Program Review SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES A partnership with the Swiss State Secretariat for Economic Affairs (SECO) World Bank Disaster Risk Financing and Insurance Program JULY 2016 Schweizerische Eidgenossenscha Confédération suisse Confederazione Svizzera Confederaziun svizra Swiss Confederation Federal Department of Economic A airs, Education and Research EAER State Secretariat for Economic A airs SECO Program Review SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES A partnership with the Swiss State Secretariat for Economic Affairs (SECO) World Bank Disaster Risk Financing and Insurance Program JULY 2016 Schweizerische Eidgenossenscha Confédération suisse Confederazione Svizzera Confederaziun svizra Swiss Confederation Federal Department of Economic A airs, Education and Research EAER State Secretariat for Economic A airs SECO SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES Table of Contents iv Foreword vi Acknowledgments vii List of Acronyms viii Executive Summary 1 Program Overview 2 Summary of Program Outcomes 3 Summary of Progress 8 Lessons on Disaster Risk Finance from Middle-Income Countries 9 Sharing Knowledge of Disaster Risk Finance Worldwide 13 Detailed Evaluation of Country Progress 13 Colombia 15 Peru 17 Vietnam 19 Azerbaijan 20 Morocco 21 Indonesia 22 Serbia 24 South Africa 25 Ghana, Egypt, Tunisia iv SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES Foreword Ivo Germann, Head of Operations, SECO and Financial planning for disasters helps Alfonso Garcia Mora, Director, F&M, World Bank governments shift from emergency borrowers to effective risk managers and match potential Losses caused by natural disasters worldwide liabilities with the required financial resources. reached an average of $165 billion per year over It ensures that following a disaster funding is the last 10 years. Middle-income countries available for immediate humanitarian response. are affected worst—relative to GDP—as But also it avoids interruptions to investments economic growth and urbanization increase in crucial public services, such as education or the concentration of assets exposed to natural health care. disasters. This can affect growth, slow down development progress and keep people in Switzerland’s State Secretariat of Economic poverty, or push them back into it. In addition, Affairs (SECO) and the World Bank Group with under-developed domestic catastrophe risk (WBG) have since 2011 built a joint program insurance markets - penetration is estimated supporting governments in middle income at less than 10 percent in most middle-income countries to take a risk management approach countries-, the governments bear a large share for the fiscal management of disaster and of these losses, either explicitly or implicitly. climate risks. The Program helps countries develop comprehensive financial protection For a finance minister, these costs are a strategies, bringing together a combination contingent liability that should be accounted for of financial instruments to protect against in the fiscal management framework. The IMF‘s disasters of different frequency and severity. To Fiscal Transparency Code reminds us that it is ensure efficient response following a disaster, a good practice principle to ‘analyze, disclose, it is focused not just on securing the funds and manage the potential fiscal exposure to in advance but also put in place the budget natural disasters and other major environmental systems to rapidly and effectively execute the risks’. If not properly handled, such contingent money in the aftermath. liabilities can cause major budget volatility when they materialize. For example the This Program is being implemented by the government will need immediate liquidity Disaster Risk Financing and Insurance Program following a disaster to pay for emergency (DRFIP), anchored in the Finance and Markets response and previously unbudgeted longer Global Practice (F&M GP) of the WBG. It is term financing for reconstructing infrastructure. one component of the broader Swiss-WBG Often the government also shoulders additional partnership on fiscal risk management for costs through unplanned post-disaster support middle income-countries, which also includes to affected local governments, families, and a component on government debt and risk small businesses. management. SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES v The Program offers SECO an opportunity As the first phase of the Program comes to to support its partner countries in achieving a close, this report highlights the Program’s macroeconomic stability and longer-term results, pulling together operational lessons fiscal sustainability, which are essential for learned over the past four years. Enhancing long term and inclusive economic growth. understanding of the economic and fiscal An active management of fiscal risk caused impact of disasters and improving capacity to by natural disasters makes these countries devise and implement cost-effective financial more resilient against climate change protection strategies are the key outcome under which is expected to exacerbate extreme this Program. This is being achieved for example weather events. SECO’s engagement in through the development of a national disaster this partnership is part of Switzerland’s risk financing strategy for Colombia, Peru, longstanding effort to promote disaster risk and Serbia; the development of catastrophe reduction as an essential requirement for risk models in Azerbaijan and Vietnam; the sustainable development. development of a new law in Morocco to deepen the domestic property catastrophe risk insurance This work is directly contributing to the market; and supporting the Ministry of Finance WBG’s twin goals of ending extreme poverty of Serbia to consider the establishment of a and boosting shared prosperity. Increased dedicated Fiscal Risk Unit in Serbia. financial resilience against disasters helps break the poverty cycle, often perpetuated by While much has been achieved over the past disasters, and prevents countries from losing four years, this has just been the start of a years of development gains by efficiently longer process in these countries and beyond managing shocks. The Program also supports to shift from emergency borrower to active the development of deep, inclusive, efficient, risk manager. A second phase of the Program is and stable financial systems, which is part of the currently under discussion to help governments F&M GP’s strategy. further improve the financial management of the disruptive shocks from natural hazards. Alfonso Garcia Mora Ivo Germann Director Head of Operations Finance and Markets Global Practice State Secretariat for Economic Affairs SECO World Bank Swiss Confederation vi SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES Acknowledgments This report was prepared by the DRFIP team, the countries under the Program in Venice, informed by the monitoring and reporting Italy, in May 2016. It formed the basis for active documents produced semi-annually for every knowledge exchange between the countries country of engagement. Consultation with the and discussions on the second phase of the World Bank teams that lead the engagement Program. in the different countries have been critical to understand the challenges and lessons learned. The Disaster Risk Financing and Insurance Program is a joint program of the World Bank’s This report was developed to review the Finance & Markets Global Practice and the progress made and consolidate lessons learned Global Facility for Disaster Reduction and over the four years of the program (2012- Recovery (GDFRR), with financial support 2016). It takes stock of ‘what works’ and what from donor partners including SECO, the UK we have learned. The report is split in two Department for International Development, parts. First, a summary of program progress, the European Union, the Government of Japan, outcomes achieved and consolidated lessons The Government of Germany, the Rockefeller learned across the countries. Second, detailed Foundation, and the Swedish International updates on progress made in each country of Development Cooperation. DRFIP has provided engagement. The report informed discussions advisory services on disaster risk financing and at a peer learning workshop, bringing together insurance to more than 60 countries worldwide. SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES vii List of Acronyms ADB Asian Development Bank APEC Asia-Pacific Economic Cooperation DRF Disaster Risk Finance DRFIP World Bank Disaster Risk Financing and Insurance Program DRM Disaster Risk Management IMF International Monetary Fund GFDRR Global Facility for Disaster Reduction and Recovery MICs Middle Income Countries OECD Organisation for Economic Co-operation and Development PPPs Public-Private Partnerships SBS Peru’s Insurance Supervisory Authority SECO Switzerland’s State Secretariat for Economic Affairs The Program The World Bank-SECO Sovereign Disaster Risk Financing and Insurance Program for Middle-Income Countries WBG World Bank Group viii SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES Executive Summary Switzerland’s State Secretariat for Economic instance, guidelines provided by the Program Affairs (SECO) and the World Bank’s Disaster have been key to improving the quality and Risk Financing and Insurance Program coverage of insurance of public assets in (DRFIP) launched a partnership to support Colombia and Peru, and of private assets in middle-income countries (MICs) strengthen Morocco. their financial