January 2017 Technical Discussion Paper  on Concessional Insurance Photo: Chhor Sokunthea / World Bank © 2018 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Technical Discussion Paper  on Concessional Insurance Acknowledgements This report has been prepared by a team of the World Bank’s Disaster Risk Financing and Insurance Program. It was au- thored by Martin Luis Alton and Barry Maher under the lead- ership of Olivier Mahul, with contributions from Laura Bou- dreau, Wassim Gharbi and Honglin Li. Inputs and reviews from Bianca Adam, Jack Campbell, Naomi Cooney, Mirtha Liliana Escobar, Hideaki Hamada, Vijayasekar Kalavakonda, Olivier Lavinal, Sumati Rajput, Benedikt Signer, Panos Varangis (from the World Bank) as well as Daniel Clarke and Nicola Ranger (from the United Kingdom’s Department for International Development) en- hanced the final paper. Anne Himmelfarb’s thorough editing ensured the final paper remained readable. Design and Layout by Alejandro Espinosa / Sonideas. DRFIP is a joint partnership between the World Bank’s Fi- nance, Competitiveness and Innovation Global Practice and the Global Facility for Disaster Reduction and Recovery, and is grateful to DFID for financing this report, an output of the Centre for Global Disaster Protection, a partnership between the UK Government and the World Bank Group. Table of Contents 2 Acknowledgements 6 Abbreviations 7 Executive Summary 15 Background 15 The Role of Public Subsidies in Achieving Policy Objectives 16 General considerations 16 Subsidy design considerations 17 Policy Development Objectives and Results Indicators 18 Risks and Mitigating Actions 22 Key Factors to Consider in Program Design 22 Country context 24 The importance of comprehensive risk financing strategies 25 Contingency planning 25 Transparency and accountability 27 Risk-based pricing 28 Allocation of subsidies to countries 28 Level of subsidy 29 Length of subsidy provision and CIW graduation criteria 30 Implementation Guidance 31 Guidance on operational aspects of a CIW 38 Potential criteria for accessing concessional financing 41 Potential governance structure of a CIW 45 References 49 Annex 1: Takeaways from a Literature Review on the Role of Premium Subsidies in Achieving Policy Objectives 53 Annex 2: Case Study of Uganda’s Scalable Safety Net 55 Annex 3: Assumptions for Comparison of Financing Sources for Disaster Response for IDA countries 59 Annex 4: World Bank Investment Project Financing (IPF): Preparation Phase 63 Annex 5: Technical Analysis of the Insurance Package 65 Annex 6: World Bank Trust Fund Governance Models 69 Annex 7: World Bank Trust Fund Governance Models: Examples Figures 32 Figure 1. The Marginal Cost of Financing Instruments 33 Figure 2. Level of Premium Subsidy Required versus Discount Rate Boxes 32 Box 1 Comparison of Financing Sources for Disaster Response in IDA Countries 35 Box 2. Concessional Finance to Enable Expansion of IDA Lending Terms for Target Countries 37 Box 3. Likelihood of Payout Table 11 Table ES.1. Potential Eligibility Criteria for Accessing Premium Subsidies 12 Table ES.2. Concessional Insurance Application and Selection Process 17 Table 1. Project Development Objectives (PDOs) 18 Table 2. Risks Faced by CIW Stakeholders and Mitigating Actions 35 Table 3. Comparison of Loan Scenarios 36 Table 4. Options for CIW Subsidy Provision 39 Table 5. Potential Eligibility Criteria for Accessing Concessional Finance from a CIW 43 Table 6: Concessional Insurance Application and Selection Process 6 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Abbreviations AAL Average annual loss CARICOM Caribbean Community CAT Catastrophe CCRIF SPC Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company CERC contingent emergency response component CIW Concessional Insurance Window CMU Country Management Unit CPF Country Partnership Framework CSO civil society organization DC Donors Committee DFID Department for International Development DP development partner DPL Development Policy Loan DRF disaster risk financing DRM disaster risk management EC Executive Committee GIIF Global Index Insurance Facility GPSA Global Partnership for Social Accountability IBRD International Bank for Reconstruction and Development IDA International Development Association IPC Integrated Food Security Phase Classification IPF Investment Project Financing IRB Investment Review Board M&E monitoring and evaluation MDTF Multi-donor Trust Fund NPV net present value NUSAF Northern Uganda Social Action Fund ODA official development assistance P4R Program-for-Results PA Preparation Advance PAD Project Appraisal Document PC Partnership Council PCN Project Concept Note PCRAFI Pacific Catastrophe Risk Assessment and Financing Initiative PDO project development objective PM&A program management and administration PMR Partnership for Market Readiness PREP Pacific Resilience Project NGO nongovernmental organization RE recipient executed SC Steering Committee SUF Scale-Up Facility TA technical assistance TC Technical Committee TF trust fund UFGE Umbrella Facility for Gender Equality All dollar amounts are U.S. dollars TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 7 Executive Summary Climate change, weather-related disasters, and slow-on- The role of subsidies set changes such as rising sea levels threaten sustainable development and force some 26 million people into pov- Governments use subsidies to achieve wide-ranging eco- erty every year. Sovereign disaster risk insurance and other nomic, social, and political objectives, and frequently jus- forms of risk finance, as part of a broader financial protection tify them as correcting market failures and/or behavioral strategy, can help countries increase their financial resilience biases. International experience offers several key lessons on to disaster and climate shocks. the use of subsidies. In particular, it is important to insulate programs from political influences, carefully target intended This discussion paper aims to contribute to the ongoing recipients, and account for administrative costs. discussions among development partners about the op- erationalization of premium subsidies for sovereign di- International experience with public subsidies offers sev- saster risk insurance, the context of increasing interest eral insights into the design of subsidies themselves, but among development partners in providing concessional mainly at the household level. Household-level evidence finance, including premium subsidies. The paper draws on suggests that high or full initial subsidies can have desir- lessons from past and existing premium subsidy schemes, able properties for a new technology (e.g., insurance) that and from the World Bank’s operational experience on disas- requires learning (Cohen and Dupas 2010; Dupas 2014; Cai, ter risk financing and insurance (DRFI), including regional de Janvry, and Sadoulet 2016). Unfortunately, there is no evi- catastrophe risk pools. It aims to inform the dialogue on how dence yet on the behavioral implications of different subsidy to operationalize concessional insurance. The objective of designs for sovereign level insurance. the paper is not to provide specific recommendations, but rather to highlight key issues and options to be considered when operationalizing concessional insurance. Project development objective This discussion paper builds on the World Bank Group’s cascade approach, which aims to crowd in private sector The following is proposed as a project development ob- capital and markets to address the development chal- jective (PDO): to enhance the financial capacity of gov- lenges posed by disaster and climate shocks. Sovereign ernments to respond to disasters. It is suggested that this disaster risk insurance uses the capital of (re)insurance com- be achieved by increasing government access to rapid post-di- panies to transfer the financial cost of disaster response from saster finance and by increasing financial resilience of vulnerable client countries to the private investors. Furthermore, it uti- households to disasters through rapid response. PDO indicators lizes private sector experience in designing appropriate risk and intermediate indicators are given in Table 1 of the main financing solutions for clients. text. 8 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Risks and mitigating actions level of stability/fragility, the quality of its wider gover- nance systems, and its ability to diversify risks spatially The provision of sovereign insurance subsidies entails and across time (for instance, debt level, tax base). Its several risks that can be mitigated with appropriate technical capacity for understanding the financial instrument measures: being offered and the quality of potential delivery channels for post-disaster funds are also important to consider. Fi- ɑɑ Reputational risk for development partners as well as nally, the wider political economy of the country and how it