PCRAFI PROGRAM - PHASE II Enhancing the financial resilience of Pacific Island Countries against natural disaster and climate risk BACKGROUND Donor partners have expressed strong support to the PCRAFI Program during COP 21. During COP21 in December 2015 in Paris, as part of the InsuResilience initiative championed by the G7, At the 2015 Forum Economic Ministers Meeting (FEMM) in Cook several donor partners including Germany, UK, USA and Japan Islands, the Finance Ministers of the Pacific Island Countries have pledged to support the development of the PCRAFI Program, (PICs) agreed to establish the PCRAFI Facility to provide both for the capitalization of the PCRAFI Facility and the provision of disaster and climate risk insurance. In addition, it was agreed to technical assistance. domicile the Facility as an independent legal entity in the Cook Islands and for the Facility to be effective by August 2016. This is a major The PCRAFI Program will be supported by the PCRAFI Multi- achievement in the development of the PCRAFI insurance program Donor Trust Fund (MDTF) with the World Bank as Trustee. The that demonstrates the willingness and commitment of the PICs to PICs called upon the World Bank and donor partners to support establish their own management entity to ensure the sustainability the PCRAFI Program during 2015 FEMM. In direct response to this and further development of the PCRAFI insurance program. request, the World Bank is currently working with donor partners to secure funds and to establish the PCRAFI MDTF. See Figure 1. The PCRAFI Facility will provide the PICs with climate and The PCRAFI Program is designed and operated according to disaster related insurance with the aim to increase the financial the following six key principles: resilience of PICs against natural disasters. By providing parametric insurance solutions to the PICs the PCRAFI Facility will help build (1) Country ownership. The PCRAFI Facility provides the PICs their financial response capacity to meet post-disaster funding needs with a regional body accountable to them, giving them control and without compromising their fiscal balances and development. It will influence over the design of future disaster and climate risk tools. also provide the PICs with greater ownership of disaster and climate PICs recognize that for the long-term sustainability of the program risk financing at the regional level, giving them control and influence they must take regional ownership. over the design of future disaster and climatic risk solutions. The Facility will also be able build reserves, which will allow it to retain some of the (2) Financial Sustainability. The Program, and especially the risk and transfer the remainder to the reinsurance market when it is the PCRAFI Facility, is designed to be financially sustainable in the most cost-effective, leading to further insurance premium reduction. long run based on sound actuarial principles that adequately account for the underlying risks and operating expenses. This will ensure that the initial capital injection is not depleted and can even PCRAFI PROGRAM grow over time. (3) Contingency Planning. Contingency planning can ensure timely The PCRAFI Program has two core components: and effective use of funds (including insurance proceeds) post disaster. Such plans should be agreed ex ante to avoid any delays • PCRAFI Facility: established as an insurance captive, designed to financing response in the aftermath of a disaster. Such plans to provide the PICs with catastrophe risk insurance coverage on should also give the PICs flexibility over the use of the insurance competitive terms; and proceeds according to their own priority (as per the principle of • PCRAFI Technical Assistance (TA) program: which aims to country ownership). The PICs have already developed post disaster provide the PICs, regional organizations and the PCRAFI Facility, budget execution manuals to reinforce the key principles of sound with technical assistance and capacity building on disaster risk public financial management by ensuring rapid budget mobilization financing and insurance and on public financial management of and execution following the declaration of emergency. natural disasters. FIGURE 1. PCRAFI PROGRAM Donor Partners Steering Grants Committee PCRAFI MDTF Trustee World Seed Capital Start up Phased Prod Prog. Bank Capital of the TA costs Dev. Mgt Facility TA Provider Insurance Premiums PCRAFI Facility PCRAFI TA Program SPV Reinsurance • Public Financial Management Market Insurance • Contingency planning Payouts Capital and reserves • Disaster risk financing strategy Insurance Insurance Payouts Premiums Pacific Island Countries Regional Organizations (SPC, PIFS, SPREP) (4) Accountability and transparency. While this has not been (6) Link with disaster risk management agenda. Disaster risk a requirement of the PCRAFI program to date both Vanuatu and financing is part of the broader disaster risk management agenda, Tonga, who received an insurance payout, have been transparent which aims to mitigate/reduce the disaster risks faced by the PICs. on their expenditures providing detailed information on how the The PCRAFI Program is executed in partnership with the Secretariat payouts were used. of the Pacific Community (SPC) who holds the regional mandate for disaster risk management. Disaster risk management plans have (5) Comprehensive disaster risk financing strategy. While been developed by each PIC under the Hyogo framework and now catastrophe risk insurance contributes to the increased financial the Sendai framework. resilience of the PICs against natural disasters, it is only one component of a comprehensive disaster risk financing strategy. The PCRAFI Program is aligned with other regional initiatives Institutional capacity building on public financial management of such as the Pacific Resilience