Panama Strategic Framework for the Financial Management of Disaster Risk Abbreviations and Acronyms CAPRA Comprehensive Approach to Probabilistic Risk Assessment CCRIF Caribbean Catastrophe Risk Insurance Facility CEPREDENAC Coordination Center for the Prevention of Natural Disasters in Central America DICRE State Directorate of Investment, Concessions, and Risks DPI Directorate of Investments Programming FAP Panama Savings Fund GDP gross domestic product GFDRR Global Facility for Disaster Reduction and Recovery GoP government of Panama IDB Inter-American Development Bank MEF Ministry of Economy and Finance PML probable maximum loss PNGIRD National Policy on Integrated Disaster Risk Management PNGRD National Disaster Risk Management Plan SINAPROC National Civil Protection System SINIP National Public Investment System UNISDR United Nations Office for Disaster Risk Reduction 3 Strategic Framework for the Financial Management of Disaster Risk Background W ith promulgation of Executive Decree 578 of PNGIRD) in December 2010. The policy establishes the November 13, 2014, the government of Panama principles of integrated risk management for the country (GoP) formalized its guiding framework for the and identifies five pillars for coordination with the stake- management of fiscal risk in the event of disasters relat- holders responsible for its implementation.2 ed to the impact of natural hazards. The decree approved The PNGIRD assigns responsibility for financial manage- the adoption of the Strategic Framework for the Financial ment of disaster risk to the Ministry of Economy and Fi- Management of  Disaster Risk1, making Panama the first nance (MEF) through the State Directorate of Investment, country in the region to implement such a framework un- Concessions, and Risks (Dirección de Inversiones, Con- der an executive decree. cesiones y Riesgos del Estado, or DICRE). Thus the MEF, Adoption of the Strategic Framework represents the cul- through DICRE, is responsible for implementing a finan- mination of a series of public reforms, consultations, and cial protection strategy in coordination with the Gener- studies undertaken by the GoP in recent years. These al Directorate of SINAPROC, as well as for implementing efforts have created a strong legal mandate in Panama the National Risk Management Platform. To ensure that for establishing a financial management strategy that these functions are performed, Executive Decree 479 of addresses natural disasters. One of the milestones in this November 22, 2011, assigns additional responsibilities to process was enactment of Law 7 of February 11, 2005, DICRE, specifically the design, development, and imple- which reorganized the National Civil Protection System mentation of investment policies for financial protection (Sistema Nacional de Protección Civil, or SINAPROC), as- through risk management programs applicable through- signing it responsibilities for the planning, investigation, out the state, including disaster risk management. direction, supervision, and organization of policies and Pursuant to the terms of the PNGIRD, in 2011 SINAPROC actions designed to prevent material and psychosocial approved the National Disaster Risk Management Plan risks and to gauge the potential danger of natural and 2011–2015 (Plan Nacional de Gestión de Riesgos de De- anthropogenic disasters in the country (Government of sastres 2011–2015, or PNGRD), which was prepared with Panama 2012). the support of the National Risk Management Platform. In 2005, the Panama National Committee of the Center Along with the National Emergency Plan, the PNGRD is for the Prevention of Natural Disasters in Central Amer- the main programmatic instrument for implementation ica (Centro de Coordinación para la Prevención de De- of the PNGIRD. sastres Naturales en América Central, or CEPREDENAC), which was established under Executive Decree 402 of December 12, 2002, was given responsibility for develop- ing the National Risk Management Platform (Plataforma Nacional de Gestión de Riesgos). This platform became a multi-stakeholder mechanism that fostered a broad par- ticipatory process and led the GoP to adopt the National Policy on Integrated Disaster Risk Management (Política Nacional de Gestión Integral de Riesgo de Desastres, or 2 The PNGIRD coordinating pillars are (i) investment in disaster risk reduction for sustainable economic development; (ii) social 1 See text of Executive Decree 578 which approves adoption development and compensation for reducing vulnerability; (iii) of the Strategic Framework for the Financial Management environment and climate change; (iv) territorial management, of Disaster Risk, at http://www.gacetaoficial.gob.pa/ governability, and governance; and (v) disaster management and pdfTemp/27662_A/48878.pdf. recovery. 4 Strategic Framework for the Financial Management of Disaster Risk Financial management of disaster risk is addressed Over the last four years, the GoP has implemented sev- in the National Disaster Risk Management Plan 2011– eral financial tools for managing disasters’ negative im- 2015. The plan’s first thematic pillar focuses on including pact on public finance. These include disaster set-asides disaster risk reduction in the processes of investment through the Panama Savings Fund (FAP) and two disaster planning and financial protection. Its objectives include contingent credit lines, one each with the IDB and the (i) incorporating disaster risk analysis in public investment World Bank. planning processes; (ii) developing instruments and mea- sures for implementing a financial protection strategy The GoP is moving forward with implementation of its in the event of disasters; (iii) systematizing information strategy for financial management of disaster risk. The on and appraisals of investments in disaster prevention, GoP understood the need for a guiding framework based mitigation, preparedness, response, and reconstruction; on Panama’s national disaster risk profile within the con- and (iv) promoting public and private investment in risk text of climate change, and adopted the Strategic Frame- management. These strategic objectives were accompa- work in November 2014. The framework emphasizes ef- nied by creation of an expenditure classification in the ficient management of available instruments and offers government’s Manual of Budget Classifications for public guidelines for developing new risk retention and transfer investment in disaster risk reduction initiatives. instruments in the event of disasters. In negotiating credit facilities, Panama made certain As it continues to strengthen its financial management policy commitments, and these have catalyzed efforts of disaster risk program, the GoP has the support of the to strengthen the financial management of disaster Global Facility for Disaster Reduction and Recovery (GF- risk. Certain commitments assumed by the GoP—those DRR), which contributed World Bank technical expertise made in the context of programmatic loans from the In- for a final review of the Strategic Framework and provid- ter-American Development Bank (IDB) to support policy ed funding from its own resources for its publication. reforms for