resilience against natural disasters. Established in late 2011, the Sovereign The Program has adopted a demand-driven Disaster Risk Financing and Insurance Program approach that delivers a large number of for Middle-Income Countries (the Program) is outputs targeting specific client needs. one component of a broader World Bank-SECO In several countries, such as Colombia, partnership on fiscal risk management for MICs. Peru, and Vietnam, engagement began with The Program provides tailored advisory services understanding the needs of the government and institutional capacity building for public and providing customized solutions for financial management of natural disasters. specific demands. Overall, 66 reports have been produced targeting specific technical The Program’s engagement has spanned knowledge gaps and 25 trainings and nine countries, making steady progress workshops have reached more than 680 in many. At its inception the countries people, strengthening governments’ capacity proposed for participation were Azerbaijan, to make informed decisions. This has set Colombia, Egypt, Ghana, Indonesia, Peru, the foundation to develop comprehensive South Africa, Tunisia, and Vietnam. Progress national-level strategies. across the different countries has varied in nature and scope. The Program has Lessons from the past four years had successful engagement in Azerbaijan, highlight what has made this Colombia, Peru, Indonesia, and Vietnam; engagement successful it then expanded to Morocco and Serbia. Engagement has not materialized in Egypt, 1. Government ownership: Active ownership Ghana, South Africa, and Tunisia. of the agenda by the government has been instrumental in countries that have made The Program has seen promising outcomes substantial progress. in four years. Understanding of the financial 2. Identifying key stakeholders: Building impact from disasters has increased in all relationships with several relevant participating countries. This understanding ministries and departments in each has often influenced or enabled changes in country proved to be effective in the institutional environment of countries to continuing engagements despite changes in improve financial planning for disasters. For government. SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES ix 3. Clear identification of priorities and challenges: 6. Balance between technical and policy solutions: Having that discussion early on in the Giving equal weight to both technical and engagement enabled a strategic approach in policy aspects of Disaster Risk Finance the support provided. (DRF) has helped in finding sustainable 4. Timely delivery of customized solutions: solutions that can be implemented. Responding to client needs in a timely and 7. Capacity building of government officials: responsive manner has been a key factor for Peer-exchange, training workshops, strengthening relationships. and targeted technical assistance have 5. Regular interaction with counterparts helps contributed to a sustainable DRF agenda. build capacity: Local consultants have made engagement with government officials possible. SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 1 Program Overview The Program’s development objective is to 4. Review of the regulatory framework for increase the financial resilience of participating catastrophe risk insurance; countries to natural disasters. It supports 5. Knowledge transfer and training to build governments in improving their financial capacity for sovereign disaster risk finance CHAPTER capacity to respond in the aftermath of natural strategy; 1 disasters while protecting their long-term fiscal 6. Implementation of market-based disaster balance. In addition, the Program seeks to build risk financing and transfer solutions. government capacity on sovereign financial protection by increasing understanding about Way Forward disaster risk financing and insurance solutions and by helping countries make informed Efforts are under way to move the decisions as part of their broader public financial engagement from the national to the sub- management, disaster risk management (DRM), national level. This shift has begun for example and financial sector development strategies. in Colombia in light of its implementation of a national-level strategy. The ministry of finance Each country’s pace of progress on the is aiming to develop a five-year implementation DRF agenda is unique, given differences in plan at the national and sub-national levels the institutional environment, needs, and by January 2017, which will define products priorities. Each country in the Program has to be implemented, institutions involved, and engaged in different activities and requested a relevant timeframes. diverse range of outputs customized to their specific needs. The Program has developed a Increased development of DRF analytics and three-stage approach towards scaling up the tools is necessary to meet country demands. DRF engagement, beginning with a diagnosis; Several countries such as Colombia, Indonesia followed by a preparation phase, setting the and Peru have already benefitted from more ground for the implementation of financial informed decision making as a result of DRF instruments or institutional reforms. analytics and tools. However, demand for these tools is steadily rising as countries such To achieve its objectives, the Program’s as Morocco or Vietnam focus on making engagement is designed around a set of key more informed decisions on the financial activities. These include: management of disaster impacts. Several countries are developing and 1. Catastrophe risk modeling; enhancing domestic insurance solutions. As 2. Assessment of economic and fiscal impact countries better manage the fiscal impact of of disasters; disasters, they increasingly look to reduce the 3. Review of fiscal management of natural underlying liability to the state through the disasters; development of insurance solutions for public 2 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES and private assets. This helps transfer risk to disasters. One important outcome has been specialized risk carriers. to inform institutional change in several countries. In Colombia, technical advice is Principles and tools for financial risk informing laws on risk retention measures such management are increasingly applied to new as the national disaster risk management fund. areas that impact the contingent liability of In Morocco, technical inputs have informed the government. For example, governments the draft law on catastrophe risk insurance to start looking to manage the financing of social expand the coverage of domestic insurance protection schemes or the potential cost and to propose a solidarity fund for uninsured of drought on energy production through households. Other institutional improvements better financial risk management. Experience include the potential development of a has shown that DRF is most effective when centralized approach to insurance of public integrated into broader development strategies assets in Colombia and its already enhanced in areas such as climate and disaster risk coverage and quality of insurance of public management, energy and water, infrastructure assets; support to Azerbaijan for identifying and urban development, agriculture and food appropriate stakeholders to develop a DRF security, macro and fiscal stability, public strategy (such as the country’s insurance debt and risk management, financial sector department, which is designing policies on risk development, and scalable social protection. transfer); and support to Serbia to conduct a functional review of its ministry of finance as groundwork for the establishment of a fiscal Summary of Program risk management unit. Outcomes Institutional capacity that the Program has The Program’s activities have helped countries helped build has led to the implementation of improve perceptions and understanding of successful reforms. For instance, the Program the economic and fiscal impact of natural worked with the government of Colombia disasters. Colombia and Peru have integrated to analyze international guidelines of best a risk layering approach within their national practices on the insurance of infrastructure and strategies, while Indonesia, Vietnam, and implement them in Colombia’s requirements Serbia are exploring that option. Support for for private concessions for the construction of development of catastrophe risk models to public infrastructure. The Ministry of Finance facilitate a better understanding of risk and now uses the guidelines among its criteria for exposure has remained central to the Program, accepting or rejecting proposed public-private with work undertaken in Azerbaijan, Colombia, partnerships (PPPs). In Peru, the Program Peru, Vietnam and Morocco. Additionally, cost- also delivered guidelines after analyzing a benefit analyses on the use of fiscal instruments database of insurance contracts of government for specific hazards have been carried out for concessions; the government incorporated Colombia, Indonesia, Morocco, and Peru. the guidelines into the contract for a road concession and into its standard templates for The Program has improved institutional concessions. The Program’s technical support capacity to devise and implement cost- for calculation of a catastrophe reserve is effective financial strategies for the fiscal helping to enhance Peru’s regulatory framework protection of the state against natural for coping with catastrophe risk. SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 3 be an important