94983
SOLOMON
ISLANDS
Country Note
PCR AFI 2015
SOLOMON ISLANDS
February 2015
Disaster Risk Financing and Insurance
© 2015 International Bank for Reconstruction and Development /
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/// ///
SOLOMON ISLANDS PCRAFI i
Table of Contents
01 Acknowledgments
02 Acronyms and Abbreviations
03 Executive Summary
04 Introduction
06 Economic Impact of Natural Disasters
08 Public Financial Management of Natural Disasters
08 Post-Disaster Budget Mobilization
09 Ex-Ante Practices and Arrangements
11 Ex-Post Practices and Arrangements
12 Total Response Funds Available
13 Post-Disaster Budget Execution
15 Domestic Catastrophe Risk Insurance Market
17 Options for Consideration
18 End Notes
19 References
20 About PCRAFI
21 Annex 1
ii PCRAFI SOLOMON ISLANDS
Table of Contents
28 Annex 2
29 Annex 3
29 Executive Summary
30 Insurance Market Overview
32 Catastrophe Risk Exposure and Capacity
33 Insurance Law and Regulation
34 Building Controls and Standards
34 Insurance of Public Assets
35 Options for Consideration
35 References
36 Glossary
37 Annex 4
SOLOMON ISLANDS PCRAFI 01
Acknowledgments
This note has been prepared by a team led (SPC) through its Applied Geoscience and
by Olivier Mahul (Disaster Risk Financing and Technology Division (SOPAC), the World Bank,
Insurance Program Manager, World Bank) and and the Asian Development Bank, with financial
comprising Samantha Cook (Financial Sector support from the government of Japan and the
Specialist) and Barry Bailey (Consultant). Global Facility for Disaster Reduction and Recovery
(GFDRR).
The team gratefully acknowledges the data,
information, and other invaluable contributions The Disaster Risk Financing and Insurance Program
made by the Pacific Island Countries. Without their is grateful for the financial support received from
skills and expertise, the compilation of this note the government of Japan and the Global Facility
would not have been possible. for Disaster Reduction and Recovery.
This note benefitted greatly from the technical
expertise of the following persons: Franz Drees-
Gross (Country Director Timore-Leste, Papua New
Guinea. and Pacific Islands, World Bank), Olivier
Mahul (Disaster Risk Financing and Insurance
Program Manager, World Bank), Denis Jordy (Senior
Environmental Specialist, World Bank), Michael
Bonte-Grapentin (Senior Disaster Risk Management
Specialist, World Bank), Paula Holland (Secretariat
of the Pacific Community), and David Abbott
(Secretariat of the Pacific Community).
Inputs and reviews from Robert Utz, David
Knight, Kim Edwards, Oscar Ishizawa, Rashmin
Gunasekera, Keren Charles, Francesca de Nicola
and Susann Tischendorf greatly enhanced the final
note. Design and layout developed by Bivee.co.
Section
The Pacific Catastrophe Risk Assessment and
Financing Initiative (PCRAFI) is a joint initiative
between the Secretariat of the Pacific Community
A
02 PCRAFI SOLOMON ISLANDS
Acronyms
and Abbreviations
CBSI Central Bank of Solomon Islands
DRFI disaster risk finance and insurance
GDP gross domestic product
HFA Hyogo Framework for Action
ISR Industrial Special Risks
MoFT Ministry of Finance and Treasury
NDC National Disaster Council
N-DRM Plan National Disaster Risk Management Plan
PCRAFI Pacific Catastrophe Risk Assessment and Financing Initiative
PIC Pacific Island Country
RFA Regional Framework for Action
SIDS Small Island Developing States
SOPAC Applied Geoscience and Technology Division of SPC
SPC Secretariat of the Pacific Community
TC Tropical Cyclone
UNDP United Nations Development Programme
UNISDR United Nations International Strategy for Disaster Reduction
Currency: Solomon Islands Dollar (SI$)
Average exchange rate: US$1 = SI$7.23
Section
A
SOLOMON ISLANDS PCRAFI 03
Executive Summary
This report aims to build understanding of the
/// The Solomon Islands government has a
///
existing disaster risk financing and insurance variety of tools for financing the cost of
(DRFI) tools in use in the Solomon Islands disasters, but the funds are limited and
and to identify gaps where engagement can be quickly exhausted. The disaster relief
///
could further develop financial resilience. It ///
budget allocated to the National Disaster Council
also aims to encourage peer exchange of regional (NDC) is small—SI$2.2million (US$305,250) in
knowledge, specifically by encouraging dialogue on 2013—and is quickly exhausted, as happened
past experiences, lessons learned, optimal use of during the response to the Santa Cruz earthquake
these financial tools, and the effect these tools may and tsunami. There is a 77 percent chance that
have on the execution of post-disaster funds. disaster losses will exceed this budget amount
in any given year. If these funds were exceeded,
The Solomon Islands is located in an area
///
the government would need to source remaining
known for frequent tropical cyclones and funds from the contingency warrant and pursue
is also in the Pacific Ring of Fire, an active budgetary reallocation. Consequently the Solomon
seismic area. Consequently, it is exposed to both
///
Islands tends to rely heavily on donor support to
hydrometeorological and geophysical hazards. This fund post-disaster expenditures.
exposure was clearly demonstrated at the end of
December 2012, when the country experienced The NDC met on the day of the Santa Cruz
///
Tropical Cyclone Freda, followed in early February earthquake and was able to immediately
2013 by a magnitude 8.0 earthquake and a mobilize SI$1 million (US$138,000) to
subsequent tsunami affecting the Santa Cruz purchase relief supplies. This is equivalent
///
Islands. to approximately half of the annual budget for
response. The remaining SI$1.2 million was
The Solomon Islands is expected to incur, over
///
exhausted shortly for the additional supplies
the long term, average annual losses of SI$145 needed, for the first shipment following updates
million (US$20 million) due to earthquakes or
///
from situation reports identifying the need
tropical cyclones. In the next 50 years, the Solomon for greater quantities of relief goods. The first
Islands has a 50 percent chance of experiencing a shipment of goods to the affected area had fully
single event loss exceeding SI$1.7 billion (US$240 exhausted the annual response budget. In light of
Section
million), and a 10 percent chance of experiencing a the small amount of dedicated funds allocated to
single event loss exceeding SI$3.7 billion (US$520 the NDC and the speed with which they can be
million) (PCRAFI 2011). used up, the Solomon Islands government should
A
04 PCRAFI SOLOMON ISLANDS
consider the reactivation of the National Disaster A number of options to improve DRFI are
///
Council Fund, or the use of other DRFI instruments presented here for consideration: ///
such as contingent credit to ensure additional
(a) Develop a post-disaster budget execution
sources of liquidity following an event.
manual to improve awareness of post-disaster
Anecdotal evidence suggests that the Ministry
/// procedures and processes;
of Finance and Treasury (MoFT) would benefit
(b) Develop an integrated disaster risk financing
from the development of a post-disaster
and insurance strategy; and
budget execution manual to improve staff
awareness of post-disaster procedures and (c) Explore the use of other DRFI tools such as
processes. During the Santa Cruz response, the
///
contingent credit to access additional liquidity
bid waiver process was not adhered to; MoFT staff post-disaster.
were unaware of this process because it is rarely
used. As a result, there were significant delays in
the purchase of necessary relief items.
Photo Credit
/// ///
Australian Department of Foreign Affairs and Trade/Flickr b
SOLOMON ISLANDS PCRAFI 05
Introduction
Located in the Pacific Ring of Fire, the
/// which is responsible for developing funding
Solomon Islands is susceptible to both arrangements for cabinet approval. These ///
hydrometeorological and geophysical plans can include reallocation of sector budgets,
disasters. Hydrometeorological hazards include
///
as well as international partner and stakeholder
tropical cyclones, floods, and droughts, whereas support (Solomon Islands Government 2010).
geophysical hazards include earthquakes and
resulting tsunamis and landslides. The population Both independently and in conjunction with
of the Solomon Islands is estimated to be 515,870, many partners—such as Secretariat of the Pacific
with an estimated growth rate of 2.3 percent.1 The Community Applied Geoscience Division (SPC-
population is spread across 845 of the country’s SOPAC), the Secretariat for the Pacific Regional
992 islands, which cover an area of 24,000km2 Environment Programme (SPREP), United Nations
. With 80 percent of the total population Development Program (UNDP) Pacific Centre,
living in rural areas, disaster response is often and the United Nations International Strategy for
time-consuming and expensive; post-disaster Disaster Reduction (UNISDR)—the Solomon Islands
transportation costs create a significant fiscal has developed several institutional frameworks
burden and have led to delays in the distribution of on disaster risk management and climate change
relief goods in the past. adaptation at the national, subregional, and
international level, including the following:
The Solomon Island government has
///
demonstrated commitment to disaster risk • Hyogo Framework for Action (HFA) 2005–2015
management through its National Disaster Risk
///
Management (N-DRM) Plan 2010, which was • Pacific Disaster Risk Reduction and Disaster
adopted by the cabinet under the 1989 National Management Framework for Action (Regional
Disaster Council Act. The N-DRM Plan provides the Framework for Action or RFA) 2005–2015
government with a comprehensive institutional
• National Adaptation Programme of Action
framework to address hazards, reduce risks
(NAPA), 2008
(including those associated with climate change),
and implement activities for disaster management, • National Disaster Risk Management Plan, 2010
recovery, and rehabilitation across sectors at the
national, provincial, and village levels. • Solomon Islands National Climate Change Section
Policy, 2012–2017
The N-DRM Plan lays out procedures for the
///
Recovery and Rehabilitation Committee, • National Development Strategy, 2011–2020
01
06 PCRAFI SOLOMON ISLANDS
Disaster risk financing and insurance (DRFI) is
/// disaster risk financing strategy developed by the
a key activity of the HFA Priorities for Action World Bank.
4 and 5.2 The HFA is a result-based plan of action
///
The Pacific DRFI Program enables countries
adopted by 168 countries to reduce disaster risk
///
to increase their financial resilience against
and vulnerability to natural hazards and to increase
natural disasters by improving their capacity
the resilience of nations and communities to
///
to meet post-disaster funding needs without
disasters over the period 2005–2015. In the Pacific,
compromising their fiscal balance. This program
the HFA formed the basis for the development of
is one application of the Pacific Catastrophe Risk
the Regional Framework for Action.
Assessment and Financing Initiative (PCRAFI).
The RFA cites DRFI activities as a key national
/// The Pacific DRFI Program is built upon a three-
and regional activity. Theme 4—“Planning for /// tiered approach to disaster risk financing. These
effective preparedness, response and recovery”— layers align to the basic principles of sound public
has an associated key national activity, “Establish a financial management, such as the efficient
national disaster fund for response and recovery.” allocation of resources, access to sufficient
Theme 6 of the RFA—“Reduction of underlying resources, and macroeconomic stabilization. The
risk factors”—cites the development of “financial three tiers acknowledge the different financial
risk-sharing mechanisms, particularly insurance, requirements associated with different levels
re-insurance and other financial modalities of risk: (i) self-retention, such as a contingency
against disasters as both a key national and budget and national reserves, to finance small
regional activity” (SOPAC 2005). These regional but recurrent disasters; (ii) a contingent credit
implementation activities align with the three-tiered mechanism for less frequent but more severe
events; and (iii) disaster risk transfer (such as
Figure 1 — Three-Tiered Disaster Risk Financing Strategy
International Assistance
Low Frequency/
High Severity
Risk Transfer
Sovereign Risk Transfer
(e.g. Cat Bond/Cat Swap, (re)insurance)
Insurance of Public Assets
Contingent Credit Lines Post Disaster Credit
Risk Retention
High Frequency/
Low Severity
Government Reserves, Contingency Budget / Funds
Section
01 Emergency Funding Reconstruction
Source: World Bank 2010.
