Parametic Insurance: A Key Tool in Disaster Risk Financing

1. Parametric Insurance:
A key tool in disaster risk financing
AXA Global Parametrics
UNDP Disaster Risk Reduction Financing Regional Conference
Istanbul, 4 October 2018

2. 1Climate change impacting ECIS region

3. Natural disasters already have a major negative social and economic
impact in the Caucasus, Central Asian and SEE states
Source: World Bank, Europe and Central Asia - Country risk profiles for floods and earthquakes
(2017)
6.9mn
Average number of people
impacted every year by floods
and earthquakes in region
$40.8bn
Average GDP value affected
every year by floods and
earthquakes in region
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4. South Eastern Europe
Most countries in SEE region impacted by a range of natural disaster risks
Source: UN Risk Assessment for South Eastern Europe (2008)
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5. Disaster risks in ECIS region are exacerbated by climate change
Region is projected to suffer from rising temperatures and increased weather volatility
Central Asia:
Kyrgyzstan, Kazakhstan, Tajikistan,
Turkmenistan, and Uzbekistan
Floods, earthquakes, landslides, mudflows
and droughts
Most seismically active areas in the world due
to fault lines
Source: IPCC Fourth Assessment Report (2008)
South Eastern Europe:
Earthquakes, floods, landslides, drought
extreme temperature, wildfires,
windstorms
South Caucasus:
Georgia, Armenia, Azerbaijan
Rising temperatures caused by climate change
exacerbate natural disasters such as floods
and landslides
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6. Agriculture in parts of ECIS region will be impacted by climate change
Reduction in yield of
major staple crops in
Europe and Central
Asia by 2050 due to
climate change
7%
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7. South Caucasus
Rise in extreme temperatures and lower overall precipitation expected
Source: United Nations Environment Programme (2015)
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8. 2Parametric insurance: key financing tool

9. Parametric insurance is a key financing tool for governments to transfer their
rising climate and disaster risk to the international risk markets
to create the
most
relevant cover
that is correlated to the
insured’s damages,
financial losses or
funding needs
Parametric insurance
is based on the use of
a parameter
How does
it work?
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10. Parametric insurance uses improved technology and innovation in product design
AXA builds parametric coverages using both satellite and weather station data
More precise satellites with data worldwide,
in high frequency or even in real-time
Improvements in correlational models,
machine learning, predictive analysis and
data processing
New channels at marginal costs, eg. Leverage
traditional agribusinesses to distribute
insurance
Better technology
Enhanced models
and data
processing
methods
Innovative
Distribution
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11. In the face of climate change, there are challenges with traditional insurance
Tailor-made & transparent
Claims payment is automatic and
received within a few days
No claims handling costs and
adapted to insured’s budget and
risk aversion
4. Not adapted to my case
3. Compensation perceived as
being “influenced” by insurer
2. Too costly
1. Claims payment takes too long
5. Not available in my location
Compensation triggered by
independent weather parameter
Available globally
Indemnity insurance Parametric solution
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12. Parametric insurance’s value proposition
Parametric insurance offers greater economic value that governments can utilize …
Traditional insurance
25 –
35%
Traditional insurance in
developing countries
Index
Insurance combined with
a meso-approach/light
broker
Frictional costs
Payback
✓ Lower
distribution
costs
✓ No claims
handling costs
✓ No adverse
selection
✓ No moral
hazard
- Higher
distribution costs
- Higher claims
handling costs
- Higher cost of
support functions
- Distribution
costs
- Claims handling
costs
- Support
functions
- Uncertainty
loading
100%
50 –
70%
10%
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13. Parametric insurance provides fast and guaranteed liquidity to
governments which is critical in the wake of a natural disaster
Speed is critical in the immediate aftermath of a disaster
Governments need rapid access to financial resources in order to save lives
and livelihoods
Parametric insurance is therefore perfectly suited to provide fast
funding
By partnering with governments/municipalities, existing public
structures can be leveraged:
To insure a large portion of people; and
To coordinate disaster relief funding
This allows distribution costs to be significantly reduced
Speed
Scale
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14. Parametric insurance :ex-ante financing tool that provides large volumes
of funding in Relief phase and onwards following a disaster
Source: Sovereign Disaster Risk Financing Concept Note, World Bank (2012)
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15. Three-tiers risk layering approach: Parametric insurance is ideal for
covering major disasters in the immediate aftermath
TransferRisk
Relief phase Recovery phase Reconstruction phase
▪ Catastrophe Bonds
▪ Parametric Insurance
▪ Traditional Insurance
▪ Tax Increase
▪ Domestic Credit
▪ External Credit
▪ Loans
▪ Contingent Credit
▪ Budget reallocations
▪ National Reserves/ Contingency budget
High Severity
Low Frequency
Eg. Major quakes +
cyclones
Low Severity
High Frequency
Eg. Localised floods
Medium Severity
Medium Frequency
Eg. Floods, small
quakes
Source: World Bank Disaster Risk Financing and Insurance Programme, Olivier Mahul (2011)
RetainRisk
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16. 3Case studies of parametric applications