driver of institutionalizing Summary of Progress progress. Such measures have often created a demand for analytical tools and services to help This section provides a brief overview of government officials understand and respond to progress made across all the countries that the technical questions. Providing curated access to Program has engaged in and lessons that have knowledge materials and technical expertise has been learned. A key insight has been the need for been a key demand; the Program has responded, complementary support on policy development for example, through targeted technical notes that parallels advances in technical expertise. and regional and national workshops on The development of financial protection experience and lessons learned. strategies at the national level has proven to Progress made in the countries under the Program (as of June 2016) Serbia Azerbaijan Morocco Vietnam Colombia Indonesia Peru South Africa Diagnostic Preparation Implementation 4 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES Colombia has improved its understanding of financial vulnerability to disasters, is implementing a national DRF strategy, and is expanding this work to the subnational level. risk insurance Catastrophe protecting investments worth US$38 billion Joint Cat Bond with the Paci c National DRF Strategy Alliance under exploration Capacity building Creation of public (PPPs and insurance) asset and insurance and insurance guidelines policies databases. for subnational entities Pilot planned for July 2016. Dra by-law for national DRM Fund Peru has increased its understanding of the financial costs from earthquakes and has developed a national- level DRF strategy. National Earthquake Risk Pro le Joint Cat Bond National DRF with the Paci c Strategy Policy Alliance under Framework exploration Creation of Household Reinsurance Catastrophe Pool by private insurers (on-going) Analytics Tool for Earthquake Financing and CBA Tool for risk- nancing instruments SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 5 Vietnam has improved its institutional capacity to develop a comprehensive, cost-effective approach to financial protection, supported by the development of a national catastrophe risk model. National Catastrophe Risk Model (ongoing) Web-based platform Inclusion of insurance of for standardized public assets in dra law on insurance policies and public assets management incurred loss database (Pilot planned August 2016) Azerbaijan has focused on catastrophe risk modeling, in addition to mobilizing greater support for the DRF agenda within the government. National Catastrophe Risk Model with database developed by sub-regions Development of Mobilization of parameters for Insurance institutionalizing Department to lead capacity to develop risk-transfer policy DRFI strategies approach at sovereign and market level 6 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES Morocco has developed a holistic disaster risk management approach, including the promotion of domestic catastrophe risk insurance solutions. Inputs to law on catastrophe risk insurance Actuarial tools to assess Potential establishment of scal implication of a ‘Solidarity Fund’ to cover dra law on catastrophe non-insured households risk insurance (ongoing) Indonesia has built capacity on sovereign disaster risk finance, through analytical tools, training, and workshops on sovereign catastrophe risk transfer solutions. Financial Decision-Making package for nancial protection against earthquakes Assessing the Fiscal Dra ing of decree impact of on Natural agricultural Disaster Insurance insurance Transaction SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 7 Serbia has improved its capacity to deal with financial implications from disasters and to develop appropriate financial mechanisms. DRF Diagnostic to assess current state of play and existing mechanisms Functional review National DRF for establishment of Strategy under a scal risk unit in development the ministry of nance South Africa engagement closed as a result of other priorities by government counterparts. Egypt, Tunisia, Ghana engagement were not initiated, mainly due to the political situation. 8 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES pave the way for developing comprehensive Lessons on Disaster Risk strategies for financial protection. Finance from Middle- Income Countries Start small, practical, and fast. Countries often start engagements by requesting assistance for Government ownership and strong “simple” and “small” products. By providing institutional counterparts are key to rapid, timely, and high-quality responses to facilitating progress. The cases of Colombia, such requests, the Program team develops Peru, Serbia, and Vietnam highlight the way in trust and credibility with its government which government interest and buy-in further counterparts, making it easier to broaden the dialogue and action on disaster risk finance. In scope and nature of the DRF engagement. contrast, a lack of government ownership of the DRF agenda stymied the discussion in South Continued contact with counterparts and Africa, Ghana, Tunisia, and Egypt. For example, local capacity are critical. The engagement of the creation of a dedicated fiscal risk unit in the local consultants based in the country has been ministry of finance has often proved to be a key critical in all countries that have made strong stepping stone towards a strong DRF agenda. progress. An in-country presence has helped the Program maneuver local institutions, Identifying key stakeholders early in the ensured regular contact between the teams and process is important. Engaging stakeholders government counterparts, and supported the with an interest in DRF both inside and outside building of capacity of public officials. the government helps to advance project implementation. A high-level champion in Development of efficient and sustainable the government can be key to anchoring DRF financial solutions requires a balance as a government priority. It is also important between technical and policy work. When to identify and build relationships with implementing financial protection strategies, additional government counterparts, such as governments need to develop sophisticated officials with responsibilities for managing instruments, a task requiring highly technical contingent liabilities, including personnel in analysis. Yet governments also need to develop fiscal risk offices. Furthermore, so progress broader strategic policies to set the overall does not completely stall due to turnover of direction and to ensure that the DRF work links key government personnel, relationships with a to the government’s overall work program in wider group of stakeholders are needed. Finally, other relevant areas. To develop this balance, engagement with the local private sector can it is necessary that World Bank teams have a tap critical technical knowledge and expertise. balance of technical as well as policy expertise. The legal mandate on DRF is often shared across multiple institutions, and all relevant Peer exchanges, training, and targeted stakeholders should be involved if possible. technical advice contribute to building the capacity of government officials in scaling Defining clear priorities and identifying up DRF solutions. Involvement of public challenges at the start of the Program allow officials in specific technical assistance, such for a strategic approach. Creating an initial as the development of products; facilitation of work plan spurs the development of actionable their participation in workshops and training and effective policy reforms and financial sessions; and delivery of simple analytical solutions. Early planning discussions may also tools to inform decision making have all been SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 9 important to building capacity. Collaboration was informed by the experience of Colombia and between countries has allowed officials to Peru. The objectives of the strategic framework benefit from one another through exchange of include (i) incorporating disaster risk analysis knowledge and experience. in public investment planning processes; (ii) developing instruments and measures for a financial protection strategy in the event Sharing Knowledge of disasters; (iii) systematizing information of Disaster Risk on and appraisals of investments in disaster Finance Worldwide prevention, mitigation, preparedness, response, and reconstruction; and (iv) promoting public The Program has informed discussions and and private investment in risk management.1 actions on disaster risk finance beyond the The adoption of the framework has been the participating countries across the world. culmination of a series of public reforms, The positive spillover effect from the in-depth consultations, and studies by the Panama technical work carried out under the Program government in recent years and creates a is clear in the cases discussed here. These cases strong legal mandate for establishing a financial also act as models for other middle-income management strategy that addresses natural countries striving to develop similar policy disasters.2 approaches to manage the financial costs from disasters. Such peer-exchange goes both ways, The Program has stimulated global policy and countries in the Program also benefit from discussions on financial resilience to the experience of others; for instance, they have disaster risk in international fora. Financial learned from Mexico about fine-tuning financial management of disaster risk