potential implementing agencies. The key reputational might affect disaster risk finance and its effectiveness are key risk is related to a small payout, or to no payout, in the case factors. of a disaster. This could be the result of basis risk,1 which is present for parametric insurance. However, basis risk A premium subsidy scheme should promote comprehen- can be mitigated through sound risk financing systems, sive risk financing strategies that include a mix of finan- technical scrutiny of products, and clear communication cial and budgetary instruments to improve a country’s of products’ upsides as well as limitations. A rules-based financial resilience to climate and disaster shocks. To en- and transparent subsidy application and approval process, sure countries are financially prepared to cost-effectively ad- as well as clear communication of criteria, can further mit- dress disasters of different sizes and frequencies, insurance igate reputational risk. should complement other financial and budgetary instru- ments. It is important to use the appropriate instruments for ɑɑ Lack of resources available to provide needed techni- each layer of risk, both because doing so is cost-efficient and cal assistance to develop proposals. This can be miti- because stand-alone insurance can create perverse incen- gated by formally linking premium subsidies to other DRF tives for risk carriers (through encouraging lower attachment initiatives. points and thereby increasing the likelihood of payouts that demonstrate the effectiveness of the insurance). Proposals ɑɑ Priority from World Bank Country Management Units for premium subsidies should therefore align with other DRF (CMUs) when premium subsidies are implemented by initiatives in a country. Experience suggests that sovereign the World Bank. This can be mitigated by focusing on insurance is primarily used to rapidly mobilize resources in countries where there is demand for low-cost resources, disaster scenarios, so other mechanisms should be in place which could include countries that are oversubscribed for to provide finance for rehabilitation and/or reconstruction. IDA18 and/or countries that do not wish to take on addi- In the medium term, investments should be made in local tional debt. insurance markets to facilitate further transfer of risk from the public to the private sector. ɑɑ Imperfect understanding of insurance. This can be mit- igated through capacity building and clear communication The provision of a financial package (including a mix of about the product. insurance, contingency funds, and contingent credit) can improve the sustainability of sovereign risk insurance ɑɑ Misspending of payouts. This can be mitigated by requir- schemes and mitigate the inherent limitations of insur- ing countries to have adequate contingency plans and to ance. Without financial capacity to respond to more frequent publish expenditure information. disasters or noninsured perils, governments are exposed to political/reputational risks when a disaster occurs but insur- ance does not pay out. This can undermine faith in insurance products and weaken political support for up-front premium Key factors to consider when financing. In addition, a financial package simplifies financial designing a concessional response for client countries by offering one comprehensive risk financing strategy to meet their needs (as opposed to insurance program multiple, sometimes overlapping, instruments). For this rea- son, contingency funds and contingent loans are critical not Country context should be considered when allocating only to sovereign financial protection but also to the sustain- subsidies, including a country’s level of development, its ability of sovereign risk insurance. The provision of premium subsidies could be aligned with the provision of concessional contingent credit and contingency funds. 1 Basis risk is the risk that an index insurance product does not fully reflect the loss incurred by the insured. For example, a sovereign earthquake risk transfer policy might not pay if an earthquake occurs but Contingency plans can increase speed of disaster re- the location of the quake is too far from key exposures to generate a lavrge loss. If basis risk is low, then the product will offer reliable protection. If it is sponse and protect the lives and livelihoods of the vulner- high, protection will be unreliable. able. There is a body of evidence showing that rapid liquidity TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 9 is most useful if systems are in place to deliver livelihood adjustments over time, and that takes stock of lessons from support, basic services, and public infrastructure quickly and implementation to refine and improve the implementation efficiently post-disaster. There should also be protocols in model. This approach also enables improved risk manage- place that ensure quick needs assessment and prioritization, ment, as risks from implementation can be identified early in as well as procedures for effective emergency procurement. the process and mitigation actions can be taken. A two-phase These will help expedite rehabilitation and reconstruction approach could be adopted; an initial pilot phase implement- activities after disasters. ed at small scale would if successful be followed by a scale-up phase implemented at larger scale. If moving to the scale-up Increasing transparency and accountability of post-di- phase, wider engagement across the World Bank would be saster spending is important, but the World Bank faces required, including with World Bank Treasury, Development strict limitations regarding the audits it can require from Finance, Legal and relevant global practices to develop con- governments. Where auditing capacity is scarce, post-di- sensus on the implementation modality of a concessional in- saster expenditure would ideally be specifically targeted by surance fund. recipient countries for auditing, given heightened risks of misappropriation. For the World Bank, only auditing of eligi- ble expenditure items is possible. Therefore, if premium sub- sidies are channeled through the World Bank, it could only Country allocations of subsidies require audits of the funds intended to pay for the premium itself. Rules determining the allocation of subsidies to countries should be transparent and could consider performance Given World Bank limitations on requiring detailed au- indicators and country needs. Performance criteria could dits of payouts from subsidized insurance, one option is be a factor in determining the allocation of subsidies, in a way to require the submission of expenditure reports to risk analogous to how International Development Association carriers. An arrangement could be established where ben- (IDA) resources are allocated.2 In addition, country needs eficiary countries that receive payouts for budget support determined on the basis of GDP per capita and the number provide a generic report on expenditure in response to the of absolute poor could be considered. While following clear event for which the payout was received. This is the approach rules for allocating subsidies will be crucial during the scale- adopted in the Caribbean and Central America: member up phase of the program, this may not be practical during the countries of the Caribbean Catastrophe Risk Insurance Facil- pilot phase, when available resources will be limited. Instead, ity Segregated Portfolio Company (CCRIF SPC) that benefit a pilot could allocate resources on a first-come-first-serve from World Bank financial assistance for purchasing sover- basis and identify countries where concessional risk finance eign insurance have agreed to submit generic reports on di- has the strongest potential to contribute to the World Bank saster response efforts to CCRIF SPC. Group’s twin goals. The cost of sovereign disaster risk insurance should be Once a country’s allocation is defined, there must be clear quoted in a standardized manner. For example, it could be and transparent rules that determine the proportion of quoted as a percentage of the average annual loss (AAL). This the premium that will be subsidized and co-paid by the would (i) support client countries’ in developing DRF capac- country. One potential rule is that countries pay at least ity by increasing their understanding of insurance products some fixed proportion of the AAL, with subsidies financing and the key drivers of their cost; (ii) ease comparisons of the rest of the premium (GAD 2017). The premium subsidy concessional insurance across countries by using the same structure should be as simple and transparent as possible and index/metric, and thereby increase understanding of value apply to all countries. Countries should easily understand for money; and (iii) increase transparency of pricing. what percentage of the average annual loss they are expected to co-pay, both in the first year they receive subsidies and in following years, when their co-pay might increase depending on what kind of graduation rule is adopted. Phased approach to implementation When determining the proportion of premium to be sub- sidized, competitiveness with other low-cost sources of Given the evolving nature of concessional risk finance, finance should be considered. IDA countries have access to a two-phase approach to implementation is proposed. Concessional risk finance is a complex, sensitive and rapidly 2 The main factor determining a country’s IDA allocation is its growing subject area. Thus, it is important to adopt a flexible, performance, as measured by the Country Policy and Institutional evidence-based approach to implementation that enables Assessment (CPIA) and Portfolio Performance Rating (PPR). 