Title: Integrating Mitigation with Risk Transfer Instruments
1Integrating Mitigation with Risk Transfer
Instruments
Howard Kunreuther Wharton
School University of Pennsylvania E-mail
kunreuther_at_wharton.upenn.edu George
Deodatis Dept. of Civil Engineering Columbia
University E-mail deodatis_at_civil.columbia.edu A
ndrew Smyth Dept. of Civil Engineering Columbia
University E-mail smyth_at_civil.columbia.edu
Paper Presented at World Bank Conference
on Financing the Risks of Natural Disasters A
New Perspective on Country Risk Management June
2-3, 2003 Washington, DC
2Objectives of Paper
Motivating Question What are the financial
benefits to national governments by encouraging
or requiring property owners to invest in
cost-effective mitigation measures? Why is this
Interesting? Previous studies have focused on
benefits of mitigation to individual property
owner. World Bank has a stake in promoting
cost-effective mitigation measures to avoid large
expenditures after a major catastrophe.
3Outline of Paper
- Defining cost-effective mitigation
- Role of risk-transfer instruments
- Combining mitigation with risk transfer
instruments to governments - Case study of Turkey
- How World Bank can promote mitigation using risk
transfer instruments - Future Research
4Defining Cost-Effective Mitigation
- Cost of Mitigation (C) (e.g. 65,000)
- Discounted Expected Benefits from Mitigation
(B) - Reduction in direct losses
- Reducing indirect losses
- Avoiding relocation of residents
- Avoiding business interruption risk
- Reducing losses to neighboring structures
- Reducing financial costs from catastrophic
losses -
- Decision Rule
- If B gt C then mitigation is cost-effective
- If B lt C then mitigation is not
cost-effective
5Building Collapse
Nearly all the fatalities and injuries can be
attributed to building collapse. EERI Report
(Oct. 99)
From BBC News
Photo by Nano Seeber
6Role of Risk Transfer Instruments
- Individual Purchasing insurance
- Reward policyholder with lower premiums for
adopting mitigation measure - Other factors influencing protective decisions
- Underestimation of risk
- Myopia (short time horizons)
- It will not happen to me
- Budget constraints
- Government Insurer
- Provide funds to compensate disaster victims
following a catastrophic event. - Increase capacity for providing more coverage to
individuals at risk
7Using Exceedance Probability Curve to Show
Benefits of Mitigation
8Questions government can address using EP curve
- What types of mitigation measures are most
appropriate for dealing with the hazard(s) that
the country faces? - What types of risk transfer mechanisms are
appropriate for reducing the magnitude of - claim payments following a major disaster?
9Case Study Protection Against Earthquake in
Istanbul
- Chances Istanbul will have strong earthquake in
next 30 years 62 - Possible losses to apartment buildings in
Istanbul from severe earthquake - 5,000 complete structural failure
- 40,000 significant structural damage
10Turkish Insurance Program
- Turkish Catastrophe Insurance Pool (TCIP) created
in September 2000. -
- Current status of insured private property (May
14, 2003) - 1.9 million insurance policies in Turkey
- 776,755 purchased by Istanbul residents
- TCIP has purchased excess of loss reinsurance
through a consortium of 60 different companies - 840 million in place
11Pilot Study
- Located in Caddebostan
- Built in 1968, seismic code of 1967
- Z-3 soil (relatively stiff)
- Moment resisting reinforced concrete frame with
no shear walls - Existing concretes yield limit of 16MPa
- Retrofitting concretes yield limit of 25MPa
- Nonlinear (Bilinear model)
- Highly representative of residential buildings in
and around Istanbul
12Retrofitting Solution 1 (Braced)
13Fragility Curves (Braced)
14EP Curves for 30 Apartment Buildings
15Reinsurance Cost to Turkish Government With and
Without Mitigation
- 30 Buildings (Based on Actuarial Risk)
- Without mitigation 16,179
- With mitigation 3,507
-
- 30,000 Buildings (Based on Administrative Cost
of 1.5 x Actuarial Risk) - Without mitigation 24.3 million
- With mitigation 5.3 million
- Savings to Turkish Government 19 million.
16Role of World Bank in Encouraging Mitigation
- Premium Reductions Linked with Government
Mitigation Loans -
- Provide funds for mitigation through some type of
long-term loan. - Insurance premiums are lowered to reflect
benefits of mitigation - May have to subsidize low-income residents
-
-
- Issuing Catastrophe Bonds to Governments
-
- Can one require cost-effective mitigation as a
condition for a cat bond? - What are the prices of these new financial
instruments likely to be? - How can one combine reinsurance with capital
market instruments?
17Future Research Questions
- What role can land-use planning play in
supplementing mitigation measures for reducing
future disaster losses? - What role can government institutions play in
aiding low income families? - What role can microcredit institutions (e.g
Grameen Bank) play at individual and community
level? - What is the role of informal mechanisms (e.g.
group-based insurance systems) in spreading
coverage over a large area to diversify risk? - How can other mechanisms (e.g. social investment
funds and safety nets) help in managing disaster
risk?
18Conclusions and Summary
- Mitigation measures have many benefits to
individuals and countries - Reducing direct physical damage
- Indirect benefits to residents and
businesses - Financial benefits to country
-
- Risk transfer instruments can aid country in
disaster planning -
- Mitigation measures can reduce countrys cost of
risk transfer mechanisms -
- World Bank can encourage mitigation and provide
risk transfer instruments -
- Need to combine many policy instruments for an
effective risk management strategy - cost-effective mitigation measures
- land-use planning
- risk transfer instruments
- reconstruction programs