has become a instruments to increase efficiency of their subject of international exchanges of knowledge financial protection strategy. and policy in recent years. Peru, for example, placed DRF in its agenda for its 2016 presidency The Philippines has prepared a comprehensive of the Asia-Pacific Economic Cooperation national financial strategy. The Philippine (APEC) Forum. Morocco presented its government’s strategy, created in 2014, aims experience at the 2015 Understanding Risk and to protect three levels of society: the national Finance Africa conference to 450 policy makers budget, local governments, and individuals. The from across Africa. Several countries took part in work in the Philippines also takes advantage of a 2015 seminar on Disaster Risk Finance in Asia and helps refine the analytical tools developed for organized by the Organization for Economic Colombia and Indonesia. World Bank support to Co-operation and Development (OECD) and the the Philippines Insurance Commission to improve Asian Development Bank (ADB). regulation of catastrophe risk insurance and management of insurance databases builds on the The combined experience and knowledge experience of Colombia, Peru, and Vietnam. from this sustained partnership and dialogue with public and private sector partners has Panama has enacted a national strategic informed the development of an operational framework for financial management of disaster framework for public financial management risk. In 2014, Panama became the first country of natural disasters. The framework is a in the world to enact by law a national strategic practical and comprehensive resource on framework for the financial management of good practices for governments that aim to disaster risk. The development of this strategy establish and improve disaster risk financing 10 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES and insurance activities.3 The experience under may take several years to accomplish. Over time, the SECO partnership has been particularly a long-term strategy developed around various important in the development of these good ongoing activities can help the government practice guidelines. build a comprehensive approach to the financial management of disasters. The operational framework is a practical guide to support decision makers who look to The figure below shows core technical steps a strengthen their nation’s financial resilience government needs to take when implementing to natural disasters. Some short-term steps may financial protection solutions. It has to address urgent problems while decision makers understand the risks it faces, consider where consider long-term and more comprehensive resources may be obtained following a disaster, financial protection policies. For example, for and identify appropriate channels to ensure a ministry of finance to use risk transfer, it may that those resources reach the intended be necessary to change existing law, a step that beneficiaries without delay. SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 11 Operational Disaster Risk Financing and Insurance Framework: Core technical steps Risk assessments for financial protection quantify potential disaster impacts based on historical and simulated data. This of- ten requires investments in the necessary underlying hazard, exposure, and vulner- ability data. This also includes building an effective interface between the policy maker and underlying technical models. PRE-DISASTER Effective post disaster re- Assess Risks sponse and recovery relies on access to sufficient and timely resources following a disaster. Sustainable financial protec- tion requires reducing under- This includes: lying drivers of this risk. (i) Arranging the required financial resources for the It complements risk reduc- tion by managing residual Reduce government to meet its Arrange Financial contingent liabilities risk which is not feasible or Underlying Risk not cost effective to mitigate. Solutions (Links to DRM) (ii) Developing catastrophe It also creates incentives to risk and agricultural insur- invest in risk reduction and ance markets, building on prevention by putting a price Public-Private Partner- on risk and clarifying risk ships ownership. (iii) Develop rules and arrange Deliver Funds financing instruments for to Beneficiaries scalable social protection POST-D I S A S TE R Resources should reach beneficiaries in a timely, transparent, and account- able fashion. This requires effective administrative and legal systems for the appropriation and execution of funds for the government budget, insurance dis- tribution and settlement (often through private channels), as well as social protection programs. Source: World Bank (2014) Financial Protection against Natural Disasters ENDNOTES 1 https://www.gfdrr.org/sites/gfdrr/files/publication/Panama-Strategic-Framework-for-the-Financial- Management-of-Disaster-Risk.pdf 2 https://www.gfdrr.org/sites/gfdrr/files/publication/Panama.pdf 3 https://olc.worldbank.org/sites/default/files/Financial%20Protection%20Against%20Natural%20Disasters.pdf SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 13 Detailed Evaluation of Country Progress government entities to improve collaboration Colombia and coordination for implementation of the Context national strategy. CHAPTER 2 In the last 40 years, natural disasters have cost The Colombian government has enabled Colombia an estimated US$2.04 billion and protection of infrastructure investments destroyed 190,000 houses. The impact of the worth US$38 billion. The Program provided 2010–2011 La Niña rainy season brought to a series of technical notes to inform the light the complexity of hazard risk in Colombia development of a pilot scheme for a collective and highlighted existing gaps in the national approach to insurance of public assets. The DRM system. Floods in 2012 alone hit some 3.5 Program provided international good practices million people with unprecedented damage and from private insurance markets to improve losses, underscoring the need to strengthen requirements for catastrophe risk insurance the national system to manage disaster risks of PPPs, which helped protect infrastructure proactively.1 The La Niña events revealed that investments worth $38 billion. In addition, infrastructure built under PPP concessions the Program supports the improvement of was often not properly insured, saddling the quality and coverage of insurance for public government with the reconstruction cost. As assets by (i) issuing insurance guidelines for the country planned major new investments in the central and subnational levels; and (ii) infrastructure through PPPs of up to $38 billion, developing internet-based software to improve it became a top priority to secure adequate the management of data on insurance policies catastrophe risk insurance for PPP concessions. and exposure of nationally owned property. The drafting of a bylaw on DRM for the National Overview of Progress Fund will strengthen budgetary measures to retain risk more effectively. In 2013, Colombia became the first country in the world to develop a dedicated national DRF The government’s interest in parametric strategy. Colombia’s National Development risk-transfer solutions also led to a number Plan of 2010–2014 required that the Ministry of technical notes to evaluate a potential of Finance lead the development of a DRF catastrophe swap. The analysis, produced strategy for reducing fiscal vulnerability of the with the Colombia Geological Survey and the country. This was reinforced by the passage of Ministry of Finance, was developed in 2014, DRM legislation in 2012. With the Program’s with supporting documents and databases that technical assistance, the national DRF strategy can be run using the Comprehensive Approach was finalized in December 2013. In 2014, the to Probabilistic Risk Assessment (CAPRA) Program supported the government to analyze tool. Colombia decided not to proceed with a the functions and mandates of different catastrophe swap at the time, but the analysis 14 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES is now being used to evaluate the feasibility of a credibility with the client and demonstrated joint catastrophe bond among the countries of the technical skills and knowledge that the Pacific Alliance.2 officials could draw on. The success of those smaller products led to development of more As of December 2015, 26 reports have been sophisticated products, and the Program’s prepared and 195 officials have been trained broader engagement on the DRF agenda. The through 10 workshops. In coordination with resulting products have also been used by other the parallel SECO-financed project on fiscal and countries (both as part of the Program as well debt risk management, for example, four regional as beyond) to advance their DRF strategies. workshops were organized on international good practices on insurance of PPPs, training 83 public Global commitments can provide incentives officers from 27 territorial entities. for quick and timely action. Colombia currently is working towards OECD membership, and its Colombia’s national DRF strategy has commitments as part of that process have helped informed efforts by several countries, to accelerate some aspects of the Program. including Costa Rica, El Salvador, Peru, Commitments made at global or regional policy Panama, the Philippines, and Vietnam. summits can also spur domestic policy reforms. Colombia’s improved management of insurance data is being replicated in Panama, the A change of government can slow progress. In