PPPs critical to disaster risk financing and insurance

Disasters will generate different financing needs and more and more governments are turning to organisations such as the World Bank and the Asian Development Bank to help them with finding the right solutions and strategy. And this is why public-private partnerships are so critical, said World Bank global lead and programme manager, disaster risk financing and insurance programme Olivier Mahul.

The World Bank helps low-income countries and emerging economies manage exposures to disasters better through disaster risk finance (DRF). “Governments may not be legally liable to help people but ultimately it’s a social responsibility for them to help, particularly lower-income people, when a disaster strikes a country,” said Mr Mahul.

Disaster-risk finance minimises social, economic and fiscal costs, and ensures timely and efficient use of funds post-disaster, he said. “What we’re trying to do is go beyond insurance and this is why we use this term disaster risk finance,” he said. All types of financial products and tools, including insurance, will ultimately help these countries in the event of a disaster.

The bank has been offering several DRF instruments including a dedicated line of credit where a country can sign up for a loan which will be made available right after a disaster. But in order to access this loan, they have to engage in the broader DRM agenda, which is “a nice incentive to get them to think beyond the pure access to financial products”, said Mr Mahul.

As the disaster gets more severe, other more sophisticated instruments such as CAT bonds are offered, he said, citing how the bank recently facilitated the issuance of a $1.35bn CAT bond covering earthquakes in Columbia, Chile, Mexico and Peru. “It’s a nice way for these countries to complement their strategies with this kind of access to international insurance capacity,” he said.

Mr Mahul emphasised that these solutions are not achieved in isolation and cannot be done only with public funding, “so the concept of blended finance – or what we call maximising finance for development – is a very important agenda for us”, bringing the focus back to the importance of PPPs.

Greater consistency in regulations required

Amidst the discussions on pricing adequacy and closing the protection gap, the Asian reinsurers representing the industry at yesterday’s panel discussed how regulation in the region could be improved to lubricate insurers’ efforts for better customer protection.

“The legislation in certain jurisdictions may have certain prohibitions, before you can utilise some distribution channels. Some of the guidelines and regulatory frameworks could be removed in order to make it more efficient for insurers to provide some of the much-needed products, at the most affordable premium and through the most efficient distribution channels,” said Malaysian Re president and CEO Zainudin Ishak.

This is where some of the opportunities for public-private partnership lie, he said, for governments and the industry to work together to come up with better regulations that puts the consumer first. The notion was echoed by Mitsui Sumitomo Insurance general manager and head of global PPP unit Sachiko Hori, who indicated that deeper and more honest communication with the regulator was necessary.

“The regulators have their own thoughts and priorities. They are thinking about the changing nature of society, the different circumstances that cause a change in attitudes, and how they can tackle all of that,” she said.

Access to information forces more government action

Given the power of social media and how much information the average person has access to, news about natural or man-made disasters can spread around the globe in a matter of hours.

“Governments used to be able to keep news of these incidents under wraps, which allowed for their handling to disaster recovery to be quite inept,” said ACR Capital group CEO Bobby Heerasing. “Not anymore. People now are demanding far more of their national, state and federal government in terms of how they react to disasters. This will, in turn, drive the demand for more forward-looking and risk managing solutions for disaster financing.”

Implementation of new regimes and standards require a careful timeline

With IFRS17 and RBC2 just around the corner, Thai Reinsurance CEO Dr Oran Vongsuraphichet cautioned for a more careful adoption process. “We have to be careful of how and when we can adopt these new standards. And when you say when, you probably can’t say the next two or three years. There may be some factors around the industry which cannot support what we have to do, according to the new standards or regulations.”

While insurers do not have an option when it comes to IFRS17, the industry should look at how they can adjust these timelines and processes to be relevant to each market and have these discussions with the regulators.

“There is an enormous amount of work involved in implementing IFRS17,” said Mr Heerasing. “We have great relationships with our regulators, but I think they should have waited when it comes to regulatory regimes, because we would like to have more consistency, from a regulatory perspective. For those of us who have multiple branches or offices in different jurisdictions, if the regulators could have a little more consistency in how they look at us as a community, that would be helpful.”

While there has been greater harmonisation across ASEAN regulators, there is still some fragmented approaches in certain areas, leading to worries about protectionism in certain nations.

SIRC 2018 – an event to remember