Sovereign risk management: dual approach in focus at the 5th IDRC

Joint effort between finance and disaster management disciplines needed to help close protection gap.

On the same day the 5th International Disaster and Risk Conference (IDRC) opened in Davos, San Francisco's Napa Valley region suffered a magnitude 6 earthquake, sending more than 120 people to hospital, with estimated economic losses of about USD 1 bn in the productive wine region. The 24 August tremor was a stark reminder of what could happen if this relatively contained shake were to precede the "big one" anticipated to strike San Francisco, with its population of more than 800,000 people, and a USD 330 bn heavy economy.

The Global Risk Forum Davos organizes the IDRC biannually to bring together decision makers, politicians, scientists and practitioners. During the conference, participants shared disaster risk management experience and discuss practical solutions for how countries, cities and communities can prepare themselves better to reduce the impacts of major disasters and speed up recovery.

This year, the IDRC attracted around 700 experts from different countries around the world, including Senegal, Mexico, Philippines, Turkey, China, India and New Zealand. A number of Swiss Re experts contributed to the debate, including Swiss Re Global Partnerships Chair Martyn Parker, who led a debate on Sovereign and Disaster Risk Financing. During the debate, panelists shared their experiences of the newly established African Risk Capacity, the Turkish Catastrophe Insurance Pool and Europa Re, a new natural catastrophe insurance facility for Southeastern Europe.

Minding the protection gap

The statistics are alarming: every year 500 million people around the world suffer natural disasters. Because of the increased concentration of people in cities with the related business activity, the humanitarian and economic costs to society can be high. 2013 saw 158 major natural disasters around the globe in which over 20,000 people lost their lives or went missing.  Economic losses from these disasters amounted to USD 140 billion. Only one third of this massive amount was insured. Swiss Re describes the discrepancy as the "protection gap."

Swiss Re Chairman Global
Partnerships Martyn Parker speaking at the IDRC

Evacuation measures, emergency health care, clean water and sanitation, ensuring food supply and restoring infrastructure all cost money. Based on the lessons from Hurricane Sandy, Typhoon Haijan and the Tohoku earthquake and tsunami - to mention a few - authorities need to consider how to survive financially.  Ex-ante arrangements, providing certainty that funds will be quickly available, enables governments to keep the affected areas from running into societal and economic collapse. Lessons from these events have led governments and city/regional officials to explore risk transfer through insurance and alternative risk financing solutions.

Different approaches for different needs

According to Parker there are different approaches governments can consider. Some have put emphasis on facilitating and promoting insurance solutions for homeowners and businesses to reduce government's liabilities for disaster relief funding, while others directly insure the government's exposure.

"Essentially, it's not an either/or decision, each instrument fulfills a different need and can also be complemented," Parker said during the session.

Referencing the Post-2015 Framework for Disaster Risk Reduction (Hyogo Framework for Action, HFA2), Parker also stated that it is of utmost importance to recognize financial resilience as a critical component of effective disaster management and the role different insurance instruments can play.

"There is a gap in financial and insurance awareness amongst disaster management specialists, and equally on disaster awareness and exposures among public finance specialists, he continued. "We need a more joined-up effort between finance and disaster management disciplines."

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