PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: PIDC100 Public Disclosure Copy Project Name SEEC Catastrophe Risk Insurance Facility APL2 (Montenegro) (P127044) Region EUROPE AND CENTRAL ASIA Country South Eastern Europe and Balkans Sector(s) Non-compulsory pensions and insurance (70%), General water, sanitation and flood protection sector (30%) Lending Instrument Adaptable Program Loan Project ID P127044 Borrower(s) Republic of Montenegro Implementing Agency Europa RE Environmental Category C-Not Required Date PID Prepared 14-Dec-2011 Estimated Date of Appraisal Completion 01-Feb-2012 Estimated Date of Board Approval 22-May-2012 Concept Review Decision Track I - The review did authorize the preparation to continue I. Introduction and Context Country Context The key natural hazards posing risk to the population and property in Montenegro are floods, earthquakes, landslides and forest fires. The valleys of larger watercourses, in which the largest settlements and the best farmland, infrastructure, and industry arelocated, are highly prone to floods. The floods occur mostly along the river courses of the Tara (Drina) and the Lim and the lowlands bordering Lake Skadar. In 2010 alone there were two periods of severe flooding, the worst in over a century, which displaced approximately 2,000 people. Montenegro is also vulnerable to low and medium-intensity earthquakes (Montenegro#s seismological observatory registered more than 200 earthquakes in 2009), and occasional major earthquakes with devastating geological impacts such as mud and rock slides. Human activity has accelerated soil erosion, increasing the landslide risk. Climate change is a major concern and is likely to exacerbate flooding, droughts and forest fires. Sectoral and Institutional Context Public Disclosure Copy Governments in the region have very limited financial capacity to assist their populations in regaining assets and productive capacity destroyed by natural disasters. An illustrative example of this is the 1994 Macedonia floods, which caused damage worth 77times the amount allocated in the budget by the government for emergency response. For this reason, a basic tenet of disaster risk mitigation is the transfer of financial risk from the public to the private sector. Catastrophe risk insurance is one of the pillars of the Bank Group#s Disaster Risk Mitigation Strategy. Catastrophe risk insurance is a means of transferring the financial and fiscal risk of disasters from government to the private sector. This not only protects the national economy as well as homeowners and SMEs, but enables more effective targeting of government assistance following a disaster, all of which become increasingly important with the global financial crisis. The World Bank has experience in facilitating the establishment of national and regional insurance pools, both disaster-related (such as the Caribbean Catastrophe Risk Insurance Facility, the Turkish Catastrophe Insurance Program, and the Romanian Catastrophe Insurance Pool) or non-disaster related (the African Trade Insurance Facility). This is a highly specialized field and the World Bank is uniquely placed to mobilize both the expertise and the participation needed to ensure a solid foundation for such a facility. The World Bank, jointly with the UNISDR and the Swiss Secretariat for Economic Affairs (SECO), is addressing the problem of low catastrophe and weather risk insurance penetration in Southeastern Europe through the creation of the regional Catastrophe Risk Insurance Facility (SEEC CRIF), which has been recently incorporated as "Europa Reinsurance Facility Ltd" (Europa Re). Relationship to CAS The proposed operation contributes to the Country Partnership Strategy (CPS) goals to strengthen institutions and competitiveness in line with EU accession requirements and improve environmental management. The project, which is included in the FY11-14 CPS, will help to develop the private insurance industry and will protect the national economy, individuals and businesses against financial losses due to natural disasters. It will assist with establishment of a risk-based regulatory framework for catastrophe and weather risk insurance compliant with EU Solvency II requirements. II. Proposed Development Objective(s) Proposed Development Objective(s) The Project Development Objective (PDO) is consistent with the development objective for the SEEC CRIF program: to help increase the access of homeowners, farmers, the enterprise sector and government agencies to financial protection from losses causedby climate change and geological hazards. Key Results Public Disclosure Copy The most important result of SEEC CRIF is the increased access to affordable weather risk coverage and catastrophe insurance for millions of people and thousands of enterprises in the region. The aim is to raise catastrophe and weather risk insurance