Catastrophe Risk Financing in Developing Countries: Principles for Public Intervention

Front Cover
World Bank Publications, 2009 - Political Science - 268 pages
'Catastrophe Risk Financing in Developing Countries' provides a detailed analysis of the imperfections and inefficiencies that impede the emergence of competitive catastrophe risk markets in developing countries. The book demonstrates how donors and international financial institutions can assist governments in middle- and low-income countries in promoting effective and affordable catastrophe risk financing solutions. The authors present guiding principles on how and when governments, with assistance from donors and international financial institutions, should intervene in catastrophe insurance markets. They also identify key activities to be undertaken by donors and institutions that would allow middle- and low-income countries to develop competitive and cost-effective catastrophe risk financing strategies at both the macro (government) and micro (household) levels. These principles and activities are expected to inform good practices and ensure desirable results in catastrophe insurance projects. 'Catastrophe Risk Financing in Developing Countries' offers valuable advice and guidelines to policy makers and insurance practitioners involved in the development of catastrophe insurance programs in developing countries.
 

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Contents

Box 11 GFDRR Financial and Technical Assistance
18
Box 12 World Bank Groups Catastrophe Risk Products and Services
22
2 Market Imperfections and Catastrophe Insurance
27
Figure 21 Developed Insurance Market Structure
28
Figure 22 Technical Catastrophe Insurance Premium Decomposition
35
Box 21 Portfolio Cost of Capital
38
Table 21 NonLife Premium Volume by Region 2006
40
Table 22 NonLife Insurance Density and Penetration 2006
41
Figure 23 Nonlife Insurance Penetration
42
Figure 24 Direct Losses From Natural Disasters Covered by Insurance Percentage
43
Box 22 World Bank Project Reallocations After a Natural Disaster
46
Figure 25 Economic Losses from Natural Disasters Covered by Donor Assistance Percentage
47
Figure 26 Global Reinsurance Capital
50
Figure 27 Global Property Catastrophe Excess of Loss Reinsurance Coverage By Region
51
Box 23 Catastrophe CAT Bonds
53
World on Line
56
Figure 210 US Reinsurance Rate on Line versus Loss on Line
57
Box 24 Information Prerequisites for Reinsurers to Provide Weather Reinsurance
63
Figure 211 Catastrophe Reinsurance Multiple US Market
64
Figure 212 Catastrophe Bond Pricing
66
Pricing of New Issues
67
Figure 214 Pricing of Catastrophe Bonds and Comparable Corporate Bonds
68
Figure 215 Comparison of Peak Nonpeak Multiple and Diversifying Peril Transactions
69
Table 23 Summary of Market Imperfections in Low and MiddleIncome Countries
71
3 Principles for Public Intervention in the Catastrophe Insurance Markets
75
Box 31 Basic Principles for Efficient Catastrophe Insurance
77
Figure 31 PublicPrivate Partnership in Catastrophe Risk Financing
80
Box 32 Theories of Market Intervention
84
4 Roles for the Donor Community
91
Box 41 Caribbean Catastrophe Risk Insurance Facility
93
Box 42 Data Quality Issues in Middle and LowIncome Countries
94
Box 43 Drought Risk Assessment Model in India
97
Box 44 Central America Probability Risk Assessment
98
Box 45 Parametric Insurance in Middle and LowIncome Countries
100
Box 46 Turkish Catastrophe Insurance Pool
103
Box 47 Livestock Indemnity Insurance Pool in Mongolia
104
Box 48 Innovative Sovereign Risk Transfer Mechanisms
105
Box 49 World Bank Contingent Loan
107
References
108
Appendix 1 World Bank List of Economies
115
Table A11 World Bank List of Economies
116
Appendix 2 Reference Catastrophe Losses
123
Appendix 3 Catastrophe Risk Modeling
127
Table A51 GovernmentSponsored Catastrophe Insurance Programs
150
Table A52 Catastrophe Program Design Variables
151
Table A53 Advantages and Challenges of IndexBased Insurance
156
Box A52 IndexBased Agricultural Insurance
157
Figure A51 Catastrophe Risk Layering
164
Figure A52 Timeliness of Financial Products
165
Box A53 Main features of CCRIF
167
Figure A53 CCRIF Risk Financing Structure 200708
168
Table A54 Mexico Catastrophe Bond Contract Features
172
Appendix 6 Prototype WeatherBased Crop Insurance Policy
177
Figure A61 TermSheet Features for a WeatherBased Crop Insurance Contract Rainfall
178
Appendix 7 Commercial Catastrophe Risk Models
179
Table A71 Commercial Catastrophe Risk Models
180
Appendix 8 Review of the Catastrophe Reinsurance Market
185
Table A81 US Hurricanes25 Largest Insured Property Losses Billions of 2005
186
Figure A81 Worldwide Insured Catastrophe Losses 2006 Monetary Units
187
Table A82 Top 40 Global Reinsurance Groups
190
Figure A82 Global ReinsurersNet Premiums Written by Country 2005
192
US Professional Reinsurers vs Alien Reinsurers
193
Figure A84 Premiums Ceded to Alien Reinsurers by Jurisdiction in 2005
194
Leverage Ratios
198
Figure A86 Global Reinsurance Industry Combined Ratio 19882006
199
Figure A87 Major Reinsurers Combined Ratios for 2005
200
The Classes of 1993 2001 and 2005
201
Figure A88 Structure of a Typical Sidecar
203
World Rate Online Index
205
Figure A810 Reinsurance Pricing
206
State of the Market and Recent Developments
211
Figure A91 CAT Bond with SinglePurpose Reinsurer
215
Figure A92 Catastrophe Risk Swap
220
New Issues
223
Risk Capital Outstanding
224
Figure A96 CAT Bond Transactions by Bond Tenor
225
Figure A97 CAT Bond Issue Volume by Financial Rating
226
New Issue Volume Purchased by Investor Type
227
Table A91 New Capital Raised Through Sidecars in 2006 Millions
228
Figure A99 CAT Bond Premiums and Expected Loss
229
Figure A910 Catastrophe Reinsurance Ratios of Rate on Line to Loss on Line
231
Appendix 10 Catastrophe Reinsurance Pricing
237
Table A101 Risk Charge and Premium for Hypothetical Reinsurance Policy
241
Table A102 Hypothetical Reinsurance Premiums
254
Index
257
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