SOLOMON ISLANDS PCRAFI 07
insurance) to cover major natural disasters. See
figure 1.
This note aims to build understanding of the
///
DRFI tools in use in the Solomon Islands and
to identify gaps where engagement could
further develop financial resilience. It also
///
aims to encourage peer exchange of regional
knowledge, specifically by encouraging dialogue on
past experiences, lessons learned, optimal use of
these financial tools, and the effect of these tools
on the execution of post-disaster funds.
Photo Credit
/// ///
Australian Department of Foreign Affairs and Trade/Flickr b
08 PCRAFI SOLOMON ISLANDS
Economic Impact of
Natural Disasters
Since 1980, the Solomon Islands has
/// (Solomon Islands Government 2013d). The Santa
experienced approximately 111 disasters that Cruz earthquake affected 37 percent of the
affected over half a million people. Just over
///
resident population, totally destroying 588 houses
half of these events were earthquakes, about a and partially damaging an additional 478.
quarter were tropical cyclones and storms, 11
percent were attributable to tsunamis, and 12 Logging, fishing, and more recently gold
///
percent were man-made disasters, landslides, and mining drive the economy of the Solomon
droughts (PDN 2013). Islands, and all of these industries can be
impacted by a natural disaster, which in turn
The Solomon Islands is located in an area
///
reduces the limited sources of government
known for frequent tropical cyclones, and revenue. Like many small island states, the
///
is also situated in the Pacific Ring of Fire, an Solomon Islands has limited sources of domestic
active seismic area. Consequently, it is exposed to
revenue and thus limited budget flexibility. In
///
both hydrometeorological and geophysical hazards.
2013, domestic revenue grew by 8 percent (SI$202
This exposure was clearly demonstrated at the end
million or US$28 million), which reflects growth
of December 2012, when the country experienced
in the national economy, ongoing improvement
Tropical Cyclone Freda, followed in early February
in revenue administration, and compliance efforts
2013 by a magnitude 8.0 earthquake and a
(Solomon Islands Government 2013).
subsequent tsunami affecting the Santa Cruz
Islands. The Solomon Islands is expected to incur,
///
over the long term, average annual losses
The majority of the population works in the
of SI$145 million (US$20 million) due to
///
agriculture, fishing, and forestry sectors,
///
earthquakes or tropical cyclones. In the next
which are highly susceptible to natural
50 years, the Solomon Islands has a 50 percent
hazards, as the Santa Cruz earthquake
chance of experiencing a single event loss
demonstrated. The tsunami following that
///
exceeding SI$1.7 billion (US$240 million), and a
Section earthquake increased saline levels in the country’s
water sources. This had a severe impact on the 10 percent chance of experiencing a single event
living standards of and livelihoods of residents, loss exceeding SI$3.7 billion (US$520 million) (see
02 most of whom practice subsistence agriculture figure 2).
SOLOMON ISLANDS PCRAFI 09
Figure 2 — Direct Losses by Return Period
700
600
DIRECT LOSSES (MILLION USD)
500 TC + EQ
400 TC
EQ
300
200
100
0 Source: PCRAFI 2012
0 100 200 300 400 500 600 700 800 900 1000
Note: TC = tropical cyclone; EQ = earthquake
MEAN RETURN PERIOD (YEARS)
Figure 3 shows average annual loss by geographic recorded over four days at the Honiara rain
area. Areas highlighted in red are likely to incur the gauge. These floods caused 22 fatalities across the
highest level of loss, between US$0.75 million and country, internally displaced some 10,000 people
$2.1 million per year. The full country risk profile initially, and affected approximately 52,000 people
for the Solomon Islands can be found in annex 4. in total. The flooding caused damage to major
infrastructure, fully destroying some 675 houses
In April 2014, flash flooding in Honiara,
along with the food gardens that many people
///
Guadalcanal, Isabel, Malaita, and Makira-
depend upon for their livelihood. This event took
Ulawa caused damage and loss estimated at
place at the time of writing, and information from
SI$787.3 million (US$108.9 million), equivalent
the event has been incorporated into this report
to 9.2 percent of gross domestic product
where possible.
(GDP). A slow-moving tropical depression caused
///
persistent heavy rains, with over 732mm of rainfall
Figure 3 — Average Annual Loss by Area
Main Islands Honiara
0 1 2 4 Total Average Annual
Loss (thousand USD)
0 50 100 200 Kilometers 0 - 10
10 - 25
Kilometers
25 - 50
50 - 75
70 - 100
100 - 500
500 - 750
750 - 2,100
Solomon Islands Honiara Section
5° S
0 175 350 700
Main Islands
Kilometers
02
10° S
Source: PCRAFI 2011.
155° E 160° E 165° E
10 PCRAFI SOLOMON ISLANDS
Public Financial
Management of
Natural Disasters
Although the Solomon Islands has developed
/// structure recognizes the need for MoFT to be
many policies to facilitate timely mobilization part of the decision-making process for disaster
and execution of post-disaster funds for response purchases. MoFT staff, however, remain
disaster response, these policies are little uncertain of their role in post-disaster finance; in
known outside the NDC. This situation has led
///
the past they have not adhered to the correct bid
to delays in the purchase and distribution of relief waiver process, which created unnecessary delays
goods and has had a significant impact on both the in purchasing needed goods.
budget for the NDC and the national contingency
Effective post-disaster financial response relies
warrant (contingency budget).
on two fundamental capabilities: (i) the ability to
All Solomon Islands government programs
///
rapidly mobilize funds post-disaster; and (ii) the
receive 100 percent of their budget allocation ability to execute funds in a timely, transparent,
(also known as a warrant) at the start of the and accountable fashion. This section discusses
calendar year. This provides government agencies
///
the existing procedures for post-disaster budget
with the flexibility to manage their allocated funds mobilization and execution and where possible
as they see fit throughout the year. Purchases can provides examples of their use.
be made as long as they are within budget. But the
arrangement can also create difficulty with post-
disaster finance, particularly if a disaster should
occur toward the end of the year. Conversely, there
is a risk that an event at the start of the year could
exhaust the entire year’s worth of funds.
Section The National Disaster Risk Management Plan
///
lists the permanent secretary of the Ministry
of Finance and Treasury (MoFT) as a member
03 of the National Disaster Council (NDC). This ///
SOLOMON ISLANDS PCRAFI 11
Post-Disaster significantly. Building on the World Bank disaster
///
risk financing and insurance framework (see
Budget Mobilization annex 1), table 1 shows the ex-ante and ex-post
financial tools available, indicates those utilized by
The Solomon Islands government takes an
the Solomon Islands, and gives indicative timings.
///
ex-post approach to financing the cost of
The tools utilized by the Solomon Islands are
disasters. The disaster relief budget allocated to
highlighted in blue. Those sections highlighted in
///
the NDC is small—SI$2.2 million (US$ 304,000)
gray are for generic instruments that to date have
in 2013 and SI$1.9 million (US$262,000) in 2014.
not been used in the Solomon Islands.
Both amounts were quickly exhausted following
one event during the first four months of the fiscal The sections below discuss the financing tools
year. In other words, for two years in a row a single available in the Solomon Islands in detail, providing
disaster has exhausted not only the relief budget information on the time needed to mobilize these
of the NDC but also the operational budget. In funds and the amount of funds available.
addition, anecdotal evidence suggests that the
majority of the national contingency budget was Ex-Ante Practices and Arrangements
depleted following the event in Santa Cruz. It
The uncertainty surrounding international
appears that the Solomon Islands continues to rely
assistance has placed pressure on countries to
heavily on donor support to fund post-disaster
establish domestic sources of finance for post-
expenditures.
disaster relief, such as national reserves or transfer
The Solomon Islands has a variety of DRFI
///
of risk to the international insurance market. The
tools available to it, and the time needed Solomon Islands has a variety of ex-ante practices
to mobilize and execute these funds varies and arrangements, which are discussed below.
Table 1— Sources of Funds Available
SHORT TERM MEDIUM TERM LONG TERM
(1-3 MONTHS) (3-9 MONTHS) (OVER 9 MONTHS)
Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Tax Incentives (Flash Appeal)
Ex-ante Financing
National Disaster Council Fund Section
Contingency Budget
Contingent Credit
Sovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance
03
Source: Solomon Islands government; World Bank.
12 PCRAFI SOLOMON ISLANDS
National Disaster Council Fund
Cruz earthquake nor the flash floods of early
2014 generated a payout under the terms of the
The National Disaster Council Fund was
///
insurance. Nor was either event eligible under the
established under Section 17 of the NDC Act terms of the insurance: the Santa Cruz earthquake
(1989). However, this fund has not received an
///
generated emergency losses that were below the
appropriation since 2008, when a special audit attachment point of the policy, and the insurance
conducted by the Office of the Auditor General does not cover flood risk in itself.
found that the National Disaster Council Fund was
misused and that funds were often diverted away The experience of the Solomon Islands
///
from disaster response activities (Solomon Islands highlights the importance of capacity building
Government 2008). In response to this finding, in DRFI. Countries need to decide exactly what
///
an account was established at the Central Bank type of risk they wish to cover and what tools
of Solomon Islands (CBSI) to give the NDC greater are best suited to covering it. Insurance cannot
control of any monies received from external be used as a singular solution to hazard risk.
sources. (See “Flash appeal” below.) The experience of the Solomon Islands has also
given impetus to development of additional DRFI
Contingency warrant products tailored to the specific needs of countries.
In 2011 the Solomon Islands government
///
Ex-Post Practices and Arrangements
established a national contingency warrant to
set aside funds to meet unforeseen spending Because disasters generally exceed a country’s
needs throughout the year (Solomon Islands capacity to cope with them, there will always be a
Government 2013c). The warrant enables
///
need for ex-post practices and arrangements. An
the government to meet an urgent need for optimal strategy for DRFI relies on a combination
expenditure on matters that were not foreseen at of ex-ante and ex-post financial instruments.
the time of the last appropriation bill; for example, Ex-post arrangements benefit from being able
it can be used in response to a national emergency to establish the extent of the disaster and
or natural disasters, but can also be appropriated prioritize the response needs. As a result these
for less imperative financing demands. arrangements take longer to implement than ex-
ante arrangements, but they can often mobilize
Contingency warrants for disaster relief and
///
larger amounts of finance. This section discusses
response can be released only following the ex-post practices and arrangements that have
a national declaration of emergency. The ///
been made by the Solomon Islands.
aggregate allocation for the 2013 contingency
warrant was SI$38 million (US$5.2million), a 28 Flash appeal
percent reduction from 2011. This decline raises
During the 2014 flash floods, an account was
questions about the long-term sustainability of
///
established at the CBSI to receive funds from
the fund.
a flash appeal conducted by the NDC. The
The Solomon Islands participated in the first
///
appeal received SI$2.3 million (US$318,000), ///
two seasons of the Pacific Catastrophe Risk which has been used to help emergency relief
Section Insurance Pilot but chose to discontinue this
///
and recovery needs. Donations came from private
insurance in the third season. This decision was companies, individuals, embassies of the Solomon
03
influenced by the fact that neither the Santa Islands, and other governments, including Papua
SOLOMON ISLANDS PCRAFI 13
Box 1— The Pacific Catastrophe Risk Insurance Pilot
The Pacific Catastrophe Risk Insurance Pilot aims to provide
/// government in the aftermath of a severe natural disaster that disrupts the
immediate budget support following a major tropical cyclone or provision of government services. Countries can choose between three
earthquake/tsunami. The insurance is designed to cover emergency
/// layers of coverage—low, medium, and high—depending on the frequency
losses, which are estimated using both a modeled representation of the of events. The lower layer will cover events with a return period of 1 in 10
event based on hazard parameters and a calculation of total modeled years, that is, more frequent but less severe events. The medium layer will
physical damage. Unlike a conventional insurance scheme, where a payout cover events with a 1-in-15-year return period, while the higher layer will
would be assessed against actual incurred costs, this scheme pays out on cover less frequent but more severe events, or those with a return period
the results of a model. The advantage of this approach is that it results in of 1 in 20 years. However, countries may request that a more customized
a much faster payout. The payout would act as a form of budget support option be developed for them.