developing the Program to Reduce Vulner- ability to Natural Disasters and Climate Change, as well In addition to the role it will serve in Panama, the Stra- as policy commitments assumed in signing a contingent tegic Framework will ideally serve as a reference for oth- credit line with the World Bank3—have stimulated much er countries considering the development of a strategic of the relevant progress. document for financial management of disaster risk. 3 Expansion of the roles and responsibilities of DICRE was one of the commitments assumed by the GoP for approval of the World Bank Development Policy Loan with a Catastrophe Deferred Drawdown Option (DPL with a Cat DDO). Similarly, the program series negotiated with the IDB under the Program to Reduce Vulnerability to Natural Disasters and Climate Change included commitments related to the financial protection component, including the formulation of guidelines for a financial risk management strategy, which later contributed to development of the Strategic Framework. Strategic Framework for the Financial Management of Disaster Risk 5 Introduction D isasters associated with the impact of natural risk, one that would help it meet the responsibilities en- hazards have had adverse social and fiscal effects trusted to it under Objective 1.2 of the PNGRD—namely, on Panama over time, and the GoP is therefore to develop instruments and measures for implementing committed to strengthening the financial management a financial protection strategy for disasters. The Strate- of disaster risks. Recognizing the importance of mitigating gic Framework is consistent with the objectives of the the consequences of disasters associated with natural PNGIRD, which was adopted under Executive Decree hazards, the GoP has implemented a number of measures 1101 of December 30, 2010. It establishes Strategic Artic- to strengthen financial management of disaster risk in ulating Pillar A, “Disaster Risk Reduction for Investments its policies and programs. This approach is evidenced in for Achieving Sustainable Economic Development,” which the inclusion of specific guidelines on the subject in the includes financial investment protection as one of its PNGIRD and the PNGRD. measures. Actions taken by the GoP in financial management The Strategic Framework was developed with the sup - of disaster risk are consistent with Law 34 of June 5, port of regional and international entities. The MEF 2008, the Law on Social Fiscal Responsibility. This law drafted this document with support from various organi- aims to establish norms, principles, and methodologies zations, including the CEPREDENAC at the regional level, for consolidating fiscal discipline in national financial along with the World Bank, the IDB, and the GFDRR. The management of the public sector, a necessary condition document incorporates a number of important lessons for continuous and sustainable economic growth. The law learned from international experience: (i) include disas- stipulates that the government’s strategic plan (which in- ter risks as part of an integrated framework of fiscal risk cludes an economic and social strategy) should consider management; (ii) ensure that governments have access possible contingent liabilities and other risks that could to immediate funds following a disaster; (iii) consider the affect budget execution. It also states that medium-term creation of a national disaster fund; and (iv) reduce the macroeconomic and macro-fiscal assumptions should in- government’s contingent liabilities against disasters as- clude an assessment of the main fiscal risks and the con- sociated with the impact of natural hazards by insuring tingent liabilities that could affect the financial situation. critical public assets and promoting the private insurance market for catastrophic risks and agricultural insurance.4 The management of expenditures stemming from di- saster situations should take the provisions of Law The Strategic Framework has the following five stra- 34 of 2008 into account. The law sets a ceiling on the tegic pillars: (i) identification, quantification, and under- absolute nonfinancial public sector deficit, calculated in standing of fiscal risk due to disasters; (ii) incorporation relation to the gross domestic product (GDP), but it al- of disaster risk analysis in the planning of public invest- lows for temporary suspension of the ceiling in the event ment; (iii) formulation of components for developing and of natural disasters. In addition, the law’s regulations re- implementing risk retention and transfer instruments; (iv) quire that, starting in fiscal year 2011, the proposed Gen- development of the domestic insurance market; and (v) eral Budget Law include a budget allocation for general strengthening of the DICRE so it can fulfill its role in de- contingencies to cover any contingent liabilities that arise signing and implementing financial protection strategies. during the fiscal year. Disasters associated with the impact of natural haz- MEF Executive Decree 578 of November 13, 2014, is a ards pose a major challenge for social inclusion, pov- guiding document for managing fiscal risk in the event erty reduction, the regulation of public finance, and of disasters, and it is consistent with both the PNGIRD the prudent administration of Panama’s public debt and the PNGRD. The Strategic Framework for the Finan- and its assets. Panama’s geographical location and geo- cial Management of Disaster Risk is a guiding document tectonic characteristics expose it to a variety of hydrome- developed by the MEF for managing fiscal risk in the teorological and geophysical hazards. These hazards will event of disasters associated with the impact of natural likely generate increasing economic losses as the country hazards. This document with its respective strategic pil- lars emerged in response to the MEF’s interest in having Some of the lessons mentioned are described in Cummins and 4 a guiding document for financial management of disaster Mahul (2009) and Ghesquiere and Mahul (2010). 6 Strategic Framework for the Financial Management of Disaster Risk experiences economic growth, especially given the social From 2015 onward, the hazards associated with cli- factors related to growth and to the attendant concen- mate variability could well become the main cause of tration of population and assets. Accordingly, the GoP is the increase in extreme events. This situation could call committed to developing strategies for managing the fis- for comprehensive risk assessments as well as for devel- cal risk associated with hazard events in order to mitigate opment planning that more closely incorporated disaster negative impacts on poverty, inequality, and malnutrition. risk planning and adaptation to climate change (World Bank 2012). In particular, transfer mechanisms for risk The steps taken by the GoP to manage fiscal risk due associated with climate change in Panama’s agricultural to events associated with the impact of hydrometeo - sector are particularly important, given the vulnerabilities rological hazards will also play an important role in the to climate change that have been identified for this sector