10 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE low-cost finance. This is particularly true in the context of to ensure that decisions on eligibility are immune to political IDA18, and subsidy levels should be set to incentivize coun- pressures. tries to apply. Early payouts could support sustainability of sovereign The criteria determining when a country “graduates” risk insurance, through demonstrating how insurance from eligibility for premium subsidies need to be trans- operates in practice. There are multiple factors to consider parent and reward achieved developmental milestones. in seeking to increase the likelihood of early payouts, includ- Such milestones could include a country’s GDP per capita ing (i) the diversification of risk between countries, and (ii) rising above the IDA threshold; or its proportion of abso- the conditions under which insurance contracts make pay- lute poor falling below a specified threshold. Further poten- outs. Insurance is usually best used for less frequent, larger tial criteria are discussed in the main text, which also notes losses. The greater the diversification of the portfolio, and that the development and graduation criteria will be critical the more conditions under which the insurance is expected for the scale-up phase of a sovereign insurance subsidy pro- to pay out for individual contracts, the greater the likelihood gram. During the pilot phase, the small amount of available of a payout in a given year. resources will automatically limit the potential length of time during which countries can receive subsidies. Any premium subsidy project implemented by the World Bank must align with World Bank Country Partnership There should be transparent and valid criteria and rules, Frameworks (CPFs), and ideally should be integrated applicable to all countries, that determine (i) eligibility into World Bank lending operations. Alignment to CPFs for subsidies, (ii) the allocation of subsidies to countries, not only is a World Bank operational requirement, it also in- (iii) the proportion of premiums that can be subsidized, creases country buy-in, as CPFs are developed in close con- and (iv) when a country graduates from subsidies. These sultation with client countries. Linking sovereign insurance criteria and rules would also apply to countries that already to lending operations (for both IDA and IBRD countries) will pay for sovereign insurance premiums with their own funds. enable the premium subsidy project to piggyback on existing, Such countries might revert to a situation where they pay and tested, implementation processes, including procure- only a proportion of premiums until they graduate. The risk ment guidelines, fiduciary requirements, environmental and that this is perceived as a step backward needs to be weighed social safeguards, and audit procedures. It will also lower the against the reputational risk and political difficulty of exclud- transaction costs of implementation, ease the administrative ing countries if they already pay for premiums. burden on clients, and reduce the risks of misappropriation, as well as leverage a larger resource base. Should the premium subsidy program be implemented by the World Bank, it would initially develop criteria for a The eligibility criteria in the table below could be consid- pilot phase in an operations manual. Should the pilot be ered for accessing premium subsidies. successful and the program scale up, all the above criteria and rules should be developed as part of a more compre- The governance model involving the World Bank and hensive operations manual for a premium subsidy program the donor partners should reflect the trade-off between reviewed and endorsed by World Bank management. This joint ownership of decisions and associated (reputation- manual should ensure that subsidies for insurance do not en- al) risks, and the operational agility of how any premi- courage strategic behavior by countries. um subsidy program is managed. The rationale for having donor partners and the World Bank jointly decide on which Given the suggested PDO, concessional insurance could proposals to approve for subsidies rests on the fact that be offered to International Bank for Reconstruction and providing premium subsidies can be complex, as sovereign Development (IBRD) countries in which a significant catastrophe insurance is a complicated product. However, proportion of the population is vulnerable. In such cases, a case can also be made for a model where donor partners a grant could be offered to IBRD countries to reduce their cannot approve or reject individual proposals, but have an cost of borrowing. This could result in a significant reduc- endorsing role on strategic priorities, annual work plans, and tion in the interest rates on loans to recipient countries, thus budgets of the program. World Bank experience suggests that incentivizing IBRD countries to develop disaster response such a model ensures more agile operations of trust funds and plans that target their vulnerable populations.3 However, avoids delays in approval processes. The initial model chosen should subsidies be offered to IBRD countries, the indica- for the program could be revisited after a pre-determined pi- tors determining which IBRD countries could access them lot phase. After the initial pilot phase, the governance model would have to be transparent and independently verifiable, could be adapted to reflect lessons and operational experi- ence gained as well as the evolution of risks associated with 3 This rule is applied by the Global Concessional Financing Facility. the program. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 11 Table ES.1. Potential Eligibility Criteria for Accessing Premium Subsidies Criteria for accessing concessional insurance Means of verification 1. Demand for technical and financial assistance from the client Letter of request for technical and financial assistance from client and World Bank CMU. to the World Bank CMU Approval of Mission Announcement Letter from CMU stating that project team will engage in risk transfer solutions 2. Countries have access to IDA funds or have a poverty head ɑɑ Official World Bank country classification count ratio above a pre-defined threshold (TBD) or are a ɑɑ Official World Bank poverty data member of the Small Island States Forum. (If subsidy is for regional government, the relevant regional figure applies.) 3. Disaster Risk Finance Strategy developed, which details the Draft of Risk Finance Strategy with contingency plan shared with role of insurance and other financial instruments in a financial World Bank package and includes an adequate contingency plan for how funds will be spent. 4. Budget published in the last fiscal year. Data from International Budget Partnership’s Open Budget Survey;a for countries not covered by the survey, this information will be obtained from CMUs 5. Commitment to publishing data on post-disaster expenditures Government letter stating such commitment as part of the government reporting process. 