and would go some way to cover the costs that would be incurred by the
New Guinea and China. This account was opened Donor assistance for reconstruction often
///
to receive funds from external parties following takes significant amounts of time and
an event and has acted as a replacement to the involves negotiation between the country
National Disaster Council Fund—and given the and its donors to establish key priorities. ///
NDC greater control over and accountability for However, significant amounts of finance
any expenditures. can be assigned. For example, the Solomon
Islands government had received SI$7.9 million
Donor funds for relief
(US$1million) by February 19, 2013, less than
and reconstruction two weeks after the Santa Cruz earthquake and
tsunami took place. Within one month of the
While donor funds will always be required,
///
disaster, the amount of international assistance
there is often an element of uncertainty
received had increased to SI$13 million (US$1.8
surrounding how much will be provided, ///
million). Approximately 5 percent of this was
what will be provided, and when the funds will
received as aid in kind while the remainder was
arrive in country. Consequently, overdependence
provided as cash grants.
on international relief as a source of post-disaster
financing can delay the provision of initial relief and Following the flash floods in 2014, the
///
inhibit ex-ante contingency planning. Development Solomon Islands was able to access SI$13
partners, international organizations, local million (US$1.8 million) in grant funds from
nongovernmental organizations, businesses, and the United Nations Central Emergency
individuals contribute in the form of cash grants Response Fund. These funds are to be used to
///
and aid in kind. The provision of aid in kind, while support health, nutrition, and water and sanitation
vital, can affect the costs borne by governments for activities. However, access to these funds came
the distribution of these goods. almost two months after the event, creating a lag
Section
in recovery activities.
03
14 PCRAFI SOLOMON ISLANDS
Budget reallocation cabinet has granted its approval (Solomon Islands
Government 1978).
The NDC has three options for acquiring
///
additional funds to facilitate response External debt
activities: ///
During the global economic crisis, the
///
(a) Transfer funds between accounts within an Solomon Islands economy was hit hard.
agency, which requires approval of the head of An 18-month Standby Credit Facility
agency and the minister of finance; Arrangement approved in June 2010
succeeded in stabilizing the economy and
(b) Seek a contingency warrant, subject to cabinet
///
catalyzing donor support. The country’s fiscal
approval and in the event that the contingency
position has improved substantially since then as a
warrant allocated for that financial year is
result of improved tax compliance and tax arrears
depleted; or
collection. The government cash balance increased
(c) Request a supplementary budget allocation from almost zero in the first quarter of 2010 to
from the contingency warrant. about two months of recurrent spending by the
second quarter of 2011 (IMF 2011).
According to the Public Financial Management
///
Bill, the finance minister may seek In 2012, the government introduced a debt
///
supplementary appropriations when an///
management framework incorporating a debt
urgent and unforeseen need has arisen and the management strategy. This new framework
///
Photo Credit
/// ///
Jenny Scott/Flickr b
SOLOMON ISLANDS PCRAFI 15
will guide any future debt decisions. The debt amount in any given year. If these funds
///
management strategy aims to provide a robust were exceeded, the government would need to
and pragmatic approach to ensure that the volume source remaining funds from the contingency
of new borrowing is limited to sustainable and warrant and pursue budgetary reallocation. This
affordable levels (Solomon Islands Government situation demonstrates the financial constraints the
2013). MoFT has set the debt-to-GDP ratio at 25 government faces in financing disaster response.
percent, and has set the future maximum debt- The government should investigate the possibility
servicing cost at 8 percent of forecast domestically of expanding the amount of dedicated funds
sourced revenue. At present, 10 percent of revenue available and the use of contingent credit to fund
is set aside for debt servicing (Solomon Islands the level of retained risk.
Government 2013).
The Solomon Islands government has been
///
improving its debt service ratio, which
suggests that the option of contingent credit
could be considered to facilitate an immediate
injection of liquidity following a disaster. ///
However, any new credit facility must be affordable
and satisfy all the criteria outlined in the debt
management strategy. Furthermore, costs of use
(including opportunity costs) must be balanced
against the benefits of the potential post-disaster
liquidity injection.
Total Response Funds Available
The Solomon Islands has a maximum amount
///
of SI$41 million (US$5.7 million) available to
facilitate disaster response. Figure 4 shows the
///
three-tiered DRFI strategy alongside the sources
of funds and the maximum amounts of funding
available to the Solomon Islands following an
event. However, it should be acknowledged that
the contingency warrant is issued at the start of
the financial year and is not exclusively for disaster
response. The full amount of the contingency
warrant will probably not be available for response,
and there is likely to be a gap between the amount
available and the disaster relief budget line.
The Solomon Islands government has SI$2.2
Section
///
million (US$0.3 million) available in dedicated
response funds, and there is a 77 percent
03
chance that disaster losses will exceed this
16 PCRAFI SOLOMON ISLANDS
Post-Disaster The location of the earthquake in Santa
///
Cruz was remote, and the Solomon Islands
Budget Execution government faced high transportation costs
to facilitate relief. This experience provides a
Following the Santa Cruz earthquake and
///
strong case for establishing some form of national
///
tsunami, a Humanitarian Action Plan was
reserves for disaster response and recovery. At
developed that identified 41 activities with an
the moment the government depends on the
///
estimated total cost of SI$68.8 million (US$9.5
recurrent budget of the NDC, which is insufficient
million), of which SI$47.5 million (US$6.6 million)
for high post-disaster transportation costs. In
remained unmet two months after the event
fact the response to the Santa Cruz earthquake
(Solomon Islands Government 2013d).
drained the annual budget for the National
The NDC met on the day of the Santa Cruz
///
Disaster Management Office and the majority of
earthquake and was able to immediately the national contingency budget.
mobilize SI$1 million (US$138,000) to purchase
Anecdotal evidence suggests that the bid
relief supplies. This is equivalent to approximately
///
waiver process was not adhered to after the
///
half of the annual budget for response. The
Santa Cruz earthquake or the flash floods
remaining SI$1.2 million was exhausted shortly
in 2014; MoFT staff were unaware of this
afterward following updates from situation
process, which is rarely used. In a statement of
reports identifying the need for greater quantities
///
emergency, normal tendering procedures should
of relief goods. The first shipment of goods to
be waived upon submission of a bid waiver. But
the affected area had fully exhausted the annual
following the earthquake and floods, the NDC
response budget.
was required to submit a copy of the statement of
Figure 4 — Amount of Ex-Ante Funds Available for Immediate Response
Section
Source: World Bank.
03
SOLOMON ISLANDS PCRAFI 17
emergency and a bid waiver form to accompany was reported to oversee over 30 maintenance
each quote for purchase. At times three quotes contracts across the islands.
were sought despite the submission of a bid waiver.
Practical policies and procedures for post-
This created significant delays in the purchase of
///
disaster finance are contained within the
necessary relief items. Some agencies, including
National Disaster Risk Management Plan. But
the Ministry of Health, asked nongovernmental
there is limited awareness of these policies
organizations to pay for goods, as this was easier
and procedures across the Solomon Islands
than procuring essential equipment through
government and in particular in the MoFT.
government. These anecdotes suggest that a
///
The small volume of dedicated funds allocated to
post-disaster budget execution manual would
the NDC is easily exhausted, and the government
help MoFT raise staff’s awareness of post-disaster
should consider reactivating the National Disaster
procedures and processes.
Council Fund or using other DRFI instruments such
Some government departments indicated
/// as contingent credit to ensure additional sources of
that they had sufficient funding to respond to liquidity following an event.
the flash floods, but lacked the institutional
capacity to expend the funds. Key line ministries
///
such as Health and Education cited the lack of
institutional capacity as a major constraint—not
only on the required response to the 2014 floods
but also on their day-to-day operations. These
ministries have significant sector budget support
from donors but do not have sufficient capacity to
implement the work required. One staff member
Photo Credit
/// ///
Australian Department of Foreign Affairs and Trade/Flickr b
18 PCRAFI SOLOMON ISLANDS
Insurance of
Public Assets
Total Solomon Islands non-life (general)
/// damaging earthquakes were a magnitude 8.1
insurance premium, all classes, was SI$95.6 earthquake in April 2007 in Western Province and
million (US$13 million) in 2012. Local insurers
///
magnitude 8.0 earthquake in February 2013 near
underwrite SI$48.7 million (US$6.6 million) of the Santa Cruz Islands.
this amount, and the balance of SI$46.9 million
(US$6.3 million), or 48 percent of the market, is Non-life premium per capita is estimated
///
placed with offshore insurers. at SI$174 (US$24), which is lower than the
///
rate in other Pacific Island Countries (PICs) and
The Solomon Islands non-life local insurance
indicates a low insurance penetration. The current
market is small and currently has two locally
low insurance market premium suggests that
registered insurers, QBE Insurance (International)
the insurance market is, like the economy, still
Limited, Tower Insurance Limited, and a new
recovering from the ethnic tension and unrest of
entrant, Pacific Assurance Group (Solomon Islands)
Limited, which joined the market in 2014. the past decade. The non-life insurance market
premium prior to 1999 was estimated by insurance
The Solomon Islands has legislation in
///
industry sources at over SI$181 million (US$25
place—the Insurance Act Cap. 82 (1985) million) (1999 value).
and regulations—to regulate the insurance
industry. The CBSI is the regulator. The CBSI
///
Insurance for catastrophe insurance perils of
///
requires insurers to report quarterly, ensures that earthquake and cyclone is available in the
solvency margins are met, and receives copies market and is automatically included in property
///
of all reinsurance contracts. Offshore insurance insurance products. Property insurance rates
placements must be approved by CBSI before for cyclone in the Solomon Islands are below
coverage is placed overseas. average rates for PICs, at 0.13 percent, due
The Solomon Islands is exposed to the
///
to comparatively lower frequency of cyclones.
catastrophic perils of cyclone, volcanic The earthquake insurance rates in the Solomon
Section
eruption, and earthquake. The Solomon Islands
///
Islands—0.17 percent—are higher than average
is located at the northern edge of the Southern rates for other PICs because of recent major
04 Hemisphere tropical cyclone zone. The most recent earthquake events.
SOLOMON ISLANDS PCRAFI 19
The Solomon Islands government does not
/// perils. Some statutory bodies do not have
///
have indemnity property insurance programs property insurance.
in place for its public assets, including major
///
transportation assets such as wharves, roads, and
bridges. This could result in delays in reconstruction
following a catastrophic event.
Since 2012, the government has had a
///
property asset register in place, managed
by the MoFT. The MoFT advised that individual
///
ministries have their own existing asset registers
and that these are not integrated or updated with
the MoFT asset register.