country’s efforts to adapt to climate change. Agricul- in Panama. Studies such as the First National Communi- ture, water resources, forests, coastal areas, and public cation (Primera Comunicación Nacional) have noted the health are especially susceptible to the effects of climate vulnerability of the agricultural sector to changes in rain- change in Panama. Hurricanes, floods, and droughts are fall patterns in the central provinces (ANAM 2010). likely to get worse in terms of their physical parameters. These events are already causing major economic losses and affecting the livelihood of the poorest and the most marginalized sectors of the population (ANAM 2013). Strategic Framework for the Financial Management of Disaster Risk 7 Box. 1. Exposure to Disasters Associated with Natural Hazards P anama’s geographical location and geotectonic char- ropolitan Area without drinking water following damage to acteristics expose it to a variety of hydrometeorolog- the city’s main treatment plant. According to calculations ical and geophysical hazards. As a result of its terri- by official sources, the cost of repairing damaged infra- torial configuration, it ranks 14th among countries of the structure and restoring economic activity in affected areas world most exposed to multiple hazards; 15 percent of its was US$149.3 million. Two years later, in November 2012, total area is exposed, and 12.5 percent of its total popu- more heavy rains caused floods and landslides in Colón lation is vulnerable to two or more hazards (World Bank and throughout the western Caribbean region of Panama. 2005). In this case the damage was estimated at US$123 million, leading the GoP to declare a national emergency and ap- Among the hazards to which the country is exposed are in- prove a waiver lifting restrictions on the deficit ceiling. tense, long-lasting rains; storms; strong electrical surges; floods; forest fires; waterspouts; earthquakes; tsunamis; The country also sits on an active seismic area, the Pana- and El Niño–La Niña episodes. Global climate change mod- ma microplate, and is exposed to a number of geological els indicate that Panama will undergo severe changes in its faults, the most important of which are the Tonosí Fault, weather patterns, with heat waves, droughts, heavier rain- the Panama Fracture Zone, the Gatún Fault, and the North fall, more frequent storms, and rising average sea levels. Panama Deformed Belt. Technical studies conducted in 2014 by the Caribbean Catastrophe Risk Insurance Facility According to studies by the University of Panama, the (CCRIF)5 estimated that for Panama, the annual probable country can be divided into four hazard zones based on the maximum loss (PMLa) produced by earthquakes with a presence and intensity of earthquakes, hurricane winds, 200-year return period would be at least 5.32 percent of floods, and landslides (figure B1.1). the 2013 GDP.b For a return period of 500 years, the annual PML would reach approximately 12.88 percent of the 2013 Figure B1.1. Classification of Zones GDP. In 2012, in a technical assistance project carried out According to Hazards through the Comprehensive Approach to Probabilistic Risk Assessment (CAPRA) program, probable maximum losses • Droughts • Floods and expected annual losses due to an earthquake in Da- Azuero Zone vid, the country’s urban area at greatest seismic risk, were • Earthquakes • Hurricane winds calculated for the housing, health, and education sectors.c The total expected annual losses come to approximately • Floods US$46.3 million  for three sectors, which together corre- Western Zone • Earthquakes spond to an exposure value of US$3.842 billion. • Hurricane winds a. Cummins and Mahul (2009) define PML as the total an- nual losses that could equal or exceed a specific prob- • Floods ability. Thus, a return period of 200 years is equivalent Metropolitan Zone • Hurricane winds • Earthquakes to an annual probability of 0.5 percent for a loss that amounts to 5.13 percent or more of GDP. b. See CCRIF (2014). Percentages were calculated on the • Earthquakes basis of CCRIF estimates at current 2013 prices and of Eastern Zone • Floods GDP at current estimated purchasing prices for 2013, using data from Comptroller General of the Republic of Source: University of Panama Institute of National Studies 1990. Panama, National Institute of Statistics and Census. c. CAPRA is a tool for understanding disaster risk through Over the last decade, floods have posed serious challenges probabilistic assessment. It originally focused on Cen- for the agricultural sector in Panama and for the concen- tral America but has now been expanded to other Latin trations of poor people living in rural areas. More recently American countries. they have begun to cause increased damage in urban ar- eas. Heavy rains in December 2010 caused serious floods and landslides, forcing a temporary shutdown of the Pana- ma Canal and leaving large sectors of the Panama City Met- CCRIF (Caribbean Catastrophe Risk Insurance Facility). 2014. 5 8 Strategic Framework for the Financial Management of Disaster Risk Strategic Pillars of the Strategic Framework T he MEF defined five strategic pillars in its Strategic Framework for managing fiscal risk due to disasters asso- ciated with the impact of natural hazards. The intent was to present approaches for reducing fiscal risk when disasters occur. The strategic pillars recognize financial management of disaster risk as a component of both fiscal management policy and policies on integrated disaster risk management. They are as follows: 1. Identification, quantification, and understanding of fiscal risk due to disasters 2. Incorporation of disaster risk analysis in the planning of public investment 3. Formulation of components for developing and implementing risk retention and transfer instruments 4. Development of the domestic insurance market 5. Strengthening of the DICRE so it can fulfill its role in designing and implementing financial protection strategies As activities are developed along these five pillars, the government’s capacity to respond to disasters will improve, and the long-term fiscal and social impacts of these events will be mitigated. Strategic Pillars 1 IDENTIFICATION, QUANTIFICATION, AND UNDERSTANDING OF FISCAL RISK DUE TO DISASTERS The identification, quantification, and understanding would have been affected if the GoP had possessed cat- of fiscal risk due to disasters constitute the critical first astrophic insurance of the kind currently under consider- step toward managing disaster risk. This pillar cross- ation through CCRIF. The finding was that such insurance cuts all the other pillars in the Strategic Framework. would have covered at least 48.4 percent of the govern- ment’s losses arising from the three major seismic events Panama has conducted studies to identify the natural of that period. hazards it faces, but further research is needed in order to improve knowledge about vulnerability and expo- To better understand the fiscal risk due to disasters, the sure. According to studies by the University of Panama GoP plans to do the following: (1990), the country can be divided into four hazard zones, ü Improve