6. Development of a product summary report with the following Report transmitted to the World Bank information: a. Policy objective government seeks to achieve with the insurance product b. Basic risk profile/loss data, with justification for selection of risk insured c. Clear articulation of index used to capture losses if parametric; this could include explanation of the risk the index seeks to capture, the limitations of the index, proposed studies to strengthen index moving forward, and historical loss information of the index d. Key information on the structure of the insurance product and how it fits within the broader DRF strategy 7. CMU clearance to execute the transaction for the proposed Decision meeting chaired by CMU on technical proposal to move insurance product. to implementation a. International Budget Partnership, “Open Budget Survey,” https://www.internationalbudget.org/opening-budgets/open-budget-initiative/open-budget-survey/. An Investment Review Board (IRB) could be established for concessional insurance to the program’s Steering Com- to review investment proposals and provide technical mittee (SC) for approval; and elaborating the criteria for ac- recommendations to the program’s Steering Committee. cessing concessional insurance. The key responsibilities of the IRB would include mobilizing expertise to conduct technical analyses that assure the quali- The application and selection process for concessional ty of proposed insurance products; presenting final proposals insurance could be organized as shown in the table below 12 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Table ES.2. Concessional Insurance Application and Selection Process Step Description 1 Initial CMU approval and application submission Countries / task teams submit applications to the Program Implementing Unit, including documentation verifying countries’ eligibility based on criteria 1–5 (see Table ES.1). There are two types of applications, requiring the following types of documentation: Type A projects: Type B projects: Stand-alone insurance premium project Integration of insurance premium component into World Bank operation under preparation Letter of request for technical and financial assistance to Project Concept Note (PCN), developed with CMU’s approval, purchase insurance policies, which is approved by CMU for a World Bank lending operation or for an additional finance which demonstrates eligibility criteria 1–5 are met Documentation that country meets eligibility criteria 1–5 As part of the application, the countries / task teams will develop supplemental document which will detail: ɑɑ The financial structure of the insurance product, including how it sits within the DRF strategy ɑɑ Indicative numbers on results / number of beneficiaries reached ɑɑ Indicative approach to engage with cat risk carriers ɑɑ Methodology to coordination with InsuResilience partners 2 Review and approval of funding application The SC evaluates countries’ applications against eligibility criteria 1–6, accounting for: ɑɑ Availability of funds in the Multi-Donor Trust Fund (MDTF) to finance premium subsidies; ɑɑ Availability of resources (in the MDTF or elsewhere) to provide technical assistance for the development of a financial package, including insurance If the above conditions are met, the SC approves the funding request. The World Bank team begin preparing Project Appraisal Document (PAD), with funds committed from the MDTF, in accordance with World Bank operational procedures. 3 Preparation of financial package Type A (stand-alone) projects: The PAD must be approved by the Country Director / Regional Vice President. After approval, the recipient country develops the financial package with World Bank technical assistance as required. The financial package is submitted to the IRB. Type B (World Bank operations under preparation) projects: Once the project becomes effective (e.g., six months to two years from PCN approval), the World Bank team will support the recipient country in preparing the financial package, including design of the insurance product. The proposal for financial package is then shared with the IRB. 4 Technical review of financial package IRB reviews the financial package based on its ToR as a quality assurer. The IRB provide their professional judgment on the financial package. The IRB prepares a summary report for the SC. In the event where improvements can be made to the insurance product, the IRB prepares a response to the client with recommended actions to improve product quality. The IRB will prepare a summary report to the SC on the technical review and product design for their endorsement on a no objection basis. 5 SC endorse summary report on a no objection basis 6 Placement process The recipient country decides on how the product will be placed on the market, depending on (1) the insurance capacity in country; (2) the availability of risk pools in its region; and (3) its preferences for how the insurance product and premium payment are structured. Competitive and transparent placement should prevail. 7 Final CMU approval The financial package including placement process is presented to CMU through a decision meeting chaired by the country director (or delegated person). The CMU provides input and a decision on whether to bring the product to market. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 13 Step Description 8 Insurance transaction is executed 9 Monitoring and evaluation (M&E) Including the assessment premium subsidies against proposed results indicators, documenting of lessons learnt from implementation to refine modalities moving forward and the conducting of impact evaluations on potential payouts, to gather evidence of the development impact of premium subsidies. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 15 Background Climate- and weather-related events—both sudden disasters determining who is eligible for concessional sovereign insur- and slow-onset changes such as rising sea levels—impair ance; on the technical analysis needed before granting such socioeconomic development, threaten sustainable develop- financing; and on options for the governance structure of a ment more broadly, and exacerbate poverty across the globe; Concessional Insurance Window (CIW), including a pro- according to one estimate, they force some 26 million people posed process for accessing and granting its resources. It also into poverty every year (Hallegatte et al. 2017). Sovereign di- identifies the key risks a CIW could face and discusses ways to saster risk insurance, as part of a broader financial protection mitigate these risks. While the report squarely focuses on con- strategy, can help countries increase their financial resilience cessional insurance, section 5 also discusses ways to provide to disaster and climate risks: it allows them to secure access concessional risk finance using other financial instruments. to rapid post-disaster financing for emergency response and early recovery needs; smooths the budget volatility that Ultimately, this technical discussion paper could inform arises from unexpected disaster-related expenses; and in- the design of an effective and sustainable CIW, one offer- centivizes investments in risk mitigation and preparedness ing value for money and encouraging ownership of risk and through the pricing of risk. More broadly, sovereign financial accountability. protection strategies complement other investments that in- crease resilience to natural disasters, such as investments in risk reduction and in preparedness. Finally, a risk-based ap- The Role of Public Subsidies in proach to development increases countries’ resilience to the Achieving Policy Objectives shocks arising at the nexus of natural disasters, fragility, and conflict—which a growing consensus at the World Bank and This section provides an overview of the role of public subsidies among the international community sees as an important in achieving policy objectives. It is based on a review of relevant development challenge for both International Development international experience with subsidies—primarily consump- Association (IDA) countries and International Bank for Re- tion subsidies—and to the extent possible draws on lessons construction and Development (IBRD) countries. from intergovernmental subsidy programs.4 Further key take- aways from the literature review are presented in annex 1. Several recent studies have recommended concessional in- surance to mitigate the impact of increasing climate and Governments use subsidies to achieve wide-ranging eco- disaster risks faced by developing countries. For example, a nomic, social, and political objectives. From an economic recent World Bank report for the G20 encourages the devel- perspective, there are policy rationales for governments to in- opment of innovative concessional financing for catastrophe tervene in private markets when they fail to operate efficiently risk transfer instruments, especially for low-income, highly (e.g., externalities, asymmetric information, imperfect com- vulnerable countries (World Bank 2017b). Similarly, a recent petition, etc.) or when individuals fail to behave optimally due report submitted to the InsuResilience working group on to behavioral biases (e.g., hyperbolic discounting5). Even if concessional insurance highlights several potential benefits private markets are efficient and individuals behave optimally, of sovereign insurance: it speeds up governments’ response governments often have a social rationale for intervening with to shocks and increases their ability to credibly commit to subsidies to achieve desired distributional outcomes. Finally, pre-agreed response plans (GAD 2017). These benefits sup- subsidies are also commonly used as tools to achieve political port government efforts to reduce both the impact of natural objectives, although politically motivated or influenced subsi- disasters on vulnerable populations and dependence on aid. dies often have perverse or unintended consequences. Building