Philippines, and Vietnam, in collaboration with 2014, although the President of the country was the insurance supervisory authorities, local re-elected, personnel changes at the Ministry insurance companies, and national insurance of Finance slowed work for several months. associations. Knowledge and peer learning The Program was able to leverage the good with Peru, Panama, and Mexico have in turn relationship with the government’s procurement contributed to Colombia’s expertise. office (Colombia Compra Eficiente) to re-engage. That experience illustrates the Lessons Learned importance of forming relationships across the government, in addition to the main Strong government ownership and engaged counterparts in the Ministry of Finance. partners are critical to DRF reforms. The engagement of selected high-level decision Next Steps makers has been key to progress. In Colombia, having a dedicated risk department in the The Program will support the continued Ministry of Finance to manage contingent implementation of the national strategy as liabilities has provided a strong institutional well as expanding the scope of risk-transfer counterpart, established the leadership and risk-retention solutions. The Program will of the Ministry of Finance, and supported continue to support the government’s priorities coordination with other government entities. to: (i) develop a cost-benefit analysis of current financial instruments for financing losses from Understand the country’s needs first, then earthquakes; (ii) improve quality and coverage provide quick and customized solutions. At of property insurance by standardizing terms the beginning, the Program invested time to for buying property insurance policies, develop develop a strong relationship with government web-based software for managing buildings counterparts and to deliver quick, demand- and property insurance, and create guidelines driven products. Those steps built trust and for property insurance; (iii) develop the bylaw SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 15 for establishing a National DRM fund; and losses. Technical products have helped the (iv) evaluate the potential for issuing a regional government to better understand and manage catastrophe bond for the Pacific Alliance. the financial costs of disasters. The government requested support in developing a catastrophe Peru risk profile of Peru, with an initial focus on the priority sectors of health, education, Context water, and sanitation in Lima-Callao. In 2014, the Ministry of Finance developed a national Peru is vulnerable to a large number of risks and seismic risk profile, with the Program providing hazards. Between 1970 and 2010, Peru was impacted technical inputs and quality control that will by 109 disasters, 72 percent of which were related be instrumental in informing Peru’s national to climate (droughts, floods, frosts, and mudslides) earthquake risk profile. In 2015, the Program and 28 percent were geophysical events (seismic prepared a comprehensive cost-benefit analysis activity, volcanic eruptions, and landslides). These for the government, including emergency and disasters caused over 74,000 deaths and affected reconstruction losses, to provide a complete 18 million people.3 During that period, Peru had picture of current financial instruments for the highest number of deaths and the second- managing its natural disaster risk—the first highest number of victims in Latin America.4 Peru’s time such an analysis has been developed. northern coast is especially vulnerable to El Niño oscillations, typically characterized by prolonged The Program also provides technical support torrential rains. The 1982-83 and 1997-98 El Niño to Peru’s Insurance Supervisory Authority events resulted in losses totaling US$2.3 billion and (SBS). An update to the country’s regulations $3.6 billion respectively, destroying and damaging on allocations for catastrophe reserves will help homes, infrastructure, production equipment, grow and strengthen local insurance companies. cropland, and transportation stock, among others.5 Peru has made progress toward strengthening Overview of Progress public asset insurance, and started early discussions on the development Developing a national strategy on DRF is a of a catastrophe reinsurance pool for priority of Peru’s government. In June 2012, homeowners. In 2012, the Program carried at the inception of the Program’s engagement out a first diagnosis of the insurance of Peru’s in Peru, the government decided to develop a public assets and concessions and prepared new sovereign DRF strategy along “strategic lines database templates. Guidelines were developed of action.” In 2013, the Ministry of Finance to strengthen the insurance of public assets and developed an internal DRF strategy with inputs concessions, some of which were integrated from the World Bank, which was adopted by the into the legal system. Additionally, with the Risk Committee of the Ministry of Finance as is Program’s support, discussions are ongoing currently being implemented. Over the course among the Ministry of Finance, the SBS, and of 2015, the strategy was formalized in a draft members of the Peruvian insurance industry national DRF strategic policy framework that is to create a household reinsurance catastrophe expected to be released by mid 2016. pool. A feasibility study is planned, contingent on commitment letters by insurance companies. Peru has developed a national seismic risk profile and conducted a cost-benefit Peru has engaged in the development of analysis on emergency and reconstruction domestic and international mechanisms for 16 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES coordinating DRM solutions. In 2015, the The active presence of the Program team government established a permanent working builds trust and credibility and supports group for the coordination and use of funds the capacity of the government. The World in the aftermath of disasters through well- Bank team spent considerable time with developed protocols and processes. In addition, government officials to develop strong working members of the Pacific Alliance proposed the relationships with them and to understand creation of a Catastrophic Risk Management their needs. A local consultant in Peru was Working Group to strengthen the cooperation instrumental in keeping counterparts engaged and sharing of information and experiences in and aware of related activities and the progress disaster risk management. The Pacific Alliance of implementation, while helping boost countries are also exploring the issuance of a officials’ capacity. joint catastrophe bond, with technical advice from the World Bank. Knowledge and experience exchange has been essential. Peru has benefited greatly A regional workshop and three internal from knowledge and lessons shared by other workshops have reached a total of 131 public countries, an example of the strong positive officials. In 2012, the World Bank facilitated a spillover effect from the Program’s broad regional peer exchange workshop for directors reach. Other countries have benefited from of relevant divisions from ministries of finance Peru’s progress, too; for example, knowledge of in Colombia, Peru, and Mexico and organized a how technical assistance has enhanced Peru’s workshop for Peru’s Ministry of Finance General insurance market and insurance supervision Directorate of Debt and Treasury (DGETP). has been shared with other countries, including In 2013 a training was held for government Colombia, Panama, the Philippines, and officials on insurance of public assets. In 2014, Vietnam. the Program team facilitated a workshop on insurance of public assets and concessions to Next Steps support implementation of insurance guidelines prepared for the government. 21 technical The Program will continue to support notes, including three larger reports, have been Peru’s implementation of a comprehensive developed. The government showcased its approach that addresses the different layers progress to an international audience at the 2015 of risk. Peru’s National DRF Strategy is an DRF forum in Malaysia and made DRF a key important achievement of the Program. topic of its 2016 APEC presidency. The government is now working toward full implementation of the strategy through the Lessons Learned development of targeted financial solutions. The next steps include, for example, exploring Political will and legislation are critical in the development of a reinsurance pool for advancing action on disaster risk financing. It catastrophe risk; the program will support can be a challenge to get government officials that effort through a feasibility study and to focus on disaster risk financing; in the case facilitation of a working group comprising the of Peru strong interest from decision makers SBS, the Ministry of Finance, the Peruvian has been essential to achieving DRF objectives. Association of Insurance Companies Another important factor has been an enabling (APESEG), and insurance companies. The legal environment that mandates action to build program will also continue to support fiscal resilience to disasters. trainings. SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 17 finalized by late 2016. The Program team has Vietnam conducted actuarial analysis of historical Context perils and damages and preliminary analysis of historical losses to public assets. The Program An estimated 59 percent of Vietnam’s land area also prepared new templates for an insurance and 71 percent of its population are vulnerable policy and incurred loss database to