information. Improving information about based on the presence and intensity of earthquakes, hur- the exposure of buildings and infrastructure, as well as ricane winds, floods, and landslides (figure B1.1). Further historical data on disaster losses, will help to improve research on vulnerability and exposure will help to pro- understanding of the country’s fiscal risk profile. duce complete and accurate information for robust stud- ies of risk quantification. ü Use complete and accurate information. Having ac- Panama has already conducted studies on the quanti- cess to complete and accurate information about the fication of fiscal risk6. According to an IDB study based exposure and risks to be managed will help to improve on 2008 data, the Disaster Deficit Index shows that an the coverage and quality of insurance on the asset extreme event with a return period of 100 years or more portfolio. It will also support decision making with re- would probably produce losses for Panama equivalent to gard to investments in disaster risk mitigation. between 5.44 percent and 9.05 percent of GDP. In such a ü Conduct probabilistic studies as part of disaster risk scenario, the GoP would not have sufficient resources of assessment. These studies will serve as a basis for fi- its own to cover such losses and to replace the affected nancial decision making under conditions of uncertain- capital stock. ty. They will make it possible to estimate the extent More recent studies conducted by the CCRIF (2014) esti- of both the expected annual loss and the PML to be mated how losses during the period from 1904 to 2003 assessed. Dynamic financial analysis in turn will make it possible to define the strategy for retention and for 6 “Indicadores de Riesgo de Desastre y de Gestión de Riesgo”, risk transfer to the market. Panamá, 2010. Banco Interamericano de Desarrollo. Notas Técnicas No. IDB-TN-169 Strategic Framework for the Financial Management of Disaster Risk 9 Having better information makes it possible to negoti- ered, the better the terms and conditions, including cov- ate the best conditions with the (re)insurance sector. erage and rates, that the insurance industry can offer. The less uncertainty there is about the risks to be cov- Strategic Pillar 2 INCORPORATION OF DISASTER RISK ANALYSIS IN THE PLANNING OF PUBLIC INVESTMENT The Ministry of Economy and Finance, through its Direc- ü Consider amending the General Budget Law of Pan- torate of Investment Programing (DPI), will incorporate ama. A plan has been proposed that would tie the disaster risk management among the tools for planning allocation of budgetary funds for public investment and monitoring of public investment. The DPI will design projects to SINIP standards and procedures; doing so economic assessment methodologies that include risk would certify the technical viability of all public invest- management in the process of public investment approv- ment projects before the funds were allocated. al within the National Public Investment System (Sistema Nacional de Inversiones Públicas, or SINIP), and it will in- ü Enact the Public Investment Law. The draft law is in- corporate disaster risk criteria in the conceptual model tended to ensure that progress in risk analysis in the to be developed for the purpose. The idea behind these public investment process is reflected in a new norma- steps is to automate the planning, monitoring, and eval- tive framework. uation processes for projects related to SINIP manage- ment. ü Provide training in tools for including disaster risk in the public investment process. There is a plan to im- Within this context, the GoP plans to do the following: plement and provide training in use of the Basic Meth- ü Include risk analysis in the pre-investment stage. odological Guidelines for the Inclusion of Disaster Risk The DPI has developed both a draft protocol for evalu- Management in the Public Investment Projects of Pan- ating public investment projects and a comprehensive ama, which are to be developed by the DPI. catalog of risks (which includes the risk of disasters), with a view to incorporating disaster risk analysis in This strategic pillar will be supplemented with a classi- the pre-investment stage. fication of expenditure for risk management. The MEF has incorporated a classification of expenditure for risk ü Make risk analysis a compulsory step in the public management within its current version of the Manual of investment process. A planned change to the SINIP Budget Classifications for public investment in disaster regulations will require all proposed public investment risk reduction initiatives. This classification of expenditure projects to include risk analysis so that their viability will help to identify, channel and monitor resources allo- and technical sustainability can be determined. cated by the state to activities for disaster risk reduction. Strategic Pillar 3 FORMULATION OF COMPONENTS FOR DEVELOPING AND IMPLEMENTING RISK RETENTION AND TRANSFER INSTRUMENTS Disasters associated with the impact of natural hazards strategy involves ex ante and ex post instruments, includ- create budget volatility for the GoP because they require ing funds allotted for use in the event of major disasters sudden unexpected expenditures during and after the (the FAP), contingent credit lines with the World Bank and event. The government should have timely access to fi- the IDB, and a public asset coinsurance scheme, with a nancial resources so that it can effectively respond to di- view to complementing the ex post financial resources sasters without affecting its fiscal stability. that should be guaranteed following an event. The MEF The Ministry of Economy and Finance has made signifi- promotes the ex ante development of a layered strategy cant progress in designing and implementing a strategy for financial management of disaster risk, as illustrated in for the financial management of disasters. The ministry’s figure 1. 10 Strategic Framework for the Financial Management of Disaster Risk Figure 1. Layered Financing Strategy for Disasters Associated with the Impact of Natural Hazards (existing instruments and instruments yet to be assessed) Low Residual risk Residual risk Transfer (e.g., improved public asset coinsurance Agricultural Micro- scheme, catastrophic insurance insurance insurance based on joining CCRIF) Frequency Panama Savings Fund Post-disaster credit Retention Contingent credit lines High Emergency fund/budget reallocation or extraordinary credit MInor Severity Major Note: The instruments currently in effect include the coinsurance scheme for public assets, agricultural insurance (managed by the Agricultural Insurance Institute [ISA]), and the FAP, as well as post-disaster credit, contingency lines of credit, and budgetary reallocation or extraordinary credit. The instru- ments still to be evaluated are the improved coinsurance scheme for public assets and catastrophic insurance, which could be obtained through partici- pation in the CCRIF; micro-insurance (to be implemented by the Superintendency of Insurance and Reinsurance); and the emergency fund. Although the MEF already has financial instruments for ments