on lessons from past and existing premium subsidy 4 Most rigorous analyses of subsidy programs, however, are of subsidies for schemes, and drawing on the World Bank’s operational ex- households, farmers, and individuals; these micro-level programs are considered to the extent that they provide insight into dynamics relevant at the macro level. perience with disaster risk financing (DRF) instruments and 5 “Hyperbolic discounting” is a term used in behavioral economics to approaches, this technical discussion paper seeks to inform describe inconsistent discounting of the future. In hyperbolic discounting, small delays are heavily reweighted downward, while longer delays are less the dialogue on operationalizing and scaling up concessional heavily reweighted downward. In the standard economic framework, these sovereign insurance. It provides guidance on the criteria for delays would be discounted at the same rate. 16 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE International experience points to several subsidy pro- payouts typically cover a small percentage of losses from an gram features that consistently contribute to success. event, in practice this effect is likely to be small or negligible. Successful subsidy programs have clearly defined policy objectives based on economic or social rationales for inter- A CIW’s governance structure should bring objectivity vention. They consider how providing subsidies to a target and transparency to the allocation of subsidies. The de- recipient group could affect this group’s incentives (e.g., by sign and allocation of subsidies have a critical influence on creating moral hazard or through adverse selection) as well as whether a CIW achieves its policy objectives and whether it the incentives of other stakeholders. To ensure sustainability, is considered legitimate by stakeholders. Governance prin- they also account for the costs of subsidies themselves and of ciples that can help to prevent political influence on a CIW program administration. In addition, they are insulated from include the following: political influences that erode their effectiveness. ɑɑ  echnical analysis of subsidy proposals, based on predeter- T The sections below go into more detail on the design of mined technical criteria, must be part of the decision-mak- an effective concessional sovereign insurance CIW. ing process and should cover both financial and policy areas. ɑɑ  he decision-making process must be transparent and T General considerations make publicly available the reasons for approval or denial of applications. A CIW should adopt clearly defined policy objectives for which there are economic and/or social rationales for in- ɑɑ  oncessional insurance should meet a sovereign’s needs, C tervention in the sovereign insurance market. The target but all sovereigns should be subject to the same set of recipients, criteria for eligibility, and terms and conditions programmatic requirements to access it (i.e., there should for concessional sovereign insurance should reflect these be no country-specific exceptions to requirements for ac- policy objectives and economic and/or social rationales. cessing concessional insurance). A CIW should provide concessional sovereign insurance  Further general considerations are discussed in annex 1. to support recipient governments’ implementation of broader policy agendas, such as disaster risk manage- ment (DRM), social protection, or public financial man- Subsidy design considerations agement. As part of broader disaster risk financing strate- gies, concessional sovereign insurance complements policies In addition to these general lessons, international expe- and investments in other areas of these agendas. To the ex- rience with publicly provided subsidies provides several tent possible, resources should be leveraged to help improve insights into the design of subsidies themselves. Relevant countries’ preparedness for and resilience to disasters, espe- here are recent experiences of “smart” consumption subsidy cially if subsidies are provided over multiple years. programs, which aim to enhance take-up while offering an exit option if demand objectives have been met or minimiz- It is important to assess how concessional sovereign insur- ing fiscal costs if they need to be sustained (Cohen and Dupas ance may affect the incentives of target governments, oth- 2010; Cai, de Janvry, and Sadoulet 2016). er governments (donors and other developing countries), reinsurers, and other market participants. Depending on ɑɑ High or full initial subsidies can have desirable prop- the program’s design, concessional sovereign insurance could erties for a new (financial) “technology” that requires crowd in or crowd out demand for and/or supply of sovereign learning. Specifically, micro-level evidence shows that insurance. It could also affect donors’ incentives to provide such subsidies increase initial take-up of the product as post-disaster aid for developing countries.6 In principle, sub- well as longer-term demand after subsidies have been re- sidies for sovereign catastrophe insurance could encourage moved or lessened (Cohen and Dupas 2010; Dupas 2014; moral hazard for recipient governments because any poten- Cai, de Janvry, and Sadoulet 2016). To the extent that tial loss resulting from their actions is partially covered by the learning is considered important for sovereign insurance insurance payout. However, given that sovereign insurance products, the benefits of increased take-up and learning from higher initial subsidies should be considered against risks of aid dependency and/or moral hazard (GAD 2017). 6 While this effect may increase incentives for countries to invest in DRM, it may adversely affect the populations of developing countries if ɑɑ For insurance, high initial subsidies appear to increase not coupled with increased support for ex ante DRM instruments and disaster risk financing and insurance—that is, even with premium subsidies, future demand by increasing the likelihood that the countries may be underinsured (EOD 2016). insured experiences a payout; it is the experience TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 17 Table 1. Project Development Objectives (PDOs) PDO PDO indicators (outcomes) Intermediate indicators (outputs) Enhance the financial capacity of governments to respond to disasters Sub-PDO 1: Increase Governments supported by the project 1. Decision-making process to submit claim to risk carrier government access to have received payment within a month of finalized and documented (Y/N) rapid post-disaster finance occurrence of a covered (insured) event (Y/N) 2. Insurance report format agreed and finalized (Y/N) Sub-PDO 2: Increase Governments supported by the project 3. Number of households with access to post-disaster financial resilience of implement a rules-based approach for financial assistance, by gender vulnerable households to (1) delivering assistance to vulnerable 4. Number of households with access to restored critical disasters through rapid households; (2) restoring critical transport transport infrastructure, by gender response infrastructure; and (3) restoring basic 5. Number of households with access to restored education, services (education, health, water & health, or water & sanitation services, by gender sanitation) (Y/N) with a payout that matters. Specifically, an agricultural their own take-up in the future, in particular if the insured insurance study in China finds that a high initial subsidy country experiences payouts. increases the take-up of insurance, which increases the likelihood of experiencing a payout (Cai, de Janvry, and ɑɑ Premium subsidies that respond dynamically to an Sadoulet 2016). Symmetrically, the study finds evidence insured’s experience may be optimal for maintaining that not receiving a payout reduces demand for insurance. take-up after subsidies are removed. A country that has While evidence is limited at the sovereign level, anecdotal received subsidized insurance for several years with no evidence suggests that countries’ experiences with pay- payout may be less inclined to purchase nonsubsidized outs are indeed critical to future insurance demand.7 coverage, in particular if it has experienced loss events for which the insurance did not pay out (e.g., the Solomon ɑɑ Full subsidies are not necessarily associated with re- Islands in the Pacific in 2014). A country that has received duced future willingness to pay for the technology (i.e., subsidized insurance and has experienced a payout, how- with price anchoring at zero). The two rigorous “smart” ever, may be more inclined to purchase insurance. subsidy studies reviewed (Cohen and Dupas 2010; Cai, de Janvry, and Sadoulet 2016) find that an initial price of zero  Additional considerations are discussed in annex 1. does not result in unwillingness to pay a positive price in the future. These findings are consistent with the