help to cyclones and floods. In the past 20 years, the Insurance Supervisory Authority (ISA) natural disasters have resulted in the loss of better understand the market. Seven domestic over 13,000 lives. Disaster losses in the country insurance companies, representing over 70 have been equivalent to at least one percent percent of the non-life insurance market of GDP per year due to natural disasters from share in Vietnam, provided input, including 1989 to 2008, according to an estimate by a information on the availability of required 2007 World Bank study on the fiscal impact data. The Program will support ISA and the of natural disasters.6 Following this report companies to develop a plan to standardize and as mandated by the country’s Law on the database template across the market and Natural Disasters Prevention and Control ultimately to collect data through a web-based and its National Strategy for Natural Disaster platform. Prevention, Response, and Mitigation, the government of Vietnam’s Insurance Supervisory The government is exploring risk-retention Authorities in 2013 asked for World Bank and risk-transfer solutions to lower the costs assistance in developing insurance solutions for of disasters to the budget. For instance, a natural catastrophes. diagnosis was prepared to identify challenges in coordination, sequencing, and prioritization Overview of Progress of available budgetary and non-budgetary funds for immediate disaster response. The Ministry of Finance has developed a The Ministry of Agriculture and Rural detailed work plan on DRF. Based on the Development (MARD) and the Ministry of government’s priorities, the World Bank Finance are holding discussions on addressing and the Ministry of Finance have agreed legal constraints, possibly through lessons on a work plan that prioritizes (i) natural from international experiences on how to disaster risk assessment for financial fully operationalize the new Funds for Natural solutions; (ii) protecting the state budget Disaster Prevention and Control established against natural disasters; (iii) advancing the at the provincial level through the 2014 Law development of insurance markets for the on Natural Disaster Prevention and Control. protection of property against catastrophe The Ministry of Finance is also reviewing risk; and (iv) building the nation’s capacity possible changes to the current regulation and knowledge exchange on disaster risk. for catastrophe risk insurance market development. Insurance of public assets has A catastrophe risk model and a web-based been incorporated into the draft revised law platform for a standardized loss database in on public assets management and passed the Vietnam are currently under development. In initial round of consultation. The Program has mid-2014, Impact Forecasting, an international also developed a note proposing a national catastrophe-risk modeling firm was selected to DRF strategy to advise the Ministry of Finance develop a catastrophe risk model for financial on the development of a comprehensive applications; the model is expected to be approach to financial protection. 18 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES The Program has introduced the government to maintaining close engagement and help to international best practices on risk- build technical understanding of government transfer solutions. The government of Vietnam officials. has gained information on other country’s experiences with catastrophe risk insurance Anchoring DRF in a broader development regulations, catastrophe risk insurance dialogue creates a strong foundation. Building policy and loss databases, and insurance of fiscal resilience to disasters is important to public assets from SECO-funded countries, the World Bank’s engagement with Vietnam such as Peru and Colombia, as well as other on macro fiscal management, disaster risk countries, notably Mexico and Costa Rica. management, urban development, governance The ISA has also established a working group and public financial management, and financial of representatives from the insurance and sector development. The Program has been able reinsurance industry that is dedicated to to leverage these different avenues of the World support implementation of this project. To Bank’s policy dialogue and lending operations; date, six technical notes have been developed this includes policy and lending operations with and 150 people have taken part in workshops MARD and the Ministry of Finance, discussions and training sessions. on potential lending for contingent liability management with the Ministry of Finance, Lessons Learned and advisory services by the World Bank’s governance department on revising the nation’s A policy mandating DRM can facilitate law on public assets management. dialogue on DRF, but institutional challenges can slow progress. Higher laws passed by the Next Steps National Assembly, specifically the Law on Natural Disasters Prevention and Control, have Work will continue based on priorities been a significant driver of the government’s in the work plan defined jointly by the engagement with the Program. However, Ministry of Finance and the Program. institutional challenges, such as fragmentation, Ongoing projects include the development lack of coordination, and limited technical of an exposure database and a catastrophe expertise across various government agencies risk model to inform natural disaster risk dealing with disaster risk finance, have slowed assessment, support for market development progress in Vietnam. of property catastrophe risk insurance by producing analyses based on the catastrophe Early identification of priorities and risk models, and adoption of international challenges can help engage the right good practices for insuring public and private stakeholders from the beginning. For assets. A template for a web-based application example, the Program team first established for insurance databases (linked to work in a good dialogue with ISA on catastrophe risk Colombia and Peru) will be finalized. Support insurance, which was within its mandate and will also be provided for revising legislation interest. The team also developed contacts for property catastrophe risk insurance. A new with the State Budget Department, the dialogue with additional departments in the Department for Public Assets Management, the Ministry of Finance aims to deepen efforts insurance and reinsurance industry, and other on state budget protection. Trainings and technical agencies on their respective areas peer exchange will continue to strengthen the of work. A local consultant has been crucial capacity of government officials. SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 19 for future supervision of the insurance sector. Azerbaijan The information on potential seismic and flood Context losses will inform public agencies responsible for financial planning before disasters. A second Azerbaijan faces high seismic activity with report discusses the potential design and frequent earthquakes that often cause severe implementation of financial mechanisms for social and economic losses, as well as a high risk transfers. These knowledge products have exposure to flooding.7 Between 1990 and helped the government evaluate catastrophe 2014, Azerbaijan experienced average annual bonds, parametric insurance contracts, and losses of US$282 million from earthquakes instruments for building fiscal resilience at the and $44 million from floods.8 Unusually national and local level. large rainfalls in Southern Azerbaijan in May 2010 caused the Kura River to rise to Lessons Learned its highest level in over a century, bursting dams and inundating nearby villages. Over A strong technical counterpart contributes to 24,000 people were affected with thousands progress. Technical teams have been critical to of homes flooded or destroyed and 50,000 driving engagement in Azerbaijan. The Ministry hectares of farmland under water. of Finance, in particular, has been keenly involved, and the insurance regulator’s office Overview of Progress has added technical expertise. A key priority for Azerbaijan has been to Support from more partners could broaden explore the development of sovereign engagement in risk-transfer solutions. risk-transfer solutions. Engagement with Efforts in Azerbaijan to develop risk-transfer the government began in early 2013 but was instruments would benefit from having not agreed to formally until 2014. Despite an additional champion. The Ministry the slow start, the process continued to of Emergency has expressed interest in move with strong government support. The improving planning for emergency recovery primary focus of engagement in Azerbaijan but is less engaged on developing risk-transfer has been on catastrophe risk modeling for instruments. And yet physical, risk-informed supporting the catastrophe risk insurance planning and development remain a key market and on sovereign-level risk-transfer priority that draws on the risk modeling instruments. The government had expressed analysis and could contribute to ongoing efforts interest in parametric catastrophe risk- to develop insurance solutions. transfer instruments to help manage the budgetary impact of disasters and to Next Steps protect homeowners through the potential development of insurance pools with Disaster risk finance will be a lower priority reinsurance arrangements. for the government in the short term due to the current economic context. Amid a A catastrophe risk-modeling report was sharp drop in oil and gas prices and following completed on the