How the public and private sectors can develop partnership-based solutions for large risks

Working with international financial institutions such as the World Bank and other public sector partners, Swiss Re explores new solutions for risk-transfer that can help governments to make their societies more resilient by addressing the rising cost of natural catastrophes

Swiss Re maintains close contacts with international financial institutions, including the World Bank, the Inter-American Development Bank and the International Monetary Fund. These organisations take an interest in supporting the development of new and innovative risk-transfer solutions for large risks, such as the negative effects of climate change, pandemics and natural and man-made disasters. A global and coordinated approach is needed to combat these risks because solutions are beyond the scope of any one country. Multi-lateral institutions, like the World Bank, play an important role in this regard, as they can help to achieve a balance between short-term and long-term responses.

Potential for cooperation between the public and private sectors

To discuss how the public and private sector can form partnerships to develop new risk-transfer solutions, Swiss Re invited Ambassador Michel Mordasini, Executive Director at the World Bank, to share his thoughts on “Global Risks: a World Bank perspective” at an event held at the Swiss Re Centre for Global Dialogue in June 2009.

Swiss Re’s approach to developing new risk-transfer solutions in cooperation with public partners has been to focus on alleviating poverty in developing and transition economies, but always with solutions linked to the market and with a clear focus on their commercial viability. Ambassador Mordasini agreed that charity plays its role, but consistent and transparent business solutions are also needed to solve the many problems facing the developing world.

Making societies more resilient

Cooperative risk-transfer solutions provide the means for governments to make their societies more resilient by transferring large risks with the support of private reinsurers, such as Swiss Re. But despite a growing trend towards more insurance coverage for catastrophic losses, the amount of uninsured losses is nonetheless growing faster, especially in developing countries. This is illustrated by the fact that little to no insurance covered losses from the two largest natural disasters in 2008, the Sichuan earthquake in China and Cyclone Nargis that struck Myanmar. Insurance can play a bigger role in such situations by providing financial relief quickly and thus supplementing the costs borne by governments and private citizens, who currently receive only minimal compensation from international aid institutions and charities.

Towards a more systematic disaster risk financing

Public-private risk transfer partnerships thus clearly have an important role to play in managing the increasing level of disaster expenses. A broad range of natural perils (wind, flood, earthquake and others) can be addressed with innovative risk transfer instruments. However, currently most governments still rely on ex-post (“after the fact”) financing. Yet, experts in disaster risk management agree that ex-ante ("before the event") measures have substantial advantages: above all, they allow governments to deliver immediate relief to the victims of large-scale disasters without creating a significant sudden burden for public finances. Swiss Re works with interested public partners towards more systematic approaches to disaster risk financing.

No one solution works in all circumstances, and the right mix of instruments, ranging from parametric covers to traditional insurance policies and pools, is crucial. Swiss Re is a leader in developing innovative risk-transfer solutions involving multiple partners, including governments, international financial institutions, semi-governmental agencies, or NGOs.

Examples of innovative risk-transfer solutions

Examples of Swiss Re's leadership role in delivering such solutions are the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which encompasses 16 nations, including Haiti; the Turkish earthquake pool for residential dwellings; weather derivative covering in Malawi for drought-related shortfalls in maize production; and funding for immediate relief efforts after earthquake events in Mexico. These are all examples of innovative insurance solutions which enable a government to access funds and deploy them quickly when a disaster strikes.

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