experi- ence of Pacific Island Countries’ participation in the Pacif- Policy Development Objectives ic Catastrophe Risk Insurance Pilot. and Results Indicators ɑɑ Premium subsidies can impact future demand for in- The policy objectives that concessional risk finance seeks surance—not only from the insured subsidy recipients, to achieve will be the key driver for the design of a CIW, but also from others in their network. Cai de Janvry, and its instruments, and the risks faced (with associated Sadoulet (2016) find that it is the opportunity to observe mitigating actions). To give just one example: if the policy payouts in one’s network that increases demand. If subsi- objective is to reduce fiscal risks of government rather than dies increase take-up of sovereign insurance among some protect the most vulnerable households within countries, the countries, other countries (in particular, their neighbors criteria for accessing finance will likely take account only of or peers) may learn from their experience and increase fiscal risk that disasters pose to government budgets, without regard to the poverty level and how it interacts with disasters within a country. Annex 2 illustrates how the design of a di- saster risk finance intervention in Uganda was determined by 7 Vanuatu’s minister of finance and economic development, for example, explains the country’s commitment to the Pacific Catastrophe Risk the specific policy objective being pursued there. Assessment and Financing (PCRAFI) Initiative, which includes an insurance facility: “In the Pacific we are extremely vulnerable to natural disasters. The PCRAFI facility will enable us to receive fast cash injections for emergency  n the past, disaster risk finance interventions have pursued a vari- I response and to sustain essential services in times of crisis. Following the ety of objectives, such as reducing the impact of disasters on poor devastation Cyclone Pam wreaked on Vanuatu in 2015, we are acutely aware of the value insurance programs like this bring in supporting our households, reducing government’s budget volatility, developing ability to respond quickly to disasters” (World Bank 2017a). domestic private insurance markets, enabling rapid emergency 18 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE response and/or rapid rehabilitation, improving transparency Risks and Mitigating Actions and discipline in government budget allocation and execution, increasing the transparency of the response decision-making Stakeholders of a CIW, who include policyholders (i.e., processes, improving cost-effectiveness, and strengthening co- beneficiary governments), donors, the CIW itself/the World ordination between different stakeholders in disaster response. Bank, risk carriers, and nongovernmental organizations (NGOs) and humanitarian organizations, face a variety of  able 1 shows the proposed PDO indicator and intermediate T risks. Table 2 identifies possible risks by stakeholder and sug- indicators. gests possible mitigating actions for each one. Table 2. Risks Faced by CIW Stakeholders and Mitigating Actions Client Risk Description of risk Beneficiaries governments Significant risks Reputational risk to 1. Some countries may see their application for subsidies rejected and not countries and/or Country accept/understand the reasons for the rejection. Management Unit (CMU) 2. Countries that are not eligible for CIW support based on eligibility criteria may due to (1) rejection of perceive these criteria to be unfair. proposal, (2) ineligibility for CIW support, or (3) inability 3. If the initial CIW is drawn down completely or to a level below an applicant to access CIW due to its countries’ proposed subsidy amount, countries may perceive a CIW as unfairly limited initial resources excluding them. Lack of resources for If a CIW is to disburse grants, resources must be available to provide clients technical assistance (TA) with needed TA for developing capacity on DRF, and ultimately for developing proposals for premium subsidies. Timing risk The IDA18 replenishment is the largest replenishment in the 56-year history of IDA. It increases available IDA resources by about 50 percent. It will be challenging to get CMUs and regional teams to work on premium subsidy engagements, as they will be focused on their defined role of programming and disbursing their allocated IDA envelopes. Imperfect understanding Sovereign insurance products will not cover all the needs arising from a disaster: of insurance product—e.g., the sum insured could be partial, there could be exclusions, or the underlying failure to realize that risk model could be flawed. funds might not be large enough to cover needs X X Misspending of payouts Many potential client countries are likely to have weak governance and public financial management systems. This leads to a heightened risk of leakage of funds and misappropriation. X X TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 19 Premium- financing Risk NGOs/ Donors Potential mitigating actions CIW/World carriers humanitarians Bank ɑɑ Institute rules-based and transparent mechanism for subsidy application and allocation. ɑɑ Ensure criteria for subsidies are well communicated. ɑɑ Manage expectations and communicate pilot nature of CIW and limitations of funds. X X ɑɑ Clearly communicate with World Bank regional operational teams to ensure that all regions are aware of CIW pilot and have information on eligibility, application process, and limitations on funds. ɑɑ Formally link the CIW to other DRF initiatives and trust funds to mobilize resources from X X these sources. Focus on: ɑɑ Countries where there is demand for low-cost resources, which could include countries that are oversubscribed for IDA18 and/or countries that do not wish to take on additional debt X X ɑɑ Countries where existing engagements on DRF are strong, and/or where DRF is a priority for the CMU ɑɑ Offer countries large block grants to increase leverage of CIW resources. ɑɑ Offer countries a package of financial instruments, including contingency funds and contingent credit, to disburse when insurance will not pay out. ɑɑ Develop capacity to understand insurance products and their inherent limitations; draw on technical review of concessional insurance products in capacity-building efforts with government. ɑɑ Clearly communicate to both governments and the public that insurance is not a silver bullet. ɑɑ Explain to governments the advantages and disadvantages of insurance as part of a broader set of instruments. ɑɑ For obtaining concessional insurance, ask governments to develop adequate contingency plans. ɑɑ Support governments with TA to improve their post-disaster expenditure frameworks. ɑɑ Offer World Bank TA to help governments produce reports on post-disaster spending; X X X publish reports on official websites for increased transparency to citizens (e.g., process audits described in subsection 4.4.1 could be published). ɑɑ Choose insurance providers on the condition that they require countries benefitting from premium subsidies to report on expenditure; consider reducing subsidy eligibility of countries that do not meet the requirements. 20 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Client Risk Description of risk Beneficiaries governments Basis risk and associated A country’s experience with sovereign insurance may be perceived as bad by reputational risk authorities and/or the population—e.g., in the aftermath of a basis risk event or if payments are small relative to total losses but large payments were expected. This could result in negative press coverage and/or political pressure on the insurance provider/donors to make ex gratia payments. X X Creation of monopoly Sophisticated service providers may capture (part of) the premium subsidy power/erosion of by offering uncompetitive pricing. This risk is greater if the catastrophe risk competitive pressures on information used to determine pricing is not transparent. X insurance providers Politicization of CIW CIW becomes driven by political objectives in addition or opposition to the project development objective Moderate risks Inability to channel funds One of the benefits of parametric insurance is the fast payout after a triggering to beneficiaries in a rapid event. There is a risk, however, that funds do not reach intended beneficiaries in manner due time because of inadequate delivery systems. X X Lack of country demand It is possible that only a very few countries are interested in premium subsidies. for premium subsidies Too few business A CIW may deliver poorly—e.g., because of a market turn following large disaster transactions losses in the United States or a lack of practical expertise in the placement phase. Other risks The risk insured against Insurance may be taken out against risks associated with a hazard that is not is not the most important responsible for most losses, on average. This could lead to