17. AXA Global Parametrics is active in 40+ countries including multiple
partnerships with international institutions
Typhoon and earthquake
Philippines (World Bank)
Typhoon and
earthquake
Pacific Islands
(World Bank)
Typhoon and
earthquake
Caribbean Islands
(World Bank)
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18. AXA Global Parametrics has a strong focus on Public-Private Partnerships
✓ Signed MoU with GIIF in 2015
✓ Working with GIIF on Cameroon and
Cote d’Ivoire pilots
✓ Working with IFC on energy, agriculture
and other projects
✓ Supports World Bank’s $206mn
Philippines deal
✓ Working with BOAD to expand index
insurance in West Africa including a
successful initiative in Senegal
✓ Lead reinsurer of WFP’s R4
programme in Ethiopia
✓ ARC: One of lead reinsurers for the
African risk pool which has transferred
$221mn in 4 years
✓ PCRAFI: One of lead reinsurers on World
Bank’s $45mn Pacific Islands risk pool deal
✓ CCRIF: Reinsurer of Caribbean and
Central American risk pool
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19. Risk pooling lowers insurance premium
Cost of capital
(reserves and risk
transfer)
Operating costs
Annual
Expected Loss
Cost of capital
(reserves and risk
transfer)
Operating costs
Annual
Expected Loss
- Lower reinsurance costs due to
better structured and diversified
portfolio
- Joint reserves to retain the first
aggregate loss
Economies of scale in operating costs
Underlying risk is unchanged
Technical insurance premium
WITHOUT risk pooling
Technical insurance premium
WITH risk pooling
Source: World Bank Disaster Risk Financing and Insurance Programme, Olivier Mahul (2011)
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20. Case Study: CCRIF parametric catastrophe risk pool
The Caribbean Catastrophe Risk Insurance Facility (CCRIF) has made 36 payouts totalling
$130,5m to 13 governments helping millions of people impacted by cyclone and earthquakes
CCRIF is a sovereign disaster risk pool covering
~20 Caribbean Island and Central American
governments against cyclone and earthquake
risks.
AXA is one of the risk pool’s reinsurers
CCRIF’s value:
Supporting governments in disaster risk
management
Insurance based on cyclone and earthquake model
pays out very quickly within two weeks which
helps reduces overall impact of disasters.
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21. Case Study: Philippines parametric insurance scheme for 25 provinces
The Philippines natural catastrophe programme provides $206mn in coverage
The programme provides coverage
against losses from major cyclones
and earthquakes to national
government assets
It also provides coverage to 25
participating provinces against losses
from major cyclones.
Philippines is expected to incur, on
average, $3.5bn in asset losses each
year due to typhoons and earthquakes
The programme uses a parametric
trigger based on modelling firm AIR
Worldwide
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22. Case study: Mexico’s CADENA agriculture pool
CADENA started in 2003 by the Mexican government
The insureds: Provincial and federal government
End beneficiaries are smallholder farmers
CADENA offers:
Traditional livestock insurance
Crop Area-yield Index Insurance (area yield measured in field)
Parametric Crop Weather Index insurance
– Using weather station data to cover drought, excess rain, flood and hurricane windstorm
Parametric insurance for livestock
– Using satellite imagery (the Normalised Difference Vegetation Index (NDVI)) to assess the level of
greenness of pasture lands.
– Low NDVI levels, which indicate insufficient grazing land, trigger an automatic and speedy payout to
cover the additional costs of buying extra fodder for livestock.
Componente de atencion a desastres naturales (CADENA)
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23. Thank You!