All nations face increasing risks from natural and man-made disasters. The past three years have seen consecutive record economic losses from these events. In Developing Nations, where reinsurance giant Swiss Re estimates climate risks could cost some countries as much as 19 percent of annual GDP by 2030, these risks are acute. The 2011 floods in Thailand show clearly that those impacts can have enormous secondary effects. With the global economy already in turmoil, we can scarcely afford these disruptions.
To meet these challenges, a variety of new financial innovations are arising from what some may see as strange bedfellows: the insurance/reinsurance industry, large non-governmental organizations (NGOs), substantial private foundations, developed nation aid ministries, and governments of developing nations themselves. These public-private partnerships, or PPPs as they are known, have the potential to change the dynamics of disaster impacts for the better.
Swiss Re, the Swiss reinsurance giant, has published a number of works on climate risk and impacts on developing nations. In their Blueprint for Managing Climate Risks in Emerging Markets, Swiss Re proposes the development of collaborative risk transfer arrangements involving the public and private sectors, including catastrophe bonds (CAT bonds). CAT bonds transfer risk to the financial markets by allowing governments to issue bonds to cover potential losses from low-frequency, high-impact events. They work like any insurance policy–if the event does not occur, the bonds are not activated and the purchasers receive a return. If the event does occur, and they are activated, the cost of borrowing is much less than if that government had waited until after the disaster to borrow for recovery.
In 2009, the Mexican Government entered a risk transfer transaction to cover $290 million in potential losses (see http://treasury.worldbank.org/bdm/pdf/Handouts_Finance/Financial_Solution_MultiCat.pdf ) from hurricanes and/or earthquakes using a CAT bond formula that triggered payouts according to pre-defined criteria. After the April 4, 2010 earthquake in Baja California, I helped develop a long-term recovery strategy for that devastated rural area. The rebuilding of communities destroyed by that 7.2 magnitude quake would have no doubt taken longer had reconstruction funds not been immediately available, and the Mexican government would have no doubt paid a higher cost for recovery activities.
Other innovative risk management and transfer mechanisms are being developed by insurers, NGOs like the United Nations and World Bank, plus foundations such as OxFam. One of the most interesting is the Weather Index Insurance program, or HARITA, which provides crop-loss insurance for farmers in exchange for their own work, engaging them in locally designed crop irrigation, reforestation, and other initiatives. Another innovation is the Turkish Catastrophe Insurance Pool, which in this middle-income nation combines incentives for property owners to invest in earthquake resilience measures, with the World Bank by providing reinsurance-style funding guarantees at very favorable terms.
Microinsurance is also becoming a very popular way to reduce overall risks by making very small policies available to large numbers of low-income people. In many developing nations partnerships are being developed to subsidize or provide reinsurance to microinsurance programs. Other programs have multiple benefits. In Malawi, a drought-prone Southern African nation, the World Bank and Swiss Re joined to provide protection from damage to corn crops as a result of prolonged dry conditions, measured by a pre-determined index. Not only does this protect financial interests of small farmers, it reduces the probability of widespread hunger, and the political unrest that can follow, due to shortages of this staple food.
All of these measures, along with both pre-disaster and post-disaster strategic planning that produces both more resilient regions and more effective, sustainable economic recovery, help transfer risk and reduce loss. According to Swiss Re Chairman of Global Partnerships Martyn Parker, “in the countries we (Swiss Re) have studied, between 40% and 70% of expected disaster losses can be cost-effectively averted if you put in the fundamental preparations beforehand”. In these economic times, reducing a potential 19% loss in GDP by 70% through better planning and innovative risk transfer doesn’t just make sense, it’s a necessity. Thankfully, a lot of very smart people are working on just that.
The key, of course, is to have the right ways to share these ideas, coordinate these efforts, and serve as a connection between the developing world, those working to reduce/transfer risk, and the global financial marketplace. I, along with my partners in the Sunrise Trade Network and Cockatoo Network, hope to play a role in making those connections. We’re about 400 strong, based in both developed and developing nations around the world, and know how to bring disparate groups together to collaborate and succeed. By working with the insurance/reinsurance industries, foundations/NGOs, and governments, we can indeed make a difference.
With the global economy already teetering, we can scarcely afford NOT to act. Let’s just hope enough people get that message……or 2012 could be remembered for things far worse than the end of the Myan calendar…..