reputational risk, one facing the country e.g., if a country buys insurance against excess rainfall but is then struck by a X X significant earthquake against which no insurance was bought. Adverse change in market A change in insurance market conditions could lead to higher premium prices conditions in the future, which could reduce demand from governments and/or confound financial planning. X TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 21 Premium- financing Risk NGOs/ Donors Potential mitigating actions CIW/World carriers humanitarians Bank ɑɑ Ensure that concessional disaster insurance products are part of actuarially sound insurance systems able to respond to both large and small disasters, such as a financial package which combines various financial and budgetary instruments to cover different risk layers. ɑɑ Increase technical scrutiny of products to reduce likelihood of basis risk events, where basis risk is relative to what the government believes the product will do. X X X ɑɑ Publicly post the risk information underlying the average annual loss (AAL) used to determine the premium to be paid by the policyholder government. ɑɑ Ensure limitations on indexes are well understood by government. ɑɑ Require governments to clearly articulate what risks the index does, and does not, cover, and to highlight key shortfalls in the index. ɑɑ Publicly post and communicate claim payment rules to the authorities and to the public. ɑɑ Require competitive selection of insurance providers for products secured with support from a CIW. X X ɑɑ Maintain transparency requirements for catastrophe risk information used in pricing (while respecting confidentiality concerns). ɑɑ Have clear eligibility criteria that are well communicated to stakeholders. X X ɑɑ Ensure transparent application and decision-making process for grant approval. ɑɑ Prioritize countries with strong delivery systems. ɑɑ Invest in systems to enable rapid disbursement of resources. ɑɑ Vet contingency plans to increase certainty that the government will be able to disburse resources in the event of a disaster. ɑɑ Inform countries of the existence of a CIW in World Bank client engagements on DRM and DRF. ɑɑ Continue to build capacity on DRF and make the case for risk transfer as part of a X broader DRF strategy where appropriate. ɑɑ Ensure subsidies are set at a level to encourage demand. ɑɑ Increase value proposition by offering a financial package, not just insurance. ɑɑ Clearly define realistic objectives up front, and ensure that relevant expertise, mandate, X and resources (including staff) are in place to achieve those objectives. ɑɑ Maintain close interactions/communications with markets. ɑɑ Conduct basic risk assessment to understand risk. ɑɑ Ensure that the insurance product and its limitations are clearly understood by authorities and communicated to the public. ɑɑ Promote a financial package approach, where insurance is complemented by other financial and budgetary instruments to finance disaster response. ɑɑ Build government capacity to understand insurance pricing and drivers of potential future price changes. X X ɑɑ Publish multiples charged for insurance, to increase transparency of pricing. ɑɑ Charge countries a fixed proportion of the AAL (in which case a CIW and not countries would bear the risk). 22 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Client Risk Description of risk Beneficiaries governments Change in government Government’s policy and budget priorities can change with changes in the budget priorities that administration and/or shocks unrelated to natural disasters. Changes in reduces demand for government priorities may suddenly reduce a country’s demand for sovereign X sovereign insurance insurance and, in cases of regional risk pools, impact pricing faced by other countries. Default of risk carrier If the insurance company from which the insurance policy was bought goes out of business, the country is exposed to the risk it insured against and loses the X money for the premium. (If counterparty risk is not transferred) Legal and regulatory Legal and/or regulatory requirements of client countries could delay and even impediments/risks impede sovereign insurance transactions. For example, some governments can X buy insurance only through a national insurance company, which might lead to increased transaction costs/time. Fiduciary risk The grant provided to the government for the insurance payment may be misappropriated. Taxes apply to premiums Premium payments may be subject to national taxes, lowering the amount of coverage that can be purchased with a given subsidy. X Targeting error It is possible that the poorest households do not benefit from post-disaster X X transfers to select households because they have not been properly identified. Placement/transaction The policy may not operate as intended, e.g., due to exclusions, litigious claims, risk etc. X Key Factors to Consider in Country context Program Design Taking country context into consideration is crucial for successful development interventions. In the case of sov- This section discusses some key factors to consider in de- ereign concessional insurance, this includes political (econ- signing a concessional insurance program: country context, omy) considerations. Specifically, the following need to be the role of a comprehensive risk financing strategy, contin- accounted for: gency planning, transparency and accountability, risk-based pricing, country allocation of subsidies, level of subsidies, Level of development. Given a CIW’s objective to reach and subsidy exit strategies. the most vulnerable households, the selection of beneficiary countries should consider both a country’s financial capacity Note that in an ideal world, a CIW’s process for reviewing to provide assistance (whether in the form of financial trans- proposals and the evaluation criteria would comprehen- fers or restored infrastructure and services) and the propor- sively reflect the issues raised in this section. However, due tion of its people living in absolute poverty. More developed to legal, operational, and political constraints, only select countries (as proxied by GDP per capita) tend to be better points will explicitly feed into the design of a CIW. This fact, able to assist their populations (including the vulnerable) af- and the reasons for choosing some issues and not others, ter disasters and to have a lower share of vulnerable house- will be further discussed in section 5, which addresses CIW holds. Still, large concentrations of vulnerable households implementation. persist in several middle-income countries. In some cases, TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 23 Premium- financing Risk NGOs/ Donors Potential mitigating actions CIW/World carriers humanitarians Bank ɑɑ Ensure “fit” of sovereign catastrophe insurance with government’s broader policy objectives. X ɑɑ For countries that seek to access sovereign insurance through regional risk pools, consider how the pricing they face will be affected if some countries withdraw from the pool. X ɑɑ Ensure minimum credit rating of risk carrier. (If ɑɑ Subject to competitive pricing, promote diversification of number and type of risk counterparty carriers (private, public, risk pools, etc.). risk is ɑɑ Transfer counterparty risk. transferred to the World Bank) ɑɑ Ensure potential legal and regulatory impediments to buying sovereign insurance are discussed with client governments from the beginning. X ɑɑ Ensure that proper accounting standards are applied to any transaction from a CIW. X ɑɑ Direct payments by a CIW to the risk carrier. ɑɑ Find out what, if any, taxes apply to purchase of sovereign premiums. ɑɑ Clarify from the outset that governments are responsible for any domestic taxes and X X that subsidies are based on the premium price net of taxes. ɑɑ Manage expectations accordingly. ɑɑ Prioritize countries that have well-established contingency plans with clear targeting X X methodology. ɑɑ Hire a skilled insurance intermediary as well as brokers with wording and claims management expertise to vet any transactions. X X X ɑɑ Conduct large market consultations. ɑɑ Ensure open and transparent placements. the vulnerable households are geographically concentrated criterion for evaluating subsidy request, the issue could be in areas with low-capacity regional governments. Selection reconsidered when reviewing the access criteria after a pilot criteria for subsidies could be devised so that such popula- phase of the program. tions can also benefit from a CIW. The country’s ability to diversify risks spatially and Level of stability (status as CFV [conflict, fragility, and across time (for instance, debt level, tax base). Catastro- violence] state) and quality of governance. Any recent his- phe insurance is a means to smooth the costs of potential di- tory of (internal) conflict could be considered in a country’s sasters across