potential risk of loss from two successive currency devaluations, the floods and earthquakes. The parameters for government has placed many priorities on hold. risk modeling will be especially useful for the The current highly strained budget environment insurance regulator in the Ministry of Finance has delayed any possibility that the government 20 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES will contribute to the development of risk- vulnerabilities and potential social tensions transfer instruments in the short term. With the that could be aggravated by a disaster, the delivery of the risk assessment and associated Moroccan government started to ramp up its reports, the Program will finalize its engagement overall approach to managing risk, placing its in Azerbaijan but will be available to resume initial priority on risks from natural hazards. support to the government once the economic conditions stabilize. A revised catastrophe risk insurance law has been drafted to support Morocco’s integrated Morocco DRM approach. Following a request for technical assistance submitted by the Minister of Finance Context to the World Bank in April 2015, the team has engaged with the Insurance Commission, Morocco is vulnerable to shocks from natural Autorite de Controle des Assurances et de la hazards that have affected communities Prevoyance Sociale (ACAPS) to help prepare and throughout the country in recent years. implement a catastrophe risk insurance law. The Morocco’s natural disaster risk is both chronic implementation of the draft law on catastrophe and often acute. Flooding is a chronic recurrent risk insurance is one of the three components problem that causes deaths, major economic of a World Bank $200 million loan on integrated losses, and destruction of assets. Between 2000 disaster risk management and resilience and 2013, Morocco experienced 13 major floods (approved by the World Bank Board on April 20, that together killed 263 persons and caused over 2016). The team reviewed the draft law ACAPS US$427 million in direct property damage. The and developed preliminary actuarial analysis most recent flood in Guelim, in 2014, caused of the fiscal impact of the catastrophe risk 47 deaths and overall economic losses of $600 insurance law. The revision of the catastrophe million. Morocco moreover has the potential risk insurance law clarifies the role of (i) the for massive, acute events, as demonstrated by private insurance industry in bearing catastrophe the 1960 Agadir earthquake, which killed 12,000 risk losses and introduces aggregate limits on and injured 25,000 people. The Al Hoceima insured losses; and (ii) the role of the Solidarity earthquake in 2004 caused direct economic Fund to compensate uninsured victims. The losses of $400 million. Potential exists for much late start of the Program’s engagement in larger earthquakes, such as in Fes and Tangiers, Morocco is balanced by the government’s strong which are situated on or near the Eurasian/ commitment, as demonstrated by the inclusion African tectonic plate boundary. of the draft law as a disbursement-linked indicator in the World Bank loan. Overview of Progress Lessons Learned The government has developed a holistic approach to managing risk, with an initial Links to financial products helps focus on natural hazards. The Program began institutionalize the works Program. The planning to expand into Morocco in 2013, when linkage of the Program’s advisory work to a political turmoil in Egypt and Tunisia made US$200 million World Bank loan ensures that engagement in those countries impossible. disaster risk finance remains a priority on the The objective of expansion was for Morocco to government’s agenda. The implementation of serve as a basis for regional DRF engagement in the draft law on catastrophe risk insurance, the Middle East and North Africa. Recognizing revised with the Program’s support, is one of SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 21 the three components of the World Bank loan to such as its capital, Jakarta. Due to its high support integrated risk management. concentration of population and its political and economic significance, disasters in Jakarta The capacity of the private insurance sector have heavy impact on the affected people and to carry additional catastrophe risk must be the country as a whole. A particular tragedy considered. The domestic market has limited for the country was the 2004 Indian Ocean expertise with catastrophe risk insurance tsunami that killed an estimated 230,000 products and will require close supervision to people, almost 170,000 of which in Indonesia. ensure the sustainability of the government’s In the tsunami’s aftermath, the country revised scheme. The Program is working with ACAPS its disaster management system to focus on and the association of Moroccan insurers to preventing disasters and reducing risks. The identify specific needs for technical assistance. revised Disaster Management Law emphasizes the integration of disaster management Next Steps planning with development policies to improve the resilience of the country.9 Fiscal analysis of the catastrophe risk insurance law is being conducted. The law Overview of Progress proposes new risk-sharing rules for the state and the insurance industry related to natural Indonesia has taken strides to build its disasters. An actuarial model currently under capacity for disaster risk management development aims to help the government through a series of reports and workshops. estimate the economic and fiscal costs among The Program’s engagement in Indonesia various stakeholders as a result of the draft law began in 2011 with meetings with Ministry on catastrophe risk insurance. of Finance officials to identify potential priorities for disaster risk financing and Work is ongoing to create the Solidarity insurance. The first meeting determined that Fund for uninsured households. The law significant capacity in this area was needed establishes the Solidarity Fund as a mechanism before a comprehensive financial protection to compensate uninsured households. The strategy should be undertaken. To build that compensation scheme creates explicit capacity, a DRF workshop in February 2012 contingent liabilities for the government and trained 23 representatives from the Fiscal directs that they be carefully estimated. The Risk Management (BFK) office. A technical actuarial model under development will help workshop later that year trained officials from the government assess those liabilities and eight departments in the Ministry of Finance, devise an appropriate financial strategy. as well as from private-sector organizations. In total four workshops were held, including a Indonesia regional workshop, reaching 126 participants. In addition, four reports were developed. Context Technical analysis helped the government Located along major tectonic subduction zones, evaluate parametric sovereign risk transfer Indonesia frequently experiences devastating to provide protection against severe earthquakes and volcanic eruptions. The earthquakes. A decree on natural disaster country also experiences severe floods at insurance transactions drafted in 2013 allows regular intervals, including in urban centers the government to purchase sovereign 22 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES catastrophe risk insurance. That measure was they were uncertain. The government regularly followed in 2014 with a complete package receives proposals from the private sector on to inform government officials of costs and sovereign risk transfer and related topics, and benefits of potential parametric financial the tools developed under the Program helped instruments to protect against earthquakes. counterparts to work through some of those The package included development of a risk proposals and to better understand the costs model and an advanced DRF analytical tool to and benefits. help evaluate different financial structures. The Program also supported initial consideration Next Steps of how to integrate such a risk-transfer product into a comprehensive financial protection The program will attempt to resume the strategy and to explore the establishment of a dialogue with the government through their national DRM fund. ongoing work on fiscal risk management. Opportunities for a fresh start may arise from A change in government has brought ongoing engagement with the World Bank- challenges for the engagement. Following SECO program on fiscal risk management elections in 2014, work on DRF was put of PPPs or as a follow-up to DRF policy on hold, as key officials moved and the commitments through APEC discussions. new government focused on clarifying its priorities. It eventually decided not to pursue Serbia parametric risk insurance or the reserve fund for sovereign risk transfer. Although the new Context government has requested technical assistance for developing a catastrophe risk insurance The floods, earthquakes, and droughts that program for public assets and for integrating periodically afflict Serbia can take a large DRF more strongly into overall planning toll. Most recently, floods in 2014 caused for DRM, the engagement and ownership in damages and losses amounting to EUR DRF efforts has been limited, and not much 1.7 billion, equivalent to 4.8 percent of the progress has been achieved in 2015. country’s GDP, and affected an estimated 1.6 million people. As a result of the floods, the Lessons Learned Serbian economy contracted by 1.8 percent in 2014, instead of growing by 0.5 percent as Providing support to