penetration among homeowners, farmers, the enterprise sector, and government entities from the current 1-5 percent to 15 percent over the next 5 years, without making the insurance compulsory. Consistent with APL 1, the PDO level results indicator will be the percent of homeowners, farmers, enterprises and government holding catastrophe insurance policies. The baseline will be set during project preparation (but earlier studies have indicated that the overall penetration rate is around 1%), and annual targets will be determined. III. Preliminary Description Concept Description The proposed project is the second phase of a horizontal Adaptable Program Loan and comprises a US$2.0 million IBRD loan to Montenegro to support its efforts to join Europa Re by financing its membership contribution to the Facility. The proposed project will enable Europa Re to provide reinsurance support and required market infrastructure for innovative insurance products that will cover the costs of replacing physical assets (such as homes, business equipment and inventory, greenhouses) and livelihoods lost to natural disasters. The first phase (APL1), approved by the World Bank Group Board on March 3, 2011, consists of IBRD loans to Serbia and FYR Macedonia. The second phase (APL2), under preparation, comprises an IBRD loan to Montenegro. And the third phase (APL3), also under preparation, comprises IDA credit to Bosnia and Herzegovina. The PDO will be achieved through SEEC CRIF, a catastrophe and weather risk reinsurance program, which will enable a rapid expansion of penetration for weather and catastrophe risk insurance products among beneficiaries in participating countries. A non-profit, government-owned organization, Europa Reinsurance Facility Ltd. (Europa Re), has been established as a specialized regional reinsurer to implement the program. Europa Re was incorporated under Swiss Law in Zug, Switzerland in November 2009 and will provide reinsurance, pricing and underwriting services to private insurers in member countries for standardized catastrophe and weather risk insurance products. The main design features of SEEC CRIF closely follow the previous prototypes of national and regional catastrophe and weather risk programs developed with direct technical and capital assistance from the Bank, however, the program contains several innovations. These include (i) the development of both traditional indemnity type catastrophe insurance products and parametric index-based weather risk hedging contracts; (ii) private management and governance of the Facility; (iii) a sunset clause for the Public Disclosure Copy duration of government participation in the program; and (iv) the openness of the Facility to a wider range of clients, inclusive of households, farmers, government agencies and the enterprise sector exposed to weather risk. There are two components under the overall program. Component 1 (Countries' Participation in Europa Re) supports SEEC countries' efforts to join Europa Re by financing their membership contributions to the Facility. The countries' membership contributions to Europa Re form the company#s initial capitalization. Component 2 (Technical Assistance), financed by donor funds (SECO and GEF grants) and implemented by Europa Re, includes: (i) risk mapping and modeling for participating countries (ii) design and pricing of appropriate catastrophe and weather risk insurance products; (iii) development of a web-based underwriting platform; (iv) small weather monitoring stations to support parametric weather insurance; and (v) technical assistance for regulatory and policy reforms, to create an enabling market environment. Most of the technical and regulatory work funded by the Technical Cooperation component will be carried out in the member countries after the disbursement of their membership contributions into the Facility. IV. Safeguard Policies that might apply Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment OP/BP 4.01 ✖ Natural Habitats OP/BP 4.04 ✖ Forests OP/BP 4.36 ✖ Pest Management OP 4.09 ✖ Physical Cultural Resources OP/BP 4.11 ✖ Indigenous Peoples OP/BP 4.10 ✖ Involuntary Resettlement OP/BP 4.12 ✖ Safety of Dams OP/BP 4.37 ✖ Projects on International Waterways OP/BP 7.50 ✖ Projects in Disputed Areas OP/BP 7.60 ✖ V. Tentative financing Financing Source Amount Public Disclosure Copy Borrower 0.00 International Bank for Reconstruction and Development 2.00 Total 2.00 VI. Contact point World Bank Contact: Alison C. N. Cave Title: Senior Urban Development Specialist Tel: 473-3952 Email: acave@worldbank.org Borrower/Client/Recipient Name: Republic of Montenegro Contact: Title: Tel: Email: Implementing Agencies Name: Europa RE Contact: Title: Tel: (41-44) 380-5090 Email: heinz.vollenweider@europa-re.com VII. For more information contact: Public Disclosure Copy The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop