Financial Protection for Pacific Island Countries Scaling-up regional collaboration on climate and disaster risk financing and insurance Why is financial protection important to reduce poverty and increase shared prosperity? Financial losses from natural disasters The Disaster Risk Financing and Insurance continue to rise. Developing countries and their Program (DRFIP) leads the dialogue on low-income populations experience the greatest financial resilience as part of the World impacts. Bank Group’s effort to support more than 50 vulnerable countries in better managing disasters and climate shocks. How we support governments Pacific Island Countries (PICs)are among the most vulnerable countries in the world, threatened by the risk of tropical cyclones, earthquakes and tsunamis that cause fiscal shocks and humanitarian crises. At the onset of a natural hazard event, Pacific Island Countries (PICs) require rapid-response, disaster risk financing instruments that provide immediate cash to cover emergency response and maintain basic public services. However, access to short-term liquidity is often constrained due to the small size of island economies, which in turn restricts their borrowing capacity and access to financial markets. Compounding this effect, PICs generally have limited budget reserves, which often force governments to reallocate public resources away from national development priorities – and can have adverse, long-term economic impacts. Without easy access to debt and robust financial markets, the ability of governments to quickly respond to provide humanitarian relief services is dramatically reduced. The PCRAFI Program is a comprehensive, regional effort to increase financial resilience to climate and disaster risks in the Pacific through the devel- opment of a regional catastrophe risk pool and technical assistance. The PCRAFI Program – Phase II builds upon 10 years’ experience of the Disaster Risk Financing and Insurance Program (DRFIP) working across the Pacific with regional agencies, governments, donors and the World Bank Group. Beginning in 2007, ministers of finance from PICs and development partners began to explore catastrophe risk insurance as a regional mechanism to enhance the financial resilience of PICs. This catalyzed the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) - Phase I, which laid the technical foundation and acquired the requisite data to model a catastrophe risk insurance pool. Six Guiding Principles of the PCRAFI Program 1. Country 2. Financial 3. Contingency Ownership Sustainability Planning 4. Accountability 5. Comprehensive 6. Link with and Transparency Disaster Risk Disaster Risk Financing Management Strategy Agenda What we do The Disaster Risk Financing and Insurance Program (DRFIP) provides technical and financial assistance to 14 PICs and three regional organizations through the PCRAFI Program Multi-Donor Trust Fund, which is implemented in two tracks: Track I: PCRAFI Facility Track II: Technical Assistance Establishment and operations of the Pacific Catastrophe Risk Insurance A multi-faceted program that focuses on strengthening institutional capacity Company (PCRIC), a regional catastrophe insurance platform dedicated to for financing climate and disaster risks at three levels of engagement: the provision of parametric climate and disaster insurance that increases national, regional and PCRAFI Facility access to rapid-response emergency funds Components Components Establishment and Operations Market-Based Instruments Technical and legal support is provided to PCRIC and the Supports the operations of the PCRAFI Facility includ- Pacific Catastrophe Risk Insurance Foundation (PCRIF), ing the review of technical documents to ensure accel- two legal entities that comprise the PCRAFI Facility erated implementation of catastrophe risk insurance, such as an annual portfolio analysis, and validation of Capitalization of PCRIC the reinsurance package, and technical assistance for Initial capitalization funds are transferred to PCRIC - a product development captive insurance company - to accelerate its key func- tions: retain and manage a portion of the risk portfolio; Public Financial Management generate cost reduction; and make rapid insurance pay- Activities focus on the development national disaster outs to countries in the event a policy is triggered risk financing strategies to strengthen post-disaster public financial management, including: post-disaster Monitoring and Evaluation budget execution, mobilization and reporting, and con- PCRIC and member countries collaborate to develop tingency plans a uniform process if a policy is triggered for member countries to report on the execution of the payout Knowledge Management and Learning Knowledge exchange activities convene PICs and sim- Development of Disaster Risk Insurance Products ilar regional risk pools to facilitate technical collabo- PCRIC is responsible to design new insurance products ration and the implementation of trainings and higher that cover additional hazards (e.g excess rainfall and education opportunities for disaster risk finance drought), and incentivize new countries to join PCRAFI Disaster Risk Financing PacRIS - Pacific Risk Information System & Insurance Through implementation of the five-year program, the regional geospa- Rapid tial data management platform – PacRIS – is being updated with current Disaster Macroeconomic Planning risk information from the 14 participating countries. PacRIS hosts the Impact necessary data inputs to run the insurance model that underpins the PCRAFI Insurance Program. The Pacific Community (SPC) leads the ef- PacRIS fort to update the database and develop capacity building to facilitate Professional Integration of the use of risk information in other economic sectors shown here. & Institutional Capacity Climate Change Projections Development Urban Planning & Infrastructure Design FINANCIAL PROTE C TION FOR PACIFIC ISL AND COUN TRI E S Impact To date, the PCRAFI Insurance Program has made two payouts totaling US$3.2 million, each within 10 days of the event, providing rapid-response financial instrument to support governments’ ability to quickly respond when a disaster strikes. TONGA Vanuatu Tropical Cyclone Ian swept across Tonga on January 11, 2014, damag- On March 13, 2015 Tropical Cyclone Pam struck Vanuatu, triggering its ing 66% of homes and losses up to 40% in affected islands. Tonga was parametric insurance policy for cyclone hazards. PCRAFI made a rapid dis- the first PIC to receive a payout under the PCRAFI Insurance Program, bursement of US$1.9 million to the government within 7 days of the event, totaling US$1.3 million. The PCRAFI payout was made within ten days which provided a rapid cash injection to minimize the fiscal shock from the of the event, and was among the first injections of cash, equal to half event. The PCRAFI payout, intended to help support emergency response of Tonga’s national budget reserves and was used to the government to services, enabled Vanuatu to respond quickly to affected populations, in- assist in disaster response activities, including the distribution of relief cluding the mobilization of nurses to provinces impacted by the storm. goods to Ha’apai. Corrugated iron litters the streets of Lifuka Island, Tonga Photo: CC-by/Scott McLennan / DFAT Devastation after Cyclone Pam. Photo: CC-by/Graham Crumb Achievements Partnerships ●● Attracted new donors to the region who have provided over US$40 The PCRAFI Program Multi-Donor Trust Fund (MDTF) was established million to support the PCRAFI Program with generous contributions in 2016 with generous contributions from Germany, Japan, the United from Germany, Japan, the United Kingdom, and the United States Kingdom, and the United States through the InsuResilience - the G7 Ini- ●● Five catastrophe risk insurance policies were issued by the PCRAFI tiative on Climate Risk Insurance1. Facility, marking its first issuance to participating members on No- World Bank Group’s Disaster Risk Financing and Insurance Program vember 1st, 2016 for Season 5, which runs until October 31, 2017 (DRFIP) is a joint program of the World Bank’s Finance and Markets ●● New products under development – a feasibility study for a rainfall Global Practice and the Global Facility for Disaster Reduction and Recov- insurance product is underway, laying down the foundation for a ery (GFDRR). As a leading provider of analytical & advisory services on new product to address heavy rainfall and drought disaster risk finance, it helps governments, businesses, and households manage the financial impacts of disaster and climate risk without com- 1 promising sustainable development, fiscal stability, and well-being. 1 http://newsroom.unfccc.int/lpaa/resilience/g7-climate-risk-insurance-initiative-stepping-up-protection-for-the-most-vulnerable Olivier Mahul Samantha Cook omahul@worldbank.org scook@worldbank.org www.worldbank.org/drfi