help the government had been previously projected. Preliminary take informed decision is a key outcome results from a risk assessment under way of the Program, independent of financial indicate that future losses could exceed those instruments. Following the elections, the new numbers for both floods and earthquakes. government decided against a couple of long- Serbia experiences frequent earthquakes, pending initiatives, including the purchase of such as the moderate 4.6 magnitude tremblor parametric insurance and the development of January 2016. of a multi-year disaster reserve fund. Notwithstanding those decisions, the Program’s Catastrophic droughts have also struck the engagement has been positive. Government country three times in the last 20 years. counterparts were engaged and gained the Damages in 1990, mainly to agricultural right information and tools to make informed production, amounted to US$873 million; decisions in two important areas about which in 1993 to $500 million; and in 2000 to $750 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 23 million. Wildfires are frequent and widespread current fiscal risk management practices in during the summer; from 1998 to 2008, 853 Serbia in light of international best practices forest fires burned 16,357 hectares of land. and is developing a gap analysis to assist the FRMU in establishing policy and administrative Following the destructive 2014 floods, the structures and functions. This effort parallels government of Serbia began an ambitious a fiscal risk assessment to inform the unit’s transformation of its disaster management operational processes and priorities. The system from response to prevention and Program also prepared an overview of mitigation. Even with a robust approach to experiences and lessons learned from its work disaster risk management, however, the country with risk management units in ministries of will remain exposed to budget shocks caused by finance in Colombia, Mexico, Panama, and major natural disasters. Peru, including engagements supported through SECO. That work is closely aligned with the Overview of Progress International Monetary Fund (IMF) and other units in the World Bank working on similar Serbia is developing a national disaster risk topics. The Program supports local staff in the finance strategy. Following a request from Ministry of Finance to help establish the fiscal the government of Serbia and discussion with risk unit; providing that capacity within the SECO, the Program began an engagement with Ministry of Finance ensures that management the country in 2015; the effort is one pillar of of fiscal risks–including risks from disasters– a broader National DRM Program, which is stays on the ministry’s agenda while work supported by the World Bank. The Program proceeds to institutionalize it for the long term. began technical cooperation by supporting the government in developing a comprehensive Lessons Learned financial protection strategy and establishing a fiscal risk unit in the Ministry of Finance. To An effective way to start a dialogue on DRF help develop that strategy, the Program assisted is to link it to broader policy and economic the government in a diagnostic study that reforms. Although the 2014 floods significantly included taking stock of existing instruments affected the economy and the government’s for risk financing; a review of institutional, fiscal position, that impact is quickly fading legal, and policy frameworks governing disaster from memory. The government currently is risk financing and insurance; an analysis of engaged in wide-ranging public-sector reforms the budgetary impact of past disasters, as well under an active IMF program, as well as as the possible future impacts; an assessment painful economic reforms. Because the IMF of the government’s contingent liabilities has recommended establishment of a fiscal from disasters; and policy options for the risk unit, the Program is coordinating with an government to reduce funding gaps and to IMF-appointed advisor to ensure that DRF is improve post-disaster budget allocations integrated in that work. and execution. That study will provide the government with information to help set policy Supporting local capacity to implement the priorities and develop a financial protection agenda can be a critical starting point. By strategy. supporting dedicated staff in the Ministry of Finance, the Program has been able to ensure Work to establish a fiscal risk management that planning for future reforms considers the unit is ongoing. The Program is reviewing risks of natural disasters and does not push the 24 SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES issue aside for more immediate concerns, such the government’s overall National DRM Plan as public enterprise reform. as well as into its broader agenda for managing fiscal risks. Integrating DRF into institutional structures for long-term sustainability is a challenge. South Africa Frequent turnover of personnel is a significant risk to progress on DRF in Serbia. The Context government’s technical experts often work as consultants, financed by international South Africa faces a wide-range of natural organizations. While that arrangement enables and human-induced hazards that could the recruitment of experienced counterparts, potentially lead to disaster events. These the work becomes very dependent on include droughts, floods and dam failures, individuals who may leave on very short notice. urban and rural fires, mining-induced The Program is trying to institutionalize the earthquakes and sinkholes, epidemics, large- work by helping to integrate DRF functions scale transportation accidents, and hazardous into key organizational plans and government waste spills. Between 1980 and 2010, a total of functions. 77 disasters killed 1,869 people and affected more than 18 million people.10 Disaster risk finance should be linked to the broader DRM program. While it is essential Overview of Progress for DRF to be part of the government’s overall approach to fiscal risk management, the Despite significant efforts to engage the Ministry of Finance often is overwhelmed and government, progress has been limited. unable to prioritize DRF. The inclusion of DRF The Program started a dialogue with the as a pillar of Serbia’s National Disaster Risk government of South Africa in 2012, followed Management Program, however, has ensured by the 2012 Understanding Risk conference that a strong institutional champion continues held in Cape Town. The government expressed to advance the work. a lack of familiarity with the subject, partly because South Africa has been fortunate to be Next Steps spared from catastrophes in recent years. In 2013, the Program’s initial engagement stalled Serbia will continue its efforts to develop and because of personnel changes at the National implement a national DRF plan. The Program Treasury. The following year, the National team will support the government in building Treasury submitted a formal letter of request to on the DRF stock-taking report to develop a the World Bank expressing interest in support comprehensive financial-protection strategy, for integrating agricultural insurance and risk jointly between the Ministry of Finance and the management into fiscal risk management. Public Investment Management Office, which Despite the Program team’s technical efforts has subsumed the DRM functions. The Program to develop a study that draws on international will also continue to support the institutional experiences in agricultural insurance, the mandate for establishing a fiscal risk unit, by government’s lack of engagement led to a coordinating with and linking to a larger World decision to close the dialogue in 2015. The Bank functional review of the organizational government has expressed renewed interest structure of the Ministry of Finance. All those in disaster risk finance in 2016; however, as its efforts will integrate financial protection into interest is focused primarily on agricultural SOVEREIGN DISASTER RISK FINANCE IN MIDDLE INCOME COUNTRIES 25 insurance, support will be drawn from a Ghana, Egypt, Tunisia different funding source. Lessons Learned Ghana, Egypt, and Tunisia were considered as potential countries for engagement in the Strong demand and country ownership is initial phase of the Program. Despite efforts crucial to advance DRF work. Without a day- to engage the governments of these countries, to-day counterpart committed to embrace and little or no progress has been made. In Ghana, advance the DRF agenda, it can be impossible to DRF was not a priority for the government. gain sufficient traction for substantive work, even Engagements in Egypt and Tunisia were not if the client proclaims interest on a general level. pursued following events of the Arab Spring. ENDNOTES 1 https://www.gfdrr.org/sites/gfdrr/files/region/CO.pdf 2 The Pacific Alliance is an initiative of regional integration comprised by Chile, Colombia, Mexico, and Peru officially established on April 28, 2011. 3 EM-DAT, 2010. 4 http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=36305169 5 http://www.gfdrr.org/sites/gfdrr.org/files/documents/Peru-2010.pdf 6 http://siteresources.worldbank.org/EXTDISASTER/Resources/Vietnam-Fiscal-Impact-Study_Final.pdf 7 http://www.adrc.asia/countryreport/AZE/2014/AZE_CR2014B.pdf 8 http://www.preventionweb.net/countries/aze/data/ 9 http://siteresources.worldbank.org/INTEAPREGTOPURBDEV/Resources/573631-1233613121646/jakarta_ extop.pdf 10 http://www.ifrc.org/PageFiles/41164/1213900-IDRL_Analysis_South%20Africa-EN-LR.pd