According to insurance industry sources, some
///
Solomon Islands statutory bodies and state-
owned enterprises that manage public assets
have insurance programs in place that include
indemnity property insurance for catastrophe
20 PCRAFI SOLOMON ISLANDS
Options for
Consideration
The Solomon Islands has developed a variety of safeguard expenditures, and development of an
DRFI processes and procedures, as detailed in this operations manual.
note. However, these could be strengthened to
Recommendation 3: Explore the use of
reduce the time it takes to expedite post-disaster
///
contingent credit to access additional liquidity
funds. Toward that end, a number of options for
post-disaster, including identification of the
///
consideration are presented:
providers of this type of finance. The advantage of
Recommendation 1: Develop a post-disaster
///
contingent credit is that it is used only following
budget execution manual to improve an event and does not affect the current debt-
servicing ratio unless a disaster of an agreed-upon
awareness of post-disaster procedures and
magnitude occurs. This option could plausibly
processes. A manual will help to reduce the time
///
finance response efforts following intermediate
it takes to approve post-disaster expenditures by
disaster events—that is, those that exceed the
ensuring normal tendering procedures are waived.
capacity of options from within the budget,
Any new process developed should align to the
but that are too expensive to fund through risk
National Disaster Council Act (1989). Agencies
transfer due to their frequency.
and suppliers alike need to be familiar with post-
disaster processes to remove any unnecessary
delays in the system.
Recommendation 2: Develop an integrated
///
disaster risk financing and insurance
strategy. This should establish potential sources
///
of immediate liquidity post-disaster, such as a
dedicated reserve fund for disaster response.
It is recommended that a feasibility study be
conducted to look at reactivating the National
Section
Disaster Council Fund, considering in particular
identification of a sustainable source of funds,
05 any necessary amendments to legislation to
SOLOMON ISLANDS PCRAFI 21
End Notes
1 Data are from Solomon Islands National Statistics Office, avail-
able at http://www.spc.int/prism/solomons/.
2 Priority for Action 4—“Reduce the Underlying Risk Factors”—
has an associated key activity of financial risk-sharing mecha-
nisms, such as insurance, while Priority for Action 5—“Strengthen
disaster preparedness for effective response at all levels”—in-
cludes the establishment of emergency funds such as contingency
budget, national reserves, and annual budgetary allocations. See
UNISDR (2005).
Section
05
22 PCRAFI SOLOMON ISLANDS
References
GFDRR (Global Facility for Disaster Reduction and Recovery) ment, Climate Change, Disaster Management & Meteorology
2012 The Sendai Report: Managing Disaster Risks for Resilient and Disaster Management Partners, Government of Solomon
Future, Washington D.C., U.S.A. Islands.
IMF (International Monetary Fund). 2011. “Solomon Islands 2011 SOPAC (Pacific Islands Applied Geoscience Commission). 2005.
Article IV Consultation.” IMF, Washington, D.C.
Pacific Disaster Risk Reduction and Disaster Management
PCRAFI (Pacific Catastrophe Risk Assessment and Financing Framework for Action (Regional Framework for Action or RFA)
Initiative). 2013. “Country Risk Profile: Solomon Islands.” June. 2005–2015. SOPAC, Suva, Fiji.
http://www.pacris.sopac.org.
———. 2009. “Implementation of the Hyogo Framework for
PDN (Pacific Disaster Net). 2013. http://www.pacficdisaster.net.
Action and the Pacific Disaster Risk Reduction and Disaster
Solomon Islands Government. 1978. Public Finance and Audit Act Management Framework for Action 2005–2015: Report for
1978. Solomon Islands Government. the Period 2007-2009.” Regional Synthesis Report, SOPAC
———. 1989. The National Disaster Council Act 1989. Solomon Miscellaneous Report 674. SOPAC, Suva, Fiji.
Islands Government.
SPC (Secretariat of the Pacific Community) 2011 Cook Islands:
———. 2008. Special Audit Report: Tsunami and Earthquake Investment in DRM, Suva, Fiji
Relief Fund within the National Disaster Council (NDC) under
SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment
the Ministry of Home Affairs. Honiara, Solomon Islands: Office
of the Auditor General, Solomon Islands Government. in DRM, Suva, Fiji
———. 2010. “National Disaster Risk Management Plan 2010 for SPC (Secretariat of the Pacific Community) 2011 Republic of
Disaster Management Arrangements and Disaster and Climate Marshall Islands: Investment in DRM, Suva, Fiji
Change Risk Reduction.” National Disaster Council, Solomon
SPC (Secretariat of the Pacific Community) 2011 Vanuatu: Invest-
Islands Government.
ment in DRM, Suva, Fiji
———. 2012. “Approved Development Estimates.” Government
SPC (Secretariat of the Pacific Community) 2012 Papua New
of Solomon Islands. December 2011.
Guinea: Investment in DRM, Suva, Fiji
———. 2011a. “Approved Recurrent Estimates Budget Paper.”
Vol. 2. Government of Solomon Islands. December 2011. SPREP (Secretariat of the Pacific Regional Environment Pro-
gramme). 2013. “JNAP Development and Implementation in
———. 2011b . “Budget Strategy and Outlook Budget Paper.”
the Pacific: Experiences, Lessons and Way Forward.” SPREP,
Vol. 1. Government of Solomon Islands. December 2011.
Apia, Samoa
———. 2012. “National Climate Change Policy 2012–2017.”
Ministry of Environment, Climate Change, Disaster Manage- UNISDR (United Nations International Strategy for Disaster
ment and Meteorology, Solomon Island Government. Reduction.) 2005. Hyogo Framework for Action 2005–2015:
Building the Resilience of Nations and Communities to Disas-
———. 2013a. “Approved Development Estimates.” Government
of Solomon Islands, December 2012. ters. UNISDR, Hyogo, Japan.
———. 2013b. “Budget Strategy and Outlook Budget Paper.” ———. 2013. “Country Study Solomon Islands.” In The Pacific
Section
Vol. 1. Government of Solomon Islands, December 2012. Experience in Developing Policy and Legislation on Disaster
———. 2013c. “Approved Recurrent Estimates Budget Paper.” Risk Reduction and Climate Change Adaptation, chap. 5.
05
Vol. 1. Government of Solomon Islands, December 2012. UNISDR.
———. 2013d. Humanitarian Action Plan for the Santa Cruz World Bank 2010 Financial Protection of the State against Natural
Earthquake and Tsunami Response 2013. Ministry of Environ- Disasters; A Primer, Washington D.C., U.S.A.
23 PCRAFI SOLOMON ISLANDS
About PCRAFI
The Pacific Catastrophe Risk Assessment and disaster risk financing strategy and focus on three
Financing Initiative (PCRAFI) is a joint initiative core aspects:
between the Secretariat of the Pacific Community
• the development of a public financial
through its Applied Geoscience and Technology
management strategy for natural disasters,
Division (SPC-SOPAC), the World Bank, and the
recognizing the need for ex-ante and ex-post
Asian Development Bank, with financial support
financial tools;
from the government of Japan, the Global Facility
for Disaster Reduction and Recovery (GFDRR), and • the post-disaster budget execution process,
the European Union, and with technical support to ensure that funds can be accessed and
from Air Worldwide, New Zealand GNS Science, disbursed easily post-disaster; and
and Geoscience Australia.
• the insurance of key public assets, to resource
The initiative aims to provide the Pacific Island the much larger funding requirements of
Countries (PICs) with disaster risk modeling recovery and reconstruction needs.
and assessment tools for enhanced disaster risk The PICs involved in PCRAFI are the Cook Islands,
management, and to engage PICs in a dialogue the Federated States of Micronesia, Fiji, Kiribati,
on integrated financial solutions to increase their the Marshall Islands, Nauru, Niue, Palau, Papua
financial resilience to natural disasters and climate New Guinea, Samoa, the Solomon Islands, Timor-
change. The initiative is part of the broader agenda Leste, Tonga, Tuvalu, and Vanuatu.
on disaster risk management and climate change
For further information, please visit
adaptation in the Pacific region.
http://pacrisk.sopac.org or contact PCRAFI@spc.int.
The Pacific Disaster Risk Financing and Insurance
(DRFI) Program is one of the many applications
of PCRAFI. It is designed to increase the financial
resilience of PICs by improving their capacity
to meet post-disaster financing needs without
compromising their fiscal balance. Through DRFI,
technical assistance is available to PICs to build
Section
capacity in the public financial management of
natural disasters. The technical assistance will build
06 on the underlying principles of the three-tiered
24 PCRAFI SOLOMON ISLANDS
Annex 1
World Bank Framework for Disaster Risk Financing
and Insurance
Major disasters increase public spending development projects (see figure A.2). This layer
requirements and reduce revenues, placing further uses tools such as contingency budgets and
strain on limited national budgets. The immediate national reserves. The aim is to finance small
and long-term fiscal consequences of a disaster but high-frequency disasters. The second layer is
depend on the sources of revenue available to aimed at less frequent but more severe events that
the government versus its public expenditure are too costly to pre-finance through retention
commitments. Investment in disaster risk financing mechanisms. Here, liquidity mechanisms—such as
instruments can help prevent the diversion of funds contingent credit, which can mobilize additional
from key development projects and significantly funds immediately following an event—become
reduce the time needed to activate an initial cost-effective.
response. Financial protection is a core component
of any comprehensive disaster risk management The third layer, disaster risk transfer (such as
strategy, and should be implemented alongside insurance), focuses on mobilizing large volumes
the pillars of risk identification, risk reduction, of funds for large but infrequent natural disasters.
preparedness, and post-disaster reconstruction (see For events of this type, risk transfer instruments—
figure A.1). such as insurance or catastrophe swaps and
bonds—become cost-effective in averting a
The World Bank framework for disaster risk liquidity crunch.
financing and insurance advocates a three-tiered
approach for the development of financing There is a clear time dimension to post-disaster
arrangements to cover the residual disaster risk funding needs and the various phases of relief,
that cannot be mitigated. These layers align to recovery, and reconstruction. Some financing
the basic principles of sound public financial instruments can be activated rapidly. Others
management, such as the efficient allocation may take longer to activate but can generate
of resources, access to sufficient resources, and substantial funding. The disaster risk financing
macroeconomic stabilization. The first layer, strategy needs to reflect both time and cost
Section
retention, relates to countries’ development of dimensions, ensuring that the volume of funding
an internal layer of protection against natural available at different stages in the response efforts
07 disasters to prevent the diversion of funds from matches actual needs in a cost-efficient manner.
SOLOMON ISLANDS PCRAFI 25
Figure A .1 — Disaster Risk Management Framework
PILLAR 1: RISK IDENTIFICATION Improved identification and understanding of disaster
risks through building capacity for assessments and
analysis
PILLAR 2: RISK REDUCTION Avoided creation of new risks and reduced risks in
society through greater disaster risk consideration in
policy and investment
PILLAR 3: PREPAREDNESS Improved capacity to manage crises through developing
forecasting and disaster management capacities
PILLAR 4: FINANCIAL PROTECTION Increased financial resilience of governments, private
sector and households through financial protection
strategies
PILLAR 5: RESILIENT RECOVERY Quicker, more resilient recovery through support for
reconstruction planning
Figure A .2 — Three-Tiered Disaster Risk Financing Strategy
International Assistance
Low Frequency/
High Severity
Risk Transfer
Sovereign Risk Transfer
(e.g. Cat Bond/Cat Swap, (re)insurance)
Insurance of Public Assets
Contingent Credit Lines Post Disaster Credit
Risk Retention
High Frequency/
Low Severity
Government Reserves, Contingency Budget / Funds
Section
07
Emergency Funding Reconstruction
26 PCRAFI SOLOMON ISLANDS
The initial relief phase requires a quick injection the funds for this phase can therefore be raised
of liquidity from day 0 but does not need to be via post-disaster budget reallocation and the
sustained for a long period of time (see figure realignment of national investment priorities.
