LEADERS 2006

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• LEADERS 2006
• International Course on Development and Disasters
• November 20 December 01, 2006. Ocho Rios,
  Jamaica.
• RISK TRANSFER and FINANCING
• Presenter Aston Brown Assistant Vice
  President, Systems Planning and Development
  (National Water Commission)

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Objectives

• Upon completion of this unit, the participant
  will be able to
• ?? Identify components of risk transfer and
  financing and
• ?? Explore options for risk transfer in the given
  scenario highlighting constraints and
  consequences.

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Definition of Risk Transfer

• Risk transfer refers to instruments that
  share/hedge economic risks before losses occur.

Components of Risk Transfer and Financing
The main components include- 1. Insurance
(Budget self-insurance, Market insurance and
re-insurance) and 2. Risk Financing (Public
asset coverage financing, catastrophe bonds,
disaster assistance funds) .
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Budget Self-Insurance

• Property owners allocate a modest yearly budget
  for improved maintenance and selected retrofit
  investments, which have the effect of reducing
  future expected losses in the event of a disaster

Market Insurance
Market insurance stabilizes loss payments through
pre-payment in the form of regular premium
payments.
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Public Asset Coverage Financing

• Governments carry a large and highly dependent
  portfolio of infrastructure assets.
• Some of these are critical for restoring
  economic growth.
• Most public assets are not covered by insurance.

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Catastrophic Bonds

• A catastrophe bond (cat bond)
• ?? Investor receives an above-market return when
  a specific catastrophe does not occur.
• ?? Investor shares the insurers or governments
  losses by sacrificing interest or principal
  following the event (Linnerooth-Bayer et al.
  2003).
• Linnerooth-Bayer, J., Mace, M., and Verheyen, R.
  (2003). Insurance-Related Actions and Risk
  Assessment in the Context of the UNFCCC,
  Background paper for UNFCCC workshops
  commissioned by the UNFCCC Secretariat. Pp 1-49.

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Potential of Risk Transfer and Financing

• ?? The potential of insurance and these
  alternative instruments for transferring the risk
  of disasters to investors across the globe.
• ?? The worldwide losses from extreme disasters
  are only a small percentage of the world capital
  market.
• ?? This highlights the scope and potential of
  trans-border risk transfer.

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Risk Transfer and Insurance in Low-Income
Countries
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Challenges of Adopting Risk Transferand Financing

• ?? Risk transfer is costly
• ?? Government may have access to less costly
  means
• ?? The premiums for insurance are hardly
  affordable for most of the citizens at the risk
  in the developing world
• ?? Most private insurance arrangements incur an
  expected net financial loss.

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THE ENDTHANK YOU!