurance
Policies
Central
Gov.
Cat‐Bonds
Intertemporal
RetenFon
(conFngent
Debt)
11
Development
of
Mexico’s
Risks
Management
Strategy
Strictly
private
&
confiden2al
Mexico
is
transi2ng
toward
a
integral
catastrophe
risks
management
strategy,
for
private
&
public
sectors
including
agricultural.
1985,
Ministry
of
Finance
develop
a
specific
regula2on
for
earthquake
reserves
in
insurance
companies.
1997,
Ministry
of
Finance
developed
the
first
calamity
fund
in
La2n
America
for
financing
of
reten2on.
2001,
Mexico
through
the
World
Bank
started
an
financial
assessment
of
catastrophes
vulnerability.
2006,
Ministry
of
Finance
developed
the
first
catbond
in
developing
economies
against
earthquake
for
expenses
expenses.
2006,
Ministry
of
Finance
develop
a
specific
regula2on
for
hurricane
reserves
in
insurance
companies.
2009,
Ministry
of
Finance
concludes
catastrophe
risks
assessment
on
public
assets
exposure.
1985,
Mexico
City
earthquake,
9000
deaths
and
8
billions
of
US
dollars
in
losses.
2000,
by
law
federal
agencies
buildings
should
be
insured
.
2002,
Ministry
of
Finance
developed
the
first
retrofijng
and
preven2on
fund
in
La2n
America.
2005,
Ministry
of
Finance
through
a
state
insurance
developed
the
first
weather
deriva2ve
in
La2n
America
for
agricultural
proposes.
2007,
Ministry
of
Finance
developed
the
first
risks
assessment
on
exposure
of
public
assets
against
natural
disasters.
2009,
Ministry
of
Finance
developed
the
first
catbond
in
developing
economies
against
hurricane
and
earthquake
for
emergency
expenses.
(1)
Op2mize
the
mix
of
capital
for
risk
financing,
covering
emergency
expenses
and
reconstruc2on,
(2)
promote
the
insurance
industry
depth
for
the
private
sector.
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
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Countries)
12
Concluding
remarks
Strictly
private
&
confiden2al
Catastrophe
risk
management
is
a
key
element
in
development
of
a
op2mal
public
finance
performance.
• There
is
strong
evidence
of
benefits
from
catastrophe
risk
management
at
the
country
level
and
regionally.
• Catastrophe
risks
management
can
improve
public
finance
through
capital
and
reinsurance
markets.
• It
is
possible
to
create
strategies
in
the
short,
medium
and
long
term,
gejng
results
in
a
short
term
frame.
• There
are
several
capital
sources,
like
capital
markets,
these
kind
of
sources
can
create
a
diversified
strategy
for
risk
financing
inside
the
public
finance
of
developing
economies.
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
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Management
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Countries)
13
Contact
info
Strictly
private
&
confiden2al
For
further
informa2on,
please
visit:
www.vcrisk.com
Victor
Cárdenas
Consultant
Specialist
[email protected]
[email protected]
Risks
Management
Services
for
Sovereigns
(Advisory
on
Climate
Change
and
Catastrophe
Risks
Management
for
Countries)
14