A.3). Rapid budget mobilization and execution However, the opportunity cost for these options
are key for financing initial disaster response, and is high, given that they can lead to reduced
governments should develop appropriate policies expenditure on other key investment areas, such as
and procedures for procurement and acquittals
health and education. Consequently, governments
to facilitate them. Initial relief should be met via
may also choose to utilize development partner
annual budget allocations and the establishment
contingent credit arrangements.
of dedicated reserves for disaster response that
can be accessed immediately; major catastrophes In contrast, the reconstruction phase has much
will exhaust these funds quickly. The residual risk larger financing requirements needed over a
associated with higher-cost events should be much longer period of time (see figure A.3).
transferred to third parties via a mixture of more Given the large funding requirements associated
expensive (re)insurance tools and catastrophe
with reconstruction, this phase often requires
bonds and, for the most extreme events,
post-disaster reconstruction loans to complement
international assistance.
traditional disaster insurance. Governments
The recovery phase requires additional funds may also introduce temporary post-disaster tax
but not immediately (see figure A.3). Some of increases aligned to budget restructuring.
Figure A .3 — Post-Disaster Phases: Funding Requirements and Duration`
Section
07
SOLOMON ISLANDS PCRAFI 27
If adequate and timely funding arrangements are innovative nature of the work in this area and the
not in place, the adverse socioeconomic impact number of products under development, this list is
of a disaster can be significantly exacerbated, at not exhaustive.
both the macroeconomic and household levels.
Ex-post financing vehicles are those that become
An optimal disaster risk financing and insurance
available in the wake of an event. The most
strategy aims to combine ex-ante and ex-post
familiar form of ex-post disaster financing is
financial instruments to secure adequate and
donor assistance for relief. There are two forms
timely funding at lower cost for the successive
this finance can take, cash grants and aid in kind,
post-disaster phases. The optimal mix of finance
and both play an important role in response. The
instruments will be unique to each country based
provision of aid in kind, while vital, can affect the
upon its associated hazard and exposure. Table
distribution costs for these goods. While donor
A.1 lists potential finance instruments that can be
funds will always be required, there can often be
used to address disasters. Those that are shaded in
an element of uncertainty surrounding how much
blue indicate the generic timelines for mobilizing
will be provided, what will be provided, and when
and executing these funds, though each country
funds will arrive in country.
may be slightly faster or slower depending on its
internal processes. The table can be adapted by Budget reallocation often plays a key role for the
countries to reflect these differences according to continuation of relief and the initial stages of the
the financial instruments they have utilized and the recovery program. Generally, this process takes
time it takes to mobilize these funds. Given the time, as the reallocation of funds will need to be
Table A .1— Availability of Financial Instruments Over Time
SHORT TERM MEDIUM TERM LONG TERM
(1-3 MONTHS) (3-9 MONTHS) (OVER 9 MONTHS)
Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Flash Appeal
Ex-ante Financing
Emergency Fund
Contingency Budget
Contingent Credit
Sovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance Section
Source: World Bank 2013.
07
28 PCRAFI SOLOMON ISLANDS
agreed upon by the cabinet and across ministries. Donor assistance for reconstruction can be
Budget reallocation can sometimes divert funds delivered as a form of direct budget support,
from key development projects and hence seriously grant, or a post-disaster reconstruction loan.
harm the long-term growth prospects of the The form of finance used here will depend on
country. The same issues are relevant to capital the size of the event, the development status of
budget realignment, although the timelines for a country (for example, low-income countries
that process are typically significantly longer. may have access to concessional loans and have
more access to grants), and the debt-servicing
Domestic credit, such as the issuance of
ratio of a country. Typically, this form of finance
government bonds, can be used to raise additional
is conditional and requires sufficient lead time for
revenue to fund post-disaster expenditures. Again,
aligning the priorities of countries and donors to
due to the processes involved, domestic credit will
meet reconstruction and recovery needs.
take some time to operationalize and is best suited
to financing recovery and reconstruction activities. Tax increases will help redress the increase in public
External credit will likewise take time to be expenditure following a disaster by generating
agreed upon with providers and will require clear additional revenue. Although higher taxes could
articulation of the activities it is to finance. Both of be politically unfavorable, they create a sustainable
Section
these forms of credit will have an impact on the source of finance for reconstruction activities.
debt-servicing ratio of a country and may not be a Conversely, some governments have applied tax
07 viable option for heavily indebted countries. incentives to encourage donations to response
SOLOMON ISLANDS PCRAFI 29
funds from both the private sector and members of Parametric insurance uses hazard triggers, linking
the public. This approach can be popular when tax immediate post-disaster insurance payouts
credits are written off on annual tax returns. to specific hazard events. Unlike traditional
insurance settlements that require an assessment
Ex-ante financing provides an element of financial
of individual losses on the ground, parametric
certainty during a disaster, because governments
policies do not pay based on actual losses incurred.
have established these sources of finance in
Instead, the payout disbursements are triggered
advance. These funds can be quickly disbursed
by specific physical parameters for the disaster
following an event so that essential relief work
(e.g., wind speed and earthquake ground motion).
commences immediately. A reserve fund provides
The payouts provide a rapid, yet limited, injection
a dedicated amount of funding for response
of liquidity that can be a valuable boost to
and if properly managed can accrue over time to
relief funds.
increase the level of funding available. However,
the opportunity cost of holding money in a Traditional disaster insurance offers indemnity
dedicated fund is high, as it diverts funds from coverage. Receipt of funds may take longer than
the operational budget. Careful analysis should be with parametric insurance, as a detailed damage
undertaken to identify the optimal level of reserves assessment is required. However, as payouts
that a country should hold and maintain. are directly linked to the damage experienced,
the payout will better match the needs of the
Contingent credit is a relatively new instrument,
insured party.
with current forms offering disbursement following
an event whose magnitude has been agreed upon Public financial management in the Pacific is
in advance. It can be fungible or conditional by dictated by the fact that many PICs are classified
design. As with other sources of credit, the amount as Small Island Developing States (SIDS). Typically,
available will depend on the development status countries in this classification have a narrow
of the country and the debt-servicing ratio. The revenue base, are net importers, and have a
advantage of contingent credit is that a drawdown consequential reliance on aid as an income stream.
can be made within a 24-hour period. These characteristics can limit the options available
for post-disaster finance. It is unlikely that a SIDS
government could afford to reallocate the capital
Section
07
30 PCRAFI SOLOMON ISLANDS
budget, and a tax increase could make many items in post-disaster budget reallocation and build
unaffordable and hence be detrimental to citizens’ a case for establishing national reserves. While
quality of life. Given these constraints on the international assistance will always play a valuable
national budget, alternatives such as contingent role, overdependence on such assistance as a
credit and risk transfer options should be used to source of financing carries limitations; international
reduce the drain on limited public funds. aid can be uncertain, which inhibits contingency
planning, and can be slow to materialize.
PIC governments face critical challenges for
Increasingly, PICs such as the Cook Islands are
financial resilience to natural disasters. Most PICs
establishing national reserves for funding initial
have restricted options for securing immediate
response.
liquidity for swift post-disaster emergency response
without compromising their long-term fiscal The World Bank, SPC, and their partners, with
balance. In addition, PICs are constrained by their grant funding from the government of Japan, have
size, borrowing capacity, and limited access to implemented the Pacific Disaster Risk Financing
international insurance markets. In the absence of and Insurance Program to help the PICs increase
easy access to debt and well-functioning insurance their financial resilience to natural disasters and
markets, a large portion of the economic losses improve their financial response capacity in the
stemming from adverse natural events is borne by aftermath of natural disasters. This program is part
governments and households, with support from of the Pacific Catastrophe Risk Assessment and
development partners. Financing Initiative (PCRAFI).
The Pacific has seen several recent cases that show
the need for immediate liquidity post-disaster. In
the Cook Islands, in the immediate aftermath of
TC Pat in 2010, a delay in the receipt of travel
funds meant that key government personnel could
not immediately commence the initial damage
assessment. Following TC Vania in 2010, Vanuatu
had to reallocate a significant amount of the
national budget. Similarly, Fiji and Samoa had to
reallocate budgetary funds in the wake of TC Evan
in 2012 and 2013; and the Santa Cruz earthquake
in the Solomon Islands in February2013 drained
the annual budget for the National Disaster
Management Office and used the majority of the
national contingency budget.
Lacking contingency reserves and access to short-
term loan funds, PICs have limited post-disaster
budget flexibility and rely heavily on post-disaster
Section donor assistance. Studies by SPC (2011 and 2012)
that look at the fiscal impact of past disasters in
selected PICs demonstrate the financial constraints
07
SOLOMON ISLANDS PCRAFI 31
Annex 2
G lossary
Attachment point. The attachment point (deductible) amount is essentially the excess payable before any
/// ///
payout is made under a policy. That is, anything under this value will be borne by the policy holder.
Catastrophe swap. A catastrophe swap, also known as a cat swap, is a financial tool used to transfer some
/// ///
of the risk that the covered party faces from catastrophes to the international reinsurance or capital markets.
In the case of the Pacific Catastrophe Risk Insurance Pilot, tropical cyclone and/or earthquake risk is passed
to the financial markets.
Coverage limit. This indicates the maximum payout as defined under the policy.
/// ///
Emergency losses. Emergency losses in the context of the Pacific Catastrophe Risk Insurance Pilot are
/// ///
calculated by using a percentage of the estimated ground-up losses.
Exhaustion point. The exhaustion point indicates the loss level at which the payout under a policy reaches
/// ///
its maximum point.
Ground-up losses. Ground-up losses in this context refer to estimated total damage to buildings,
/// ///
infrastructure, and cash crops.
Payout. A payout refers to the amount of cash that countries will receive following an eligible event.
/// ///
Premium. The premium is the cost that an insured party will pay for a given level of coverage: the more
/// ///
that is included in the coverage provided, the higher the premium will be. Premiums are determined by the
amount of coverage a country chooses, the event attachment point (deductible) and exhaustion point (limit)
of that coverage, and the risk profile of the country.
Risk pool. A risk pool is a group of people, institutions, or countries that collaborate to manage risk
/// ///
financially as a single group.
Section
07
SOLOMON ISLANDS PCRAFI 32
Annex 3
Insurance Market Review, April 2014
Executive Summary damaging earthquakes were a magnitude 8.1
earthquake in April 2007 in Western Province and
Total Solomon Islands non-life (general)
///
magnitude 8.0 earthquake in February 2013 near
insurance premium, all classes, was SI$95.6 the Santa Cruz Islands.
million (US$13 million) in 2012. Local insurers
///
Non-life premium per capita is estimated
underwrite SI$48.7million (US$6.6 million) of
///
at US$24, which is lower than the rate in other
this amount, and the balance of SI$46.9 million
///
Pacific Island Countries (PICs) and indicates a low
(US$6.3 million), or 48 percent of the market, is
insurance penetration. The current low insurance
placed with offshore insurers.
market premium suggests that the insurance
The Solomon Islands non-life local insurance
///
market is still recovering from the political unrest
market is small and currently has three of the past decade. The non-life insurance
locally registered insurers, QBE Insurance market premium prior to 1999 was estimated by
(International) Limited, Tower Insurance insurance industry sources at over US$25 million
Limited, and a new entrant, Pacific Assurance (1999 value).
Group (Solomon Islands) Limited, which joined
///
Insurance for catastrophe insurance perils of
the market in 2014.
///
earthquake and cyclone is available in the
The Solomon Islands has legislation in
///
market and is automatically included in property
///
place—the Insurance Act Cap. 82 (1985) insurance products. Property insurance rates for
and regulations—to regulate the insurance cyclone in the Solomon Islands are 0.13 percent,
industry. The Central Bank of Solomon Islands
///
below average rates for PICs, due to the lower
(CBSI) is the regulator and requires insurers to frequency of cyclones. The earthquake insurance
report quarterly to ensure that solvency margins rates in the Solomon Islands, at 0.17 percent, are
are met. All reinsurance contracts must be sent higher than average rates for other PICs because
to CBSI, which also approves offshore insurance of recent major earthquake events.
placements before coverage is placed overseas.