such as budget reallocations and general contin- responding to disasters, these will be supplemented gency funds in the budget, which do not require a waiver with additional instruments. The MEF will be assessing for their use. For less frequent and more severe events, additional financial protection instruments with a view to it can use contingent lines of credit, as well as resources establishing a strategy for solid and robust financial man- from an emergency fund that require a waiver for their agement of disaster risk. use.7 For rare and very serious events, the government can use other retention and transfer resources, such as The GoP’s selection of financial instruments will take the FAP and catastrophic insurance. It should be kept in into account the need for resources over time. In select- mind that the first response phase requires short-term re- ing the ideal combination of instruments for its financial sources, whereas the reconstruction phase calls for me- management of disaster risk strategy, the GoP will consid- dium-term resources, since it involves a planning process er the needs for resources over time—from the moment that can take a year or longer. the funds are required (first response), to recovery and reconstruction, as shown in figure 2. The following mechanisms and instruments are current- ly in place for use in response to a disaster: At all times, the GoP will respect the guidelines on use of the instruments pursuant to the Law on Social Fiscal ■■ Budget reallocations and extraordinary credits. Ac- cording to the General Standards for Budget Manage- Responsibility. This law distinguishes the various instru- ment, when a disaster occurs, budgeted funds may be ments for the financial management of disaster-related reallocated and extraordinary credits may be request- expenditure based on whether they require a waiver or ed. These are the budgetary mechanisms available for not (the latter are instruments that correspond to financ- implementing an expansion of the deficit limit. ing and fiscal income, which do not impact the deficit and can therefore be implemented without a waiver). ■■ Panama Savings Fund. This fund, created under Law 38 of June 5, 2012, establishes mechanisms to ensure The GoP has risk retention and transfer instruments for responding to both low- and high-severity events. For 7 The emergency fund is one of the financial instruments that the frequent low-severity events, it can use retention instru- government intends to evaluate. Strategic Framework for the Financial Management of Disaster Risk 11 Figure 2. Financing Needs over Time Relief Recovery Reconstruction Resource requirements ($) Source: Ghesquiere and Mahul (2010) Time long-term savings for Panama and stabilization in the ■■ Contingent credit lines. Contingent credit lines are event of emergencies and economic slowdowns; it is signed for the purpose of ensuring liquidity in the also meant to reduce the need to use debt instruments event of emergencies due to disasters associated with in response to such situations. According to the regula- the impact of natural hazards. The GoP has negotiated tions on financing limits, the GoP can request permis- credit facilities with the World Bank and the IDB that sion to raise financing limits up to a maximum of 1.5 guarantee the financial resources needed to deal with percent of GDP in the event of especially large disas- disaster-related contingencies. A Development Policy ters. According to the drawdown rules, the GoP may Loan with a Catastrophe Deferred Drawdown Option use FAP resources when a state of emergency has been (DPL with a Cat DDO) in the amount of US$66 million declared by the Cabinet Council and a request to raise was signed with the World Bank effective March 7, the deficit ceiling up to 1 percent of GDP has been ap- 2012. This instrument is a line of credit that becomes proved by the National Assembly, as long as the costs active when a national state of emergency is declared, associated with the event exceed 0.5 percent of GDP the Government decides how to spend it, i.e, emergen- and the FAP continues to have assets greater than 2 cy, reconstruction, etc. In addition, a Natural Disaster percent of the nominal GDP for the previous year. Contingency Loan for US$100 million was signed with the IDB, effective October 3, 2012. This loan is a para- ■■ Post-disaster credit. After a disaster has occurred, the metric instrument covering floods and earthquakes government can negotiate loans from the multilateral with characteristics specified in the loan agreement. or commercial banking systems. To strengthen and supplement these instruments, the ■■ Coinsurance scheme. According to the provisions of MEF will evaluate the following approaches: Cabinet Decree 17 of June 12, 1991, in order to trans- fer the risk of public assets, all state institutions must ■■ Contracting catastrophic insurance through par- have a risk management system that considers the ticipation as a member country in the Caribbean GoP a single client. This means that a standardized, Catastrophe Risk Insurance Facility. The CCRIF is a collective, and centralized scheme exists, but it could platform through which member countries share risks be improved. Toward that end, all public assets will be and capital to ensure more economical access to the inventoried, risk assessment studies will be conduct- reinsurance markets. This joint reserve mechanism ed, and proposals will be submitted for improving the gives Caribbean governments access to short-term terms and conditions of the insurance policies. liquidity during rare and severely destructive cata- 12 Strategic Framework for the Financial Management of Disaster Risk strophic events, specifically hurricane winds and earth- managing the risk of these assets; (ii) carry out studies quakes—an arrangement that protects public finance to assess the risks for public assets; (iii) strengthen the and supports the government’s response capacity. A government’s insurance contracting policy by updating product for excessive rain should also be available to the Insurance Tariff Manual and negotiating and updat- current members of CCRIF at some time in the future. ing new terms and conditions for the insurance policies The GoP is evaluating whether this regional initiative (considering first loss insurance) and bonds contracted should supplement its current financial instruments. for by the state; (iv) conduct studies on maximizing the As part of the process, studies are being conducted benefit of having a standardized, centralized, and col- that will make it possible to assess the risks to be cov- lective insurance system; and (v) develop a Risk Man- ered. In addition, the country’s average annual loss has agement Policy for the government. been estimated, as well as its losses according to differ- ■■ Creating an emergency fund. According to the IDB ent probabilities of occurrence. The results will form (2013), recurring events are partially covered with the basis for setting prices on risk transfer products. budget reallocations. The cost of these events is es- In short term, coverage under the CCRIF earthquake timated to range between 0.18 and 0.22 