94983 SOLOMON ISLANDS Country Note PCR AFI 2015 SOLOMON ISLANDS February 2015 Disaster Risk Financing and Insurance © 2015 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Cover Photo Credit: Kyle Post / Flickr b /// /// 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.