The Solomon Islands government does not
///
The Solomon Islands is exposed to the
///
have indemnity property insurance programs
catastrophic perils of cyclone, volcanic in place for its public assets, including major
///
Section
eruption, and earthquake. The Solomon Islands
///
transportation assets such as wharves, roads,
is located at the northern edge of the Southern and bridges. This could result in delays in
Hemisphere tropical cyclone zone. The most recent reconstruction following a catastrophic event.
08
SOLOMON ISLANDS PCRAFI 33
Table 1— Pacific Non-life Insurance Premium per Capita 2012 (US$)
GDP PER MARKET PREMIUM PER
MARKET GDP MILLIONS POPULATION
CAPITA PREMIUM CAPITA
Cook Islands $305 19,300 $15,823 $6,600,000 $342
Fiji $3,908 874,700 $4,467 $97,500,000 $111
Marshall Islands $182 52,560 $3,470 $3,000,000 $57
Samoa $683 188,900 $3,619 $17,000,000 $90
Solomon Islands $1,008 549,600 $1,130 $13,000,000 $24
Tonga $471 104,900 $4,495 $4,400,000 $42
Vanuatu $781 247,300 $3,182 $16,500,000 $67
Source: World Bank
Since 2012, the government has had a
/// Limited (QBE), Tower Insurance Limited (Tower),
property asset register, managed by the and a new entrant, Pacific Assurance Group
Ministry of Finance and Treasury (MoFT). /// (Solomon Islands) Limited, which joined the market
The MoFT advised that individual ministries have in 2014.
their own existing asset registers and that these
The Insurance Act Cap. 82 (1985) restricts the
are not integrated or updated with the MoFT
///
placement of insurance offshore, and any
asset register.
offshore placements must be approved by
According to insurance industry sources, some
/// the Central Bank of Solomon Islands (CBSI). ///
Solomon Islands statutory bodies and state- Insurance industry sources advised that most
owned enterprises that manage public assets offshore placements are for specialist and global
have insurance programs in place that include corporate insurance risks, such as Gold Ridge mine
indemnity property insurance for catastrophe and Solomon Breweries. Aviation risks are also
perils. Some statutory bodies do not have
/// placed offshore, as there is no capacity for this
property insurance. class of business in the Solomon Islands.
The non-life premium per capita in the
///
Solomon Islands is US$24, lower than rates
Insurance Market Overview
in other Pacific Island Countries (PICs) (table
Total non-life (general) insurance premium,
///
1). Insurance industry sources advised that the
///
all classes, was SI$95.6 million (US$13 million) non-life insurance market premium in 1999 was
in 2012. Local insurers underwrite SI$48.7 an estimated US$25 million. The current low
million (US$6.6 million) of the business and insurance market premium suggests that the
the balance of SI$46.9 million (US$6.3 million) insurance industry is still recovering from the
is placed with offshore insurers. ///
ethnic tension and unrest of the past decade.
The Solomon Islands non-life insurance
///
Distribution channels Section
market is small and currently has three locally
registered insurers, QBE Insurance (International)
08
///
34 PCRAFI SOLOMON ISLANDS
Table A .2— Pacific Commercial Property Insurance Rate and Deductible Comparison
GENERAL
AVERAGE AVERAGE CYCLONE GENERAL CYCLONE
MARKET EARTHQUAKE
EARTHQUAKE RATE RATE DEDUCTIBLE
DEDUCTIBLES
Cook Islands 0.12% 2% of sum insured 0.45% 20% of sum insured
Fiji 0.08% 10% of sum Insured 0.30% 20% of loss
2% of sum insured, or 2% of sum insured, or
Samoa 0.12% 0.20%
5% of loss 5% of loss
Tonga 0.15% 5% of sum insured 0.25% 5% of sum insured
Vanuatu 0.30% 5% of loss 0.17% 20% of loss
Source: World Bank 2013
Note: Average market rate percentage of value based on insurance industry sources.
According to CBSI, the Solomon Islands has two number of claims for these events in the Solomon
licensed insurance agents, Australia & New Zealand Islands; while the events themselves are relatively
Banking Group Limited and Credit Corporation frequent, the areas affected have limited assets
(Solomon Islands) Limited. and consequently very little insurance coverage.
There are four licensed insurance brokers: United There are a number of limitations with a
Risk Services Limited, MAT Insurance Brokers comparison of this type because of the variables
Limited, Pacific Insurance Broker Limited, and in property insurance rating, such as location of
Marsh PTY Limited. Only Marsh does not have a premises, construction, occupation, fire protection,
servicing office in the Solomon Islands; its business frequency of expected losses, and the amount
is transacted from Australia or Papua New Guinea. and type of deductible on the policies. It is not
possible to use average rating data as an exact
Both of the current non-life insurers in Solomon
basis for a specific company or individual risk, but
Islands offer insurance products on a direct
it is possible to offer a general comparison of the
basis for domestic household and motor vehicle
property insurance rates in respective markets.
insurance products. No insurance services are
available by Internet in the Solomon Islands. The local market does not appear to have any
major capacity limitations for property insurance.
There is a range of distribution channels available
Insurance intermediaries’ advised that both
in the marketing of general insurance products in
insurance providers have capacity for most
Solomon Islands, all of which are focused in the
property risks within the Solomon Islands. There
capital, Honiara.
is additional capacity available, by way of offshore
Property insurance rates for cyclone in the Solomon placements, if necessary. The fact that 48 percent
Islands are below average for PICs, although the of the market premium is placed offshore suggests
earthquake rates are higher than average (see table that the capacity is used by insurance brokers to
2). These high earthquake rates are due to the place client business.
Section
occurrence of major earthquake events in recent
years. The low cyclone rates are due to the low
08
SOLOMON ISLANDS PCRAFI 35
Catastrophe Risk Insurance
requiring adequate reinsurance programs, placed
with robust reinsurers.
There are three major catastrophe hazards in the
Solomon Islands: earthquakes, volcanic eruptions, Catastrophe Reinsurance
and tropical cyclones. The major property
In 2011, natural catastrophe insured losses in
accumulation exposure is in the capital (Honiara)
the global reinsurance market were the second-
and the island of Guadalcanal.
largest ever, at over US$110 billion (Swiss Re
Catastrophe risk insurance presents a particular 2012). What made this year significant for insurers
challenge to insurers’ exposure management, (and reinsurers) in the Pacific was the number of
since unlike other types of insurance, it presents events that occurred in the Asia Pacific region:
the possibility of large correlated losses. Insurers earthquakes in New Zealand and Japan, floods in
need to use a combination of reinsurance, reserves, Australia and Thailand, and a cyclone in Australia.
and diversification within their underwriting to According to the Global Insurance Market Report
ensure that their portfolios can withstand large (IAIS 2012), these Asia Pacific events accounted
disaster shocks without threatening their solvency. for 61 percent of the insured losses from natural
The Solomon Islands local domestic market has catastrophes in 2011, compared to a 30-year
capacity available, with one international insurer average of 18 percent. As a consequence, there
and two regional insurers, and additional capacity were adjustments in reinsurance capacity and
is available offshore if needed. higher risk premiums. In 2012 the natural disaster
losses dropped to US$77 million (Swiss Re 2013),
All insurers with catastrophe exposures need
but this was still the third-highest year for natural
to obtain reinsurance to increase their capacity.
catastrophe insured losses since 1970. In the
This is even more important when the insurer
Pacific, Tropical Cyclone Evan caused insured losses
or the insurance market pool is small, such as in
of F$57 million in Fiji (RBF 2012) and estimated
the Pacific. As regulators become increasingly
insured losses of SAT 3 million in Samoa in
vigilant about requiring insurers to have sufficient
December 2012.
capital and a good solvency margin to protect
their interests from catastrophic events, they are
Photo Credit
/// ///
Australian Department of Foreign Affairs and Trade/Flickr b
36 PCRAFI SOLOMON ISLANDS
QBE (Solomon Islands) is reinsured for catastrophe building code, since a national building code has
events under the QBE Group reinsurance program. not been agreed upon or passed in the country.
QBE Group has a detailed risk management Should clients wish, they can provide an engineer’s
process (QBE Insurance Group Limited 2012) report to indicate that the building meets the
that includes monitoring of catastrophe claims building standards applied elsewhere, and this can
concentration and reinsurance protection to be factored into the policy.
mitigate the exposures.
Industrial Special Risks (ISR) policies are used for
Tower (Solomon Islands) is reinsured for property insurance on most major commercial,
catastrophe events under the Tower Insurance government, and government public bodies
Limited Group reinsurance program. Tower accounts. There is no agreed upon ISR within
has determined that its main exposure in the the market—that is, each property insurer has its
Solomon Islands is earthquake and that the main own ISR. The wordings are generally based on the
accumulation is in the capital, Honiara. Tower Australian Mark IV or Papua New Guinea market
Insurance Limited (2011, 2012) acknowledges that ISR wordings.
property accumulations and exposure to natural
The QBE ISR wording is based on the Australian
perils represent a significant risk to its business. In
Mark IV insurance industry standard wording.
order to mitigate this risk the company undertakes
Tower uses an ISR wording based on the Papua
accumulation risk modeling and ensures that
New Guinea insurance market wording. These
adequate reinsurance protection is in place. In
wordings insure material damage (subject
its 2011 annual report, Tower Insurance Limited
to specific exclusions) and include insurance
(2011) advised that its event excess had increased
for natural perils, such as volcanic eruption,
to NZ$6.7 million and that it had protection for
earthquake, tsunami, and cyclone.
two catastrophe events within the program for the
2011/12 period. The reinsurance program is not Commercial Package or Business Protection
detailed in the company’s 2012 report, but it could wordings are used for small and medium
be expected to follow the previous arrangements. enterprises, and policies are taken as either Multi
Risks (accidental damage including earthquake and
Insurers throughout the Pacific have expressed
cyclone by extension) or as Specified Risks (fire and
concern at the recent increase in reinsurance
extraneous perils). These policies generally follow
premiums, particularly premiums for catastrophe
the perils insured under the ISR, although coverage
reinsurance. They have limited ability to pass on the
may be more restricted.
full costs of these increases to insured clients due
to the small size and economic constraints in those
markets.
Regulatory Framework
Market Property and Catastrophe
Insurance Products Insurance Law and Regulation
Cyclone insurance in the Solomon Islands differs Under the Insurance Act Cap. 82 (1985), all
from that in most other PICs in that it is available insurance companies, agents, and brokers must
Section be licensed. The CBSI is the regulator and requires
automatically, with no preconditions for acceptance
such as an engineer’s report. It can be assumed, quarterly and annual returns from insurers.
08
however, that buildings do not meet any form of According to the CBSI (2012), the draft of a new
SOLOMON ISLANDS PCRAFI 37
Photo Credit
/// ///
Stefan
Insurance Bill was completed in 2008 with the Cap. 154 (1980), any development plans must be
Krasowski/
assistance of the International Monetary Fund, lodged with local authorities prior to construction,
Flickr b
although the bill is still pending at this time. but this legislation does not require compliance
with any building code.
CBSI requires insurers to annually submit a
reinsurance management strategy and program In the absence of a legally enforceable building
details with their insurance license renewal code, insurers underwrite on the basis that
application. CBSI holds quarterly prudential premises do not meet code, unless proof by way of
consultative meetings with insurance companies an engineer’s report is provided to the contrary.
and brokers to discuss market issues. It also
Financial Security of Onshore Insurers
undertakes biannual on-site reviews of local
insurers, including cross-checks of accumulations The Solomon Islands has three onshore insurers,
against adequacy of insurance coverage. QBE (Solomon Islands), Tower (Solomon Islands),
and Pacific Assurance Group (Solomon Islands)
Building Controls and Standards
Limited,
The Solomon Islands does not have a building act QBE (Solomon Islands) is a branch of QBE Section
in place. Insurance industry sources advised that Insurance (International) Limited, which is a wholly
a draft National Building Code was circulated in owned subsidiary of QBE Insurance Group Limited,
1990, using the New Zealand earthquake code
(NZS4203) and Australian wind loads (AS1170.2) as
an Australian company listed on the Australian
stock exchange. QBE Insurance (International)
08
its basis. Under the Town and Country Planning Act Limited has a security rating of A+ (strong) from
38 PCRAFI SOLOMON ISLANDS
Standard & Poor’s, dated May 22, 2013, as a core property insurance management and purchasing,
operating entity of QBE. which could result in lower premiums.