percent of parametric insurance policy will be evaluated. GDP (US$63 million to US$77 million in 2012) and may Any consideration of catastrophic insurance must keep reach as high as 0.4 percent of GDP in some years. To in mind the provisions of Law 38 of 2012, which creat- avoid impact on programmed investments, the GoP is ed the FAP. Under the law, in 2015 the MEF may con- considering creation of an emergency fund to cover tract catastrophic insurance as a preventive measure events of this kind. This instrument, which is provided to guard against possible disasters due to natural phe- for in the PNGIRD, would require clear identification of nomena, and it may maintain this insurance as long as the mechanisms for allocating resources and specify- the assets in the FAP do not exceed 5 percent of the ing their use, and would also need to be tied with the GDP for the previous year and the cost of the premi- National Emergency Plan. ums is no greater than 0.3 percent of fund assets. Creation of the emergency fund would affect any plans ■■ Strengthening the coinsurance scheme. Cabinet for obtaining catastrophic insurance through partic- Decree 17 of 1991, which sets the terms for the man- ipation in the CCRIF, since holding resources in this agement of state insurance, distinguishes between fund would be considered a retention mechanism that standard and special insurable risks, as stipulated in would have to be quantified as a deductible amount in the Insurance Tariff Manual. The state is regarded as the catastrophic insurance scheme. a sole client, for which an insurable value is covered ■■ Establishing standards for insuring concessions. The by payments on a property insurance policy. Basically, generation and maintenance of national infrastructure the GoP has a standardized, centralized, collective in- through the modality of concessions are a very import- surance scheme that covers its standard risks. ant activity for the GoP. It is therefore in the GoP’s best The MEF seeks to improve the efficiency of contract- interest to have these assets insured according to the ing insurance for infrastructure buildings and public best international standards. The MEF, through DICRE, services. Accordingly, it plans to (i) conduct an inven- will analyze and recommend policy improvements for tory of public property and information systems for the concession’s insurance. Strategic Framework for the Financial Management of Disaster Risk 13 Strategic Pillar 4 DEVELOPMENT OF THE DOMESTIC INSURANCE MARKET Panama’s average insurance penetration is high ü Expand agricultural insurance. Law 34 of April 29, compared with the rest of Latin America’s, and the 1996, which created agricultural insurance and the government is interested in increasing it. In 2012, Agricultural Insurance Institute (Instituto de Seguro Panama’s insurance penetration ratio (personal and Agropecuario, or ISA), strengthened regulation of the general lines of business) was 3.2 percent, compared agricultural sector by ensuring that agricultural entre- with 3.0 percent for Latin America as a whole. Panama’s preneurs were indemnified for fortuitous investment ratio thus represents a sizable penetration of the national losses and by granting the ISA, among its functions, the insurance market.8 Developing the domestic insurance power to manage and create new insurance branches market would increase access to insurance for both private for activities carried out in the agricultural sector. The companies and the population in general. This would in ISA is currently working on a draft bill to update Law 34 turn reduce the demand for state resources in the event of 1996; the aim is to expand the supply of agricultural of disasters and enable the government to concentrate insurance products in order to reduce the fiscal burden its resources on restoring affected infrastructure and that disasters associated with the impact of natural supporting the most vulnerable sectors of the population. hazards place on the sector. Within this context, the following steps will be taken: ü Develop new micro-insurance products. Law 12 of ü Strengthen regulation of the insurance sector. Law 2012, which restructured the regulation and super- 12 of April 3, 2012, restructured the regulation and vision of the insurance market, defines the supply of supervision of the insurance market. It recognizes the micro-insurance products. The GoP is interested in Superintendency of Insurance and Reinsurance as an promoting programs aimed at developing new mi- autonomous agency of the state, one responsible for cro-insurance products and expanding penetration in regulating, controlling, and overseeing the companies, the productive sectors and the general population. entities, and individuals subject to application of the The supervisor of Insurance and Reinsurance is look- law for the purpose of guaranteeing the solvency of ing to expand this kind of insurance program through insurance companies and the adequate protection of market channels. insured parties. The Superintendency of Insurance and Implementation of this strategic pillar will be enhanced Reinsurance has established a preliminary work plan by fostering an insurance risk culture. Among the for the short, medium, and long term that includes successful drivers of this pillar is an aggressive education continuous consumer education, strengthening of re- campaign—carried out by the supervisory of Insurance serves, regular advisory services from international or- and Reinsurance—that seeks to educate consumers ganizations, and other initiatives, all for the purpose of about insurance and its benefits. attaining the objectives set forth in the law. See Sigma (2013) and the Sigma website at http://www.sigma- 8 explorer.com/index.html. 14 Strategic Framework for the Financial Management of Disaster Risk Strategic Pillar 5 STRENGTHENING THE DICRE SO IT CAN FULFILL ITS ROLE IN DESIGNING AND IMPLEMENTING FINANCIAL PROTECTION STRATEGIES DICRE is the unit of the MEF that is responsible for de- 4. Representing the MEF on the Executive Committee of signing and implementing a financial strategy for man- the ISA aging fiscal risk due to disasters associated with the im- In 2013, DICRE was also designated the focal point and pact of natural hazards. The MEF created DICRE under representative of the MEF on the National Risk Manage- Executive Decree 110 of 2009 and entrusted it with func- ment Platform. tions related to the oversight of mixed enterprises. These functions were subsequently modified under Executive For DICRE to fulfill these functions, its capacity must be Decree 479 of 2011, which made DICRE responsible for strengthened. Accordingly, work in the following areas designing and implementing a financial policy for disaster is under way: risk management. 