Program (PREP), an IDA-funded natural disasters, including post disaster budget execution, will regional program that is designed to strengthen early warning, complement catastrophe risk insurance. resilient investments, and financial protection in the Pacific region. The PCRAFI Program also builds on similar initiatives in the Caribbean (CCRIF) and in Africa (Africa Risk Capacity) and as such creates the opportunity for knowledge exchange across the three institutions. PCRAFI FACILITY The PCRAFI Facility is to be established by August 2016. This will enable the Facility to manage the renewal of the PCRAFI insurance policies for the fifth season running from November 1, 2016 to October 31, 2017. The PCRAFI Facility will be established in Cook Islands as a Trust or Foundation with a Board of Directors that holds a special purpose vehicle (SPV) in the form of a group captive insurer. This structure, established in the Pacific region and owned by the beneficiary countries, would ensure high ownership by the PICs. The Cook Islands have been identified as host jurisdiction for the PCRAFI Facility following the completion of legal due diligence. The Cook Islands have insurance legislation and supervision that Two typhoons and one tropical storm in the northern Pacific Ocean on July 6 and 7, 2015. From left to right: Tropical Storm Linfa is in the South China Sea. Typhoon Chan-Hom is heading west-northwest recognize the particular needs of oversight required to host a toward the East China Sea. Typhoon Nangka is making its way east of Guam. Photo credit: NOAA captive insurer. See Figure 2. FIGURE 2. STRUCTURE OF PCRAFI FACILITY regional facilities, in particular, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and Africa Risk Capacity (ARC). PCRAFI Facility • Regional level technical assistance will be provided to the World regional agencies of the Council of Regional Organizations of Bank as the Pacific (e.g. Secretariat of the Pacific Community [SPC], trustee Trust/ Pacific Islands Forum Secretariat [PIFS]) while leveraging Foundation their expertise such as risk assessment for SPC and political dialogue for the PIFS. • National level technical assistance for the Ministries of Finance PCRAFI Board of the beneficiary countries in coordination with those ministries Donors MDTF responsible for disaster risk management will support; (i) capacity building in post disaster public financial management including Group post disaster budget execution, mobilization and reporting the captive Reinsurers development of disaster risk financing tools; (ii) the development Insurer of ex ante contingency plans; (iii) the development of financial models to help assess the fiscal exposure to natural disasters; and (iv) the development of disaster risk financing strategies. Regional organizations ROLE OF DONOR PARTNERS A technical working group comprised of the Secretaries of Finance of the participating PICs has been established to Donor partners will continue to play a critical role in the prepare the operations manual of the PCRAFI Facility. The development of the PCRAFI insurance program and the mandate of the Facility are twofold; (i) to increase the number establishment and capitalization of the PCRAFI Facility. Donor of participating PICS; (ii) to develop new disaster risk insurance partners have supported the development of the PCRAFI insurance products to address the needs of the PICs. program during the three seasons (Jan 2013-Oct 2015) through the Pacific Disaster Risk Financing and Insurance Multi-Donor Trust The Facility will be structured to keep the operating costs Fund (MDTF) and the Japan Disaster Risk Management single at a minimum. Establishing a dedicated PCRAFI Facility for the donor trust fund held at GFDRR. Donors will continue to play a management of the PCRAFI insurance program will keep the critical role through providing capital to the PCRAFI Facility and help operating costs to a minimum while offering greater control over the Facility build up its reserves over its first years of operation and the future development of disaster- and climate-related insurance through providing financial support to the PCRAFI TA Program. tailored to the PICs. As the portfolio grows, operating costs (which will be relatively high in the initial years) will form a smaller proportion The PCRAFI MDTF will have a steering committee, comprised of total cost creating economies of scale as the Facility spreads of representatives of partner donors and the World Bank. The these costs over more business. steering committee will (i) provide strategic direction and oversight of activities supported under the MDTF and (ii) review and monitor The Facility will require initial capital. Initial capital will be required the establishment and operationalization of the Facility and the use in order to allow the Facility to retain some risk and purchase of technical assistance. reinsurance when it is the most cost-effective. It will also help generate additional income to cover the day-to-day operations of the Facility. This will therefore allow the Facility to further reduce the NEXT STEPS insurance premium paid by the participating PICs while ensuring its long term financial sustainability. The Technical Working Group (TWG) comprised of the Secretaries of Finance from the PCRAFI member countries will meet on April PCRAFI TECHNICAL ASSISTANCE PROGRAM 11-12, 2016 to finalize the draft operations manual for the Facility. The TWG are currently working on a preliminary operations manual, governance structure and work plan for the PCRAFI Facility. During this Technical assistance and institutional capacity building on disaster meeting the TWG will agree on the draft manual and pursue Cabinet risk financing and insurance will be provided through a program approval of the operations manual by May 2016. of activities designed