Tower (Solomon Islands) is a branch of Tower
Insurance Limited, a New Zealand–registered
company listed on the New Zealand and Australian
Past Catastrophe Events
stock exchanges. As a branch, Tower (Solomon The most destructive cyclone within the Solomon
Islands) holds the financial security rating of the Islands was Cyclone Namu in 1986 (Revell
parent company, Tower Insurance Limited, which 1986). This event caused significant property
has a security rating of A- (excellent) from A. M. damage in the capital city, Honiara, and in the
Best dated July 26, 2013. surrounding islands of Guadalcanal and Malaita.
The new entrant, Pacific Assurance Group Insurance industry sources reported that claims
(Solomon Islands) Limited, is a subsidiary of were estimated at SI$14 million (1986 values),
a company registered in Papua New Guinea, the largest of which was from Solomon Islands
Pacific Assurance Group Limited. No details of Plantations Limited at over SI$7 million. The
the company’s financial security are available at remaining SI$7 million in claims was from flood
this time. and wind damage within Honiara township. The
loss adjuster who attended to these claims advised
that there were a number of roof failures due to
Insurance of Public Assets
incorrect or inadequate fixing of roofing iron.
According to the Ministry of Finance and
///
On April 2, 2007, a magnitude 8.1 earthquake
Treasury (MoFT), the Solomon Islands has occurred in Western Province to the southwest
no property insurance program in place for of the regional town Gizo. As a result of damage
government buildings or infrastructure assets. ///
from the earthquake and resulting tsunami, 35
Nor is there a current plan to insure public assets. insurance claims were lodged, and insured damage
was estimated at SI$9 million (US$1.1 million). The
The government does have an asset register
claims and insured costs were lower than might
///
in place for property and infrastructure assets,
have been expected due to the low penetration of
managed since 2012 by MoFT. The existing asset
insurance in remote islands.
///
register could be used to identify key government
assets for any risk financing or insurance program. Following Cyclone Namu, one insurer, Sun
Alliance, withdrew from the underwriting of
Some state-owned enterprises that hold
insurance business in the Solomon Islands market.
///
major public assets have property insurance
programs that include earthquake and cyclone
perils. These enterprises include Solomon Airlines
///
Limited, Solomon Islands Electricity Authority, and
Solomon Islands Ports Authority.
Section The government keeps no centralized register
///
detailing the insurance arrangements made by
individual state-owned enterprises. A register
08
///
of this type would allow a coordinated approach to
SOLOMON ISLANDS PCRAFI 39
Options for Consideration References
Recommendation 1: The government should
///
CBSI (Central Bank of Solomon Islands). 2012. 2012 CBSI Annual
develop an insurance program for key public
Report. http://www.cbsi.com.sb/index.php?id=105.
assets and include this in a broader disaster
risk financing and insurance strategy. This///
IAIS (International Association of Insurance Supervisors). Global
Insurance Market Report. 2012 edition. http://iaisweb.org/
step would include use of the existing asset
index.cfm?event=getPage&nodeId=25308.
register to identify key assets and assessment of
premium costs for property indemnity insurance QBE Insurance Group Limited. 2012. Annual Report 2012. http://
www.group.qbe.com/.
on key public assets, in particular for the major
catastrophe perils of earthquake/tsunami and RBF (Reserve Bank of Fiji). 2012. Insurance Annual Report 2012.
cyclone/sea surge. Suva, Fiji. http://www.rbf.gov.fj/Publications/Publications/Insur-
ance-Annual-Reports.aspx.
Recommendation 2: The government should
///
Revell, C. G. 1986. “Tropical Cyclone Namu.” Weather and
update the asset register held by the MoFT to
Climate 6: 67–69.
include the property assets currently listed in
existing asset registers with other ministries. ///
Solomon Islands Government. 1980., Town and Country Planning
Act Cap. 154, 1980
Where possible the asset register entries should
include the current replacement value of public ———. 1985. Insurance Act Cap. 82,1985.
assets, in addition to the existing purchase value.
Standards Australia Limited, AS1170 Minimum design loads on
structure, Part 2 Wind forces 1989, (superseded standard,
replaced by AS/NZS 1170.2:2011)
Standards New Zealand, NZS4203 1984, Code of practice for
general structural design and design loadings for buildings,
Part 3 Earthquake provisions, (superseded standard, replaced
by NZS 1170.5:2011)
Swiss Re. 2012. “Natural Catastrophes and Man-Made Disasters
in 2011.” Sigma 2/2012. http://www.swissre.com/sigma/.
———. 2013. “Natural Catastrophes and Man-Made Disasters in
2012.” Sigma 2/2013. http://www.swissre.com/sigma/.
Tower Insurance Limited. 2012. _Annual Reports 2012_. http://
www.tower.co.nz/Investor-Centre/Reports/Documents/TOW-
ER_Annual_Report_2012.pdf
Section
08
40 PCRAFI SOLOMON ISLANDS
Glossary
Someone who acts for the insurance company in arranging insurance contracts. There are two main
Agent types of agents: tied agents, who act for one insurer only, and general agents, who act for multiple
insurance companies.
Someone who acts as an agent for the insured in arranging an insurance or reinsurance program
Broker
with a provider of capacity.
The ability of an insurance company to provide insurance protection to clients, which is limited by
Capacity
its own financial strength and the reinsurance protection it has in place.
An insurance company wholly owned by a company or entity that insures the risks of the parent
Captive insurer
entity and subsidiaries.
Insurance that reimburses individuals or entities for loss or damage to a financial position as close
Indemnity insurance as possible to the position they were in prior to the event, in the context of the financial terms of
the coverage (such as deductible/excess and limit).
Intermediaries The general term given to insurance agents and brokers.
The amount that an insurance company retains on a reinsurance contract and in particular an
Net retention
excess of loss of contract.
A type of insurance that is triggered by the occurrence of a specific measured hazard event, such
Parametric insurance
as a certain magnitude of earthquake or category of cyclone.
Probable maximum loss
The maximum value of a claim from a large or catastrophe event. May also be called MPL.
(PML)
The insurance of physical assets such as buildings, plant and equipment, stock, and machinery.
Property insurance The products used for this insurance are variously named as fire and perils, commercial or business
package, industrial special risks, or material damage insurance.
A risk transfer method used by insurance companies to transfer part of a single large risk or an
accumulation of similar risks and so increase their capacity. Reinsurance helps to smooth the
Reinsurance
extreme results and effects of specific perils (such as catastrophe events) and therefore to reduce
the volatility of an insurance portfolio.
The extent by which an insurer’s assets exceed its liabilities. Minimum statutory solvency
Solvency margin
requirements are normally included in insurance acts or regulations.
Section
08
SOLOMON ISLANDS PCRAFI 41
Annex 4
Country Risk Profile
Section
09
PACIFIC CATASTROPHE RISK
ASSESSMENT AND FINANCING
INITIATIVE
SOLOMON ISLANDS
SEPTEMBER 2011
COUNTRY RISK PROFILE: SOLOMON ISLANDS
The Solomon Islands are expected to incur, on average,
20.5 million USD per year in losses due to earthquakes
and tropical cyclones. In the next 50 years, the Solomon
Islands have a 50% chance of experiencing a loss
exceeding 240 million USD and casualties larger than
1,650 people, and a 10% chance of experiencing a loss
exceeding 527 million USD and casualties larger than
4,600 people.
BETTER RISK INFORMATION FOR SMARTER INVESTMENTS
COUNTRY RISK PROFILE: SOLOMON ISLANDS
POPULATION, BUILDINGS, INFRASTRUCTURE AND
CROPS EXPOSED TO NATURAL PERILS
An extensive study has been conducted to assemble a
comprehensive inventory of population and properties at
risk. Properties include residential, commercial, public and
industrial buildings; infrastructure assets such as major ports,
airports, power plants, bridges, and roads; and major crops,
such as coconut, palm oil, taro, cocoa, rice and many others.
TABLE 1:
Summary of Exposure in Solomon Islands (2010)
General Information:
Total Population: 547,500
GDP Per Capita (USD): 1,240
Total GDP (million USD): 678.6
Figure 1: Building locations.
Asset Counts:
Residential Buildings: 157,035
Main Islands Honiara
0 1 2 4
Public Buildings: 4,615 0 50 100 200 Kilometers
Building Replacement
Kilometers
Commercial, Industrial, and Other Buildings: 7,462 Cost Density
(million USD / km^2)
0 - 0.01
All Buildings: 169,112 0.01 - 0.025
0.025 - 0.05
Hectares of Major Crops: 83,955 0.05 - 0.075
0.075 - 0.1
Cost of Replacing Assets (million USD): 0.1 - 0.25
0.25 - 1
Buildings: 3,059 1 - 300
Infrastructure: 420
Solomon Islands Honiara
Crops: 117
5° S
0 175 350 700
Main Islands
Total: 3,596 Kilometers
Government Revenue and Expenditure:
10° S
Total Government Revenue
(Million USD): 297.6 155° E 160° E 165° E
(% GDP): 43.9% Figure 2: Building replacement cost density by ward.
Total Government Expenditure
(Million USD): 283.1
(% GDP): 41.7%
1
Data assembled from various references including WB, ADB, IMF and The
Secretariat of the Pacific Community (SPC).
2
The projected 2010 population was trended from the 2006 census using
estimated growth rates provided by SPC.
Table 1 summarizes population and the inventory of buildings,
infrastructure assets, and major crops (or “exposure”) at risk
as well as key economic values for the Solomon Islands. It
is estimated that the replacement value of all the assets in
the Solomon Islands is 3.6 billion USD, of which about 86%
represents buildings and 12% represents infrastructure.
Figures 1 and 2 illustrate the building exposure location and
replacement cost distribution, respectively. The footprints of
about 35,000 of the approximately 169,000 buildings shown
in Figure 1 were digitized from high-resolution satellite
imagery. More than 12,000 of such buildings, including more
Figure 3: Land cover/land use map.
2
than 7,000 near the national capital of Honiara, were also
September 2011
COUNTRY RISK PROFILE: SOLOMON ISLANDS
field surveyed and photographed by a team of inspectors
deployed for this purpose. Figure 3 displays the land cover/
land use map that includes the location of major crops. The
data utilized for these exhibits was assembled, organized almost 1,000 tropical cyclones with hurricane-force winds
and, when unavailable, produced in this study. spawned in the last 60 years, with an average of about 16
tropical storms per year. The Solomon Islands were affected
TROPICAL CYCLONE AND EARTHQUAKE
HAZARDS by devastating cyclones multiple times in the last few decades.