1. Establishment of the Department of Risks, a special- The risk-related functions of DICRE include the follow- ized unit that will be responsible for overseeing com- ing: pliance with each of the functions assigned to the DICRE 1. Setting standards and defining procedures that will guarantee the establishment of a modern system of 2. Design and implementation of the State Risk Man- risks, insurance, and bonds for assets that require agement Policy them, including the construction of information sys- 3. Creation of a system for monitoring and auditing the tems to track assets owned by the state State Risk Management Policy 2. Drafting policies on state risk management, including 4. Reactivation of the Insurance Technical Committee policies on risks, insurance, and bonds; and design- DICRE will draw up a plan for each government admin- ing, developing, and implementing risk management istration, both in order to set targets with respect to programs applicable throughout the country that are implementation and in order to monitor progress along consistent with these policies the pillars of the Strategic Framework for the Financial 3. With technical assistance from SINAPROC and the Management of Disaster Risk. National Risk Management Platform, coordinating standardization of the information and criteria for quantifying and assessing damage caused by disas- ters Strategic Framework for the Financial Management of Disaster Risk 15 Summary and Conclusions D isasters associated with the impact of natural haz- and implementing the strategy for fiscal risk management ards pose a major challenge to the effectiveness in the event of disasters associated with the impact of nat- and sustainability of public policies related to social ural hazards suggests the value of incorporating financial inclusion, poverty reduction, the planning of public fi- management of disaster risk within the framework of the nance, and the prudent administration of Panama’s pub- National Policy on Integrated Disaster Risk Management. lic debt and its assets. Because of the country’s geographi- It also suggests the benefits of formalizing this strategy cal location and geotectonic characteristics, it is exposed to through a decree that reflects the country’s commitment a variety of hydrometeorological and geophysical hazards. to the different instruments that it plans to evaluate in or- In addition to long-standing risk patterns in rural areas, der to supplement the existing instruments. The process Panama must now address growing urban vulnerability—a that led up to the adoption of this Strategic Framework product of rapid economic growth that places people and has produced some lessons learned that may be useful assets increasingly at risk. One of the clearest expressions for other countries engaging in similar processes. These of these new risk patterns is the increase in losses associat- lessons include the following: ed with the occurrence of natural hazards that the country ■■ Having a national policy in place that promotes com- has witnessed in recent years. Given this context, the gov- prehensive disaster risk management, including a ernment is committed to developing strategies to manage component on financial risk management, has been fiscal risk in order to strengthen the economic resilience fundamental for sustaining the country’s commitment of the state and ensure the continuity and sustainability of to formulating and adopting the Strategic Framework. development processes. ■■ Similarly, the explicit assignment of responsibilities to Through Executive Decree 578 of November 13, 2014, the MEF and particularly to DICRE in connection with the GoP created its guiding framework for managing both the National Policy on Integrated Disaster Risk fiscal risk in the event of disasters associated with the Management and the National Disaster Risk Manage- impact of natural hazards. The Strategic Framework for ment Plan 2011–2015 has supported expansion of the the Financial Management of  Disaster Risk, which was roles and responsibilities of DICRE for addressing the formally approved under the decree, includes the fol- issues of financial protection. lowing five strategic pillars: (i) identification, quantifica- ■■ Including indicators or targets related to financial risk tion, and understanding of fiscal risk due to disasters; (ii) management in contingent credit facilities and pro- incorporation of disaster risk analysis in the planning of grammatic and policy loans negotiated with the World public investment; (iii) formulation of components for Bank and the IDB has served to catalyze these financial developing and implementing risk retention and transfer risk management processes and fuel their momentum. instruments; (iv) development of the domestic insurance market; and (v) strengthening of the DICRE so it can fulfill ■■ Moreover, the official active participation of the MEF its role in designing and implementing financial protec- through DICRE in the National Risk Management Plat- tion strategies. form has made it possible to shield these processes and has gradually empowered the MEF in all areas re- Adoption of the Strategic Framework was an important lated to disaster risk management that fall within its step within the GoP’s integrated approach to strength- competence. ening disaster risk management. Having the framework in place represents significant progress toward accom- ■■ The incremental approach—defining guidelines for plishing the actions planned along one of the articulating formulating the framework, including the consultation pillars of the National Policy on Integrated Disaster Risk process within the MEF and other relevant institutions, Management. It can also be seen as contributing to the and incorporating lessons learned and good practices MEF’s goals, which include inserting risk analysis in public suggested by the CEPREDENAC, World Bank, the In- investment processes, adopting mechanisms to monitor ter-American Development Bank, the United Nations Office for Disaster Risk Reduction (UNISDR) and the public expenditure on risk management, and collecting Global Facility for Disaster Reduction and Recovery information to quantify the exposure of state assets. (GFDRR)—has been a key factor in arriving at a Strate- Important lessons have been learned from the experi- gic Framework that is backed by the necessary consen- ence of the GoP. The government’s progress in designing sus to formalize it as an executive decree. 16 Strategic Framework for the Financial Management of Disaster Risk ■■ The retention and transfer instruments currently in ■■ Carrying out actions along the framework’s various place show the feasibility of a legal framework that al- strategic pillars has shown the need for a five-year op- lows the standardized, centralized, and collective man- erating plan to guide the framework’s implementation. agement for the insurance of public assets. Strategic Framework for the Financial Management of Disaster Risk 17 Glossary Agricultural insurance: Tool for mitigating risks that en- Financial management of disaster risk: The set of pol- ables farmers to transfer to third parties climate risks that icies, guidelines, and instruments for the management threaten their productive activities. Through agricultural of disaster risk that makes it possible to access economic insurance, producers can cover biological risks and nat- resources on a timely basis in order to improve response ural risks such as excess or insufficient rainfall, strong capacity at the time of a disaster while also preserving