to strengthen the institutional capacity of the PCRAFI Facility, national and regional level organizations as well as Establishment of the PCRAFI MDTF by end of April 2016. The the Ministries of Finance of beneficiary PICs. World Bank will continue to liaise with donors to ensure that the PCRAFI MDTF become operational by the end of April in order to • Technical assistance to the PCRAFI Facility will support the provide support to the PICs as needed. It is tantamount that the establishment of the Facility and the project management and MDTF is operational by the end of April in order to commence the operational support to the PCRAFI insurance program’s linked program of work. However, the World Bank will continue to seek activities. It will also facilitate technical collaboration with similar additional support from donor partners. Establishment of the PCRAFI Facility by August 2016. This will information on the hazard, exposure and vulnerability of fifteen enable the phased handover of work for the PCRAFI insurance PICs. This includes a database of over 5 million buildings and program from the World Bank to the Facility by ensuring that the their attributes, the largest of its kind in the Pacific. PacRIS has Facility is operational for the implementation of the fifth season of been used to inform urban planning as well as to support the insurance coverage to start on November 1, 2016. development of the PCRAFI insurance. The PCRAFI Insurance program was launched on January 17, 2013 and designed to Increase the number of participating PICs within the Pacific provide the PICs with parametric insurance as a mechanism for catastrophe risk insurance program. Expansion of the insurance rapid response financing through immediate injection of cash pool is expected to continue in the medium term with countries like following a major tropical cyclone and/or earthquake/tsunami. Fiji and FSM expressing their interest to join. PCRAFI insurance is a successful example of public-private Develop additional disaster risk insurance products to cover partnership. Launched in January 2013, the insurance program losses “below the insurance deductible”. Hybrid disaster risk has been piloted with five Pacific island countries (PICs): Vanuatu, insurance (products based on parametric trigger and soft trigger Tonga, Marshall Islands, Samoa, and Cook Islands. Working such as declaration of emergency to cover medium size disasters) together, PICs have been able to secure aggregate insurance will be designed to finance disaster events that result in mid- coverage in excess US$43 million against tropical cyclones level damage, that is, those that are not covered by the PCRAFI and earthquakes/tsunamis. The World Bank has acted as an insurance because they are “below the insurance deductible”, intermediary between PICs and a group of international reinsurance but yet are too large to be financed solely by domestic reserves. companies —Sompo Japan Insurance, Mitsui Sumitomo This product is being developed at the request of PICs during Insurance, Tokio Marine & Nichido Fire Insurance Swiss Re and 2015 FEMM. It will require additional seed capital and close Munich Re. AIR Worldwide provides the underlying risk modeling collaboration with the private sector. for the transaction. Japan generously provided co-financing of the insurance premiums during the first three years of operations. Since 2016, the PICs are paying their premium in full. HISTORY OF THE PCRAFI PROGRAM Since its inception the PCRAFI insurance portfolio has made two payouts for an aggregate amount of US$3.2 million within Launched in 2007, PCRAFI aims to provide the PICs with 10 days of the disasters. Tonga received a payout of US$1.3 disaster risk assessment and financing tools for enhanced million within 10 days of being affected by Tropical Cyclone Ian in disaster risk management and climate change adaptation. One January 2014. Vanuatu received a payout of US$1.9 million within of the key outputs of the PCRAFI program was the development 7 days of being affected by Tropical Cyclone Pam in March 2015. of the Pacific Risk Information System (PacRIS) which contains About PCRAFI About the Pacific Resilience Plan (PREP) The current PCRAFI program, phase II builds on the initial phase of the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), a The PREP is designed to address the challenges posed by disaster and joint initiative of the World Bank, SPC, and the Asian Development Bank climatic hazards consolidating the national and regional programs such with financial support from the Government of Japan, the Global Facility as PCRAFI that have been undertaken by the World Bank to date. The for Disaster Reduction and Recovery (GFDRR) and the European Union. PREP designed to (i) strengthen early warning and preparedness; (ii) PCRAFI, launched in 2007, aimed to provide the PICs with disaster risk create a framework for stronger and prioritized investments in resilience assessment and financing tools for enhanced disaster risk management and retrofitting of key-public assets to meet international standards; and and climate change adaptation. (iii) improve the post-disaster response capacity of the countries through strengthened financial resilience to disaster events. Under the PREP The PCRAFI Program (phase II) launched in April 2016 is comprised premium financing for the PICs has been secured until October 2018. of two key pillars; (i) the PCRAFI Facility and (ii) the PCRAFI Technical Assistance Program. CONTACTS Olivier Mahul, Samantha Cook, Raymond Prasad, Global Lead Senior Disaster Risk Financing Specialist Economic Advisor Disaster Risk Financing and Insurance Program Disaster Risk Financing and Insurance Program Pacific Islands Forum Secretariat The World Bank Group; omahul@worldbank.org The World Bank Group; scook@worldbank.org raymondp@forumsec.org