IN SOLOMON ISLANDS For example, tropical cyclone Namu in 1986 claimed more than
The Pacific islands region is prone to natural hazards. The 100 lives and tens of thousands were left homeless. The storm
Solomon Islands are situated along one segment of the Pacific caused massive landslides and flooding with severe damage
“ring of fire,” which aligns with the boundaries of the tectonic to the building stock, infrastructure and crops, incurring losses
plates. These boundaries are extremely active seismic zones between 30 and 60 million USD that considerably set back
capable of generating large earthquakes and, in some cases, the country’s development. Figure 5 shows the levels of wind
major tsunamis that can travel great distances. A recent and speed due to tropical cyclones that have about a 40% chance
tragic example is the 2007 magnitude 8.1 earthquake, which to be exceeded at least once in the next 50 years (100-year
struck the islands of the Western and Choiseul Provinces of the mean return period). These wind speeds, if they were to occur,
Solomon Islands. The earthquake generated a tsunami that are capable of generating moderate to severe damage to
killed 52 people and caused widespread damage to housing, buildings, infrastructure and crops with consequent significant
infrastructure, schools, and medical facilities, resulting in economic losses.
about 100 million USD in losses. Figure 4 shows that the
Solomon Islands have a 40% chance in the next 50 years of
Main Islands Honiara 0 1 2 4
0 50 100 200 Kilometers
experiencing, at least once, very strong to severe levels of Kilometers
ground shaking. These levels of shaking are expected to cause
damage ranging from moderate to heavy to well-engineered
buildings and even more severe damage to structures built
with less stringent criteria.
The Solomon Islands are located south of the equator at
the northern extremity of an area known for the frequent Solomon Islands Honiara
occurrence of tropical cyclones with damaging winds, rains
5° S
0 175 350 700
Main Islands
and storm surge between the months of October and May. Kilometers
In the South Pacific region from the equator to New Zealand
10° S
in latitude and from Indonesia to east of Hawaii in longitude,
155° E 160° E 165° E
Main Islands Honiara 0 1 2 4
0 50 100 200 Kilometers 0 25 50 75 100 125 150 175 200
Kilometers
Maximum Wind Speed
Figure 5: Maximum 1-minute sustained wind speed (in miles per hour) with a 40%
chance to be exceeded at least once in the next 50 years.
RISK ANALYSIS RESULTS
To estimate the risk profile for the Solomon Islands posed
Solomon Islands Honiara by tropical cyclones and earthquakes, a simulation model of
potential storms and earthquakes that may affect the country
5° S
0 175 350 700
Main Islands
Kilometers in the future was constructed. This model, based on historical
data, simulates more than 400,000 tropical cyclones and
about 7.6 million earthquakes, grouped in 10,000 potential
10° S
realizations of the next year’s activity in the entire Pacific
155° E 160° E 165° E Basin. The catalog of simulated earthquakes also includes
Perceived Shaking Not Felt Weak Light Moderate Strong Very Strong Severe Violent Extreme large magnitude events in South and North America, Japan
Moderate/ Very
Potential Damage none none none Very light light Moderate Heavy Heavy Heavy and the Philippines, which could generate tsunamis that may
Peak ACC. (%g) <0.17 0.17-1.4 1.4-4.0 4.0-9 9-17 17-32 32-61 61-114 >114 affect the Solomon Islands’ shores.
Peak Vel. (cm/s) <0.12 0.12-1.1 1.1-3.4 3.4-8 8-16 16-31 31-59 59-115 >115
Instrumental Intensity I II-III IV V VI VII VIII IX X+
Scale based upon Wald. et al: 1999 The country’s earthquake and tropical cyclone risk profiles are
Figure 4: Peak horizontal acceleration of the ground (Note: 1g is equal to the
derived from an estimation of the direct losses to buildings,
acceleration of gravity) that has about a 40% chance to be exceeded at least once in infrastructure assets and major crops that are caused by all the
the next 50 years.
3
September 2011
COUNTRY RISK PROFILE: SOLOMON ISLANDS
simulated potential future events. The direct losses include Main Islands 0 1 2 4 Total Average Annual
the cost of repairing or replacing the damaged assets, but 0 50 100 200 Honiara Loss (thousand USD)
Kilometers 0 - 10
do not include other losses such as contents losses, business Kilometers
10 - 25
25 - 50
interruption losses and losses to primary industries other 50 - 75
70 - 100
than agriculture. The direct losses for tropical cyclones are 100 - 500
500 - 750
caused by wind and flooding due to rain and storm surge, 750 - 2,100
while for earthquakes they are caused by ground shaking
and tsunami inundation. After assessing the cost of repairing
or rebuilding the damaged assets due to the impact of all the
simulated potential future events, it is possible to estimate Solomon Islands Honiara
5° S
0 175 350 700
in a probabilistic sense the severity of losses for future Main Islands
Kilometers
catastrophes.
10° S
The simulations of possible next-year tropical cyclone and
earthquake activity show that some years will see no storms
155° E 160° E 165° E
or earthquakes affecting the Solomon Islands, while other
Figure 7: Contribution from the different wards to the average annual loss for
years may see one or more events affecting the islands, tropical cyclone and earthquake (ground shaking and tsunami).
similar to what has happened historically. The annual losses
averaged over the many realizations of next-year activity Main Islands Honiara
0 1 2 4 AAL / Asset Value
0 50 100 200 0% - 0.2%
are shown in Figure 6 separately for tropical cyclone and Kilometers
0.2% - 0.3%
for earthquake and tsunami, while the contributions to the Kilometers
0.3% - 0.4%
average annual loss from the different wards are displayed 0.4% - 0.5%
0.5% - 0.75%
in absolute terms in Figure 7 and normalized by the total 0.75% - 1%
asset values in each ward in Figure 8. Figure 8 shows how the 1% - 2%
2% - 3.5%
relative risk varies by ward across the country.
The same risk assessment carried out for the Solomon Islands
was also performed for the 14 other Pacific Island Countries. Solomon Islands Honiara
5° S
0 175 350 700
Main Islands
Tropical Cyclone Earthquake Kilometers
Average Annual Loss = 5.8 million USD Average Annual Loss = 14.7 million USD
1.3% 15.5%
46.0%
10° S
0.0%
Buildings Buildings
Cash Crops Cash Crops
Infrastructure 155° E 160° E 165° E
Infrastructure
52.8%
84.5% Figure 8: Contribution from the different wards to the tropical cyclone and earthquake
(ground shaking and tsunami) average annual loss divided by the replacement cost
Figure 6: Average annual loss due to tropical cyclones and earthquakes (ground of the assets in each ward.
shaking and tsunami) and its contribution from the three types of assets.
Tropical Cyclone Earthquake Ground Motion Tsunami
Average Annual Loss (million USD)
The values of the average annual loss of the Solomon Islands 100
10
and of the other 14 countries are compared in Figure 9. 8
80 6
4
In addition estimating average risk per calendar year, 2
another way of assessing risk is to examine large and 60 0
rather infrequent, but possible, future tropical cyclone
and earthquake losses. Table 2 summarizes the risk profile 40
for the Solomon Islands in terms of both direct losses and
emergency losses. The former are the expenditures needed 20
to repair or replace the damaged assets while the latter are
the expenditures that the Solomon Islands government may 0
need to incur in the aftermath of a natural catastrophe to
provide necessary relief and conduct activities such as debris
removal, setting up shelters for homeless or supplying
medicine and food. The emergency losses are estimated as a
Figure 9: Average annual loss for all the 15 Pacific Island Countries
percentage of the direct losses.
4
considered in this study.
September 2011
COUNTRY RISK PROFILE: SOLOMON ISLANDS
Table 2 includes the losses that are expected to be exceeded, adopted to estimate the likelihood that different levels of
on average, once every 50, 100, and 250 years. For example, casualties (i.e., fatalities and injuries) may result from the
an earthquake loss exceeding 270 million USD, which is future occurrence of these events. As shown in Table 2, our
equivalent to about 40% of the Solomon Islands’ GDP, is model estimates, for example, that there is a 40% chance
to be expected, on average, once every 100 years. In the in the next fifty years (100 year mean return period) that
Solomon Islands, earthquake losses are expected to be one or more events in a calendar year will cause casualties
substantially more frequent and severe than losses due to exceeding 1,900 people in the Solomon Islands. Events
tropical cyclones. The latter, however, remain potentially causing 3,000 or more casualties are also possible but have
catastrophic events. much lower likelihood of occurring.
A more complete picture of the risk can be found in Figure TABLE 2: Estimated Losses and Casualties Caused by Natural Perils
10, which shows the mean return period of direct losses in Mean Return Period (years) AAL 50 100 250
million USD generated by earthquake, tsunami and tropical
Risk Profile: Tropical Cyclone
cyclones combined. The 50-, 100-, and 250-year mean return
period losses in Table 2 can also be determined from the Direct Losses
curves in this figure. The direct losses are expressed both in (Million USD) 5.8 44.5 63.9 101.5
absolute terms and as a percent of the national GDP. (% GDP) 0.9% 6.6% 9.4% 15.0%
Emergency Losses
In addition to causing damage and losses to the built (Million USD) 1.3 10.2 14.7 23.4
environment and crops, future earthquakes and tropical
(% of total government 0.5% 3.6% 5.2% 8.2%
cyclones will also have an impact on population. The same expenditures)
probabilistic procedure described above for losses has been
Casualties 63 489 691 1,019
700 Risk Profile: Earthquake and Tsunami
TC+EQ
600 Direct Losses
Direct Losses (million USD)
TC
500 EQ (Million USD) 14.7 175.3 268.7 400.8
400
(% GDP) 2.2% 25.8% 39.6% 59.1%
300
Emergency Losses
200
(Million USD) 0.0 28.2 43.7 65.3
100
(% of total government 0.0% 10.0% 15.4% 23.1%
0 expenditures)
0 100 200 300 400 500 600 700 800 900 1,000
Mean Return Period (years) Casualties 96 1,043 1,780 3,106
Risk Profile: Tropical Cyclone, Earthquake, and Tsunami
100% Direct Losses
TC+EQ
80% TC (Million USD) 20.5 189.6 280.6 426.2
GDP)
EQ (% GDP) 3.0% 27.9% 41.4% 62.8%
Direct Losses (%
60%
Emergency Losses
40% (Million USD) 3.8 32.8 46.6 68.6
20% (% of total government 1.3% 11.6% 16.4% 24.2%
expenditures)
0% Casualties 159 1,234 1,914 3,246
0 100 200 300 400 500 600 700 800 900 1,000
Mean Return Period (years)
Casualties include fatalities and injuries.
1
Figure 10: Direct losses (in absolute terms and normalized by GDP) caused by either
tropical storms or earthquakes that are expected to be exceeded, on average, once
in the time period indicated.
5
September 2011
PCRAFI 2015
Country Note
SOLOMON ISLANDS
This note on the Solomon Islands forms part of a series of country Disaster Risk Finance and Insurance
(DRFI) notes that were developed to build understanding of the existing DRFI tools in use in each country
and to identify gaps future engagements in DRFI that could further improve financial resilience. These
notes were developed as part of the technical assistance provided to countries under the Pacific DRFI pro-
gram jointly implemented by the World Bank and the Secretariat of the Pacific Community financed by
the Government of Japan. The technical assistance builds on the underlying principles of the three-tiered
disaster risk financing strategy and focuses on three core aspects: (i) the development of a public finan-
cial management strategy for natural disasters, recognizing the need for ex-ante and ex-post financial
tools; (ii) the post-disaster budget execution process, to ensure that funds can be accessed and disbursed
easily post-disaster; and (iii) the insurance of key public assets, to resource the much larger funding
requirements of recovery and reconstruction needs. The Pacific DRFI Program is one of the many appli-
cations of PCRAFI. It is designed to increase the financial resilience of PICs by improving their capacity to
meet post-disaster financing needs without compromising their fiscal balance.
The Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) is a joint initiative of SOPAC/SPC, World Bank, and the Asian
Development Bank with the financial support of the Government of Japan, the Global Facility for Disaster Reduction and Recovery
(GFDRR) and the ACP-EU Natural Disaster Risk Reduction Programme, and technical support from AIR Worldwide, New Zealand GNS
Science, Geoscience Australia, Pacific Disaster Center (PDC), OpenGeo and GFDRR Labs.