the winds, floods, freezes, hail, and landslides or avalanches fiscal balance of the state. of climatic origin. Fiscal risk: Future resource pressure on an entity’s bud- Budget reallocation: The reassignment of resources be- get. The sources of fiscal risk include macroeconomic tween one budget line and another, changing the com- shocks and the realization of contingent liabilities. position of approved expenditures in the budget without Geophysical hazard: Latent danger from an event of geo- affecting the total expenditure. physical origin, such as an earthquake, volcanic eruption, Contingent liabilities: Defined under Article 7 of Law 34 tsunami, landslide, or avalanche, among others, that oc- of June 2008 as obligations originating from specific inde- curs with sufficient severity to cause loss of life, injury, or pendent events that may or may not occur in the future. other impacts on health, as well as loss of or damage to property, infrastructure, means of livelihood, delivery of Critical public assets: Public assets and infrastructure utilities, or environmental resources. necessary for governability and emergency response. Hydrometeorological hazards: Natural atmospheric, hy- Disaster: A serious interruption in the functioning of drologic, or oceanographic processes or phenomena that a community or society that causes a large number of can cause injury or loss of life, damage to property, social deaths, as well as material losses, economic impacts, and and economic upheaval, or environmental degradation. environmental impacts that cannot be adequately ad- Examples of hydrometeorological hazards include floods, dressed by the affected community’s own resources. It mud or debris flows, tropical cyclones, tidal waves, tem- is the result of a combination of factors, including expo- pests and hailstorms, heavy rainfall and wind, heavy sure to a hazard, existing conditions of vulnerability, and snowfall, other severe storms, drought, desertification, insufficient capacity to contend with or reduce the pos- forest fires, extreme temperatures, sand or dust storms, sible negative consequences. In addition to death, disas- and severe freezing. ters can cause injury, disease, and other harm to physical, mental, and human social well-being, and can also cause Intensive risk: Risk associated with infrequent events damage to property, destruction of assets, loss of utilities, of great intensity that take a high toll on human life. In- social and economic upheaval, and environmental degra- tensive risk is concentrated in a few locations—generally dation. large urban areas—that combine high exposure to poten- tially destructive hazards (such as earthquakes) with high Disaster risk: Potential damages or losses that may occur vulnerability. due to hazardous natural physical events within a specific time period, determined by the vulnerability of the assets Natural hazards: All atmospheric, hydrologic, and geolog- exposed. Hence, disaster risk is derived from the combi- ic (especially seismic and volcanic) phenomena and fires, nation of hazard, vulnerability, and exposure. which, because of their location, severity, and frequen- cy, have the potential to adversely affect human beings, Disaster risk management: The capacity of a society and their structures, and their activities. The “natural” qualifi- its public officers to transform or avoid conditions that er excludes all phenomena caused exclusively by humans, lead to disasters by acting upon the causes that produce such as wars and pollution. The term also excludes haz- them. It should be understood as a necessary character- ards that are not necessarily related to the structure and istic of development management rather than a specific function of ecosystems—for example, infections. separate activity—in other words, its main characteristic is that it is present at all levels of development planning. Nonfinancial public sector: The sector composed of all the entities of the central government and all nonfinancial Extensive risk: Risk associated with frequent low-severity public enterprises. In Panama, it does not include public events, such as floods, landslides, or high winds. deposit-taking financial institutions, the Panama Canal 18 Strategic Framework for the Financial Management of Disaster Risk Authority, Tocumen International Airport (Aeropuerto hazards and an evaluation of existing conditions of vul- Internacional de Tocumen, S.A.), the National Highway nerability which, considered together, could cause poten- Enterprise (Empresa Nacional de Autopistas, S.A.), or the tial damage to the exposed population, property, utilities, Electric Power Enterprise (Empresa de Trasmision Eléctri- and means of livelihood, as well as the environment on ca, S.A.). which they depend. Public debt: A passive financial instrument issued by a Risk management system: Tool that guarantees the cor- public entity (country, province, state, department, dis- rect identification, evaluation, control, and monitoring of trict, or municipality) that seeks to obtain funds in the risks to the portfolio being covered against disaster risk. local and international markets against the promise of fu- Sudden expenditures: Unplanned expenditures that ture payment and income; the debt is to be paid at a rate arise unexpectedly. and over a time period specified in said instrument. Risk assessment: Methodology for determining the na- ture and degree of risk based on an analysis of possible Strategic Framework for the Financial Management of Disaster Risk 19 References ANAM (National Environmental Authority. 2010. “First IDB (Inter-American Development Band).2010. “Indica- National Communication to the United Nations Frame- dores de Riesgo de Desastre y Gestión del Riesgo, Pana- work Convention on Climate Control” [Primera Comuni- má”. Notas Técnicas No. IDB-TN-169 cación Nacional]. IDB (Inter-American Development Band). Propuesta de ———. 2013. “Aumento de la resiliencia al cambio Dimensionamiento de un Fondo de Reservas para Emer- climático y la variabilidad climática en el Arco Seco y la gencias por Desastres Naturales. División de Mercados y Cuenca del Canal de Panamá: Nota conceptual.” Proposal Capitales, Banco Interamericano de Desarrollo. 2013 presented to the Adaptation Fund. Sigma. 2013. “World Insurance in 2012: Progressing on CCRIF (Caribbean Catastrophe Risk Insurance Facility). the Long and Winding Road to Recovery.” Sigma 3/2013, 2014. Swiss Re Limited, Zurich. http://media.swissre.com/docu- ments/sigma3_2013_en.pdf. Cummins and Mahul (2009). Catastrophe Risk Financing in Developing Countries: Principles for Public Interven- University of Panama Institute of National Studies. 1990. tion.The World Bank. “Desastres naturales y zonas de riesgo en Panamá: Condi- cionantes y opciones de prevención y mitigación.” Ghesquiere and Mahul (2010). Financial Protection of the State Against Natural Disasters (Primer). The World Bank. Policy Research Working Paper No. 458 Government of Panama. 2012. “Plataforma Nacional de Reducción de Riesgo de Desastres de Panamá 2012: pro- puesta de movilización de recursos para impulsar la im- plementación del PNGIRD y del Plan Nacional de Gestión de Riesgos.”