time. A country’s ability to spread costs across funding proposals and the design of its DRF solutions. Fra- time and across regions affects how much it can benefit from gility can undermine the implementation of DRF solutions insurance. In general, countries can spread disaster costs insofar as it leads to weakened government systems, lessens across time through debt, and across space through interre- the legitimacy of the government in the eyes of (segments) gional transfers. The ability to take on debt to finance disas- of the population, or promotes active conflict. At the same ter expenditure in a cost-effective way depends on a variety time, fragility may be compounded by natural disasters, of factors, such as the debt-to-GDP ratio, fiscal rules that may which increase economic and societal stress. Given a CIW’s limit a country’s ability to contract the required amounts of specific objectives, as well as the general objective of DRF debt, access to international capital markets, etc. The ability interventions to better manage and reduce risk, a case can to spread risk across space depends on the system of interre- be made for prioritizing fragile countries for premium subsi- gional transfers and, crucially, on a country’s size and distri- dies. While this paper does not suggest fragility as an explicit bution of economic activity. A small country widely exposed 24 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE to disaster, or a larger one where most economic activity is acknowledged when developing and considering proposals concentrated in disaster-prone areas, may be unable to sig- for concessional risk finance, and measures to mitigate them nificantly spread disaster costs spatially. Such factors could could be proposed. be taken into account when preparing and evaluating pro- posals for subsidized risk transfer. That being said, relatively large and diversified countries can also benefit from insur- The importance of comprehensive risk ance even if they have limited needs for risk transfer; this is financing strategies because insurance offers other benefits, notably support for fiscal discipline and sound public financial management. The importance of incorporating risk transfer into wider disaster risk finance strategies has been treated extensively The technical capacity for understanding the financial in- elsewhere; see for example World Bank (2014) and Clarke et strument being offered. This is a prerequisite for taking own- al. (2016). The discussion here is therefore brief. ership of the instrument, which in turn is an important condi- tion for a successful and sustainable intervention. Furthermore, The financing strategy for disaster response needs to sup- the capacity to properly understand risk transfer instruments, port client countries in achieving their policy objectives. including their drawbacks and risks, is important both in order This involves clarifying the policy objectives (rapid access to to minimize reputational risk to the World Bank and the CIW liquidity, protection of the vulnerable from shocks, etc.) and donors, and in order to safeguard the relationships between the identifying the target beneficiaries (government, households, World Bank and client governments. Requirements for capac- subnational governments) and the perils to be covered. Only ity building before and after a risk transfer transaction could after this step can a financing strategy be developed to meet therefore be considered when selecting country proposals. In the identified objectives. many countries, prior capacity building may be a prerequisite for entering a sovereign insurance contract. A CIW must align with other DRF initiatives and fund- ing sources to deliver on its project development ob- The quality of potential delivery channels for post-di- jectives (PDOs). Identifying DRF-related policy objectives saster funds. A sound framework for disaster risk finance is a nontrivial undertaking by client countries that can re- requires channels to deliver pre-arranged funds to intended quire years of technical assistance (TA). A CIW must rely beneficiaries.8 Systems to channel funds to beneficiaries af- on the activities of other initiatives to develop capacity, ter disasters include social protection systems, agricultural and ultimately proposals for concessional finance, up to insurance, reserve funds, and public investment systems, the point at which it can review proposals. It is therefore among others. In principle, funds for post-disaster assistance critical that a CIW aligns with other TA initiatives that have could also bypass government systems and be channeled the resources to finance the initial—and substantive— directly to private service providers (such as construction preparation work. companies or payment system providers who are tasked with making social protection payments to pre-identified benefi- It is important to use the appropriate financial instru- ciaries). The type and quality of arrangements for delivering ments for each layer of risk, as documented in the World insurance payout funds could therefore be considered when Bank (2017b, section 1.5) report on risk pooling for the evaluating proposals. G20. This is particularly true for insurance. Numerous stand- alone sovereign insurance schemes have collapsed in the The wider political economy of the country (i.e., the pol- past, due to a combination of two factors: (1) the insurance itics and formal as well as informal institutions), and how product was poorly explained to the insured (governments), it might affect disaster risk finance and its effectiveness. It and (2) the disaster events were not severe enough to trigger is widely acknowledged that political economy factors are a payout. These issues have been extensively documented central to development and a key determinant of the effec- (see for example EOD [2016]). tiveness of projects and other interventions.9 For instance, the coordination between agencies required for effective Stand-alone insurance (versus a comprehensive financial post-disaster response may be hampered by political compe- package) can also create perverse incentives for risk car- tition between the heads of the agencies. Such risks could be riers. Stand-alone insurance providers may be tempted to offer insurance for more frequent events, since these events 8 See World Bank (2014). are more likely to generate payouts and therefore “prove” in- 9 Explicit recognition of this point by institutions such as the World Bank has been increasing since 1996, when then World Bank president surance is an effective financial risk management tool. In ex- Wolfensohn spoke of the “cancer of corruption.” For a recent example of treme cases, insurance protection for very frequent (less than World Bank research on the role of politics in development, see World Bank (2016b). Clarke and Dercon (2016) discuss the politics of credible disaster 1-in-2-year) events may lead to “cash swapping,” where yearly plans and of post-disaster intervention more widely. premiums are paid to the insurer, and payouts are made to TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 25 the insured nearly as often. Since insurance is expensive, this what; what the conditions for protection are; how protection represents poor value for money for clients (and donors). will be implemented; and who will pay for what (Clarke and Dercon 2016). In turn, these plans need to be informed by Experience suggests that sovereign insurance is primar- the country’s policy objectives: if a country seeks premium ily used to rapidly mobilize resources after a disaster. subsidies from a CIW, its policy objectives should be broadly Governments use this rapid injection of liquidity to finance aligned with those of a CIW. immediate response plans. Two recent examples from the Pa- cific are relevant here: Vanuatu and Tonga used payouts from Quick liquidity is most useful if systems are in place for PCRAFI ($1.8 million and $1.3 million, respectively) to pro- quick and efficient post-disaster delivery of livelihood vide essential liquidity for first responders. Payouts can also support, basic services, and public infrastructure. After di- be used to rapidly scale up safety nets in response to shocks, sasters, governments need to provide both private and public providing much-needed resources to maintain household goods. The former can include in-kind support to individuals welfare. An example here is Uganda, where in 2016 $4 million and households such as food rations, housing (or support to was rapidly mobilized through contingent Investment Proj- rebuild housing), or cash payments, whereas the latter in- ect Financing (IPF) in response to a drought. cludes public infrastructure reconstruction, debris removal, and the provision of education and health services. Effective In the medium term, investments should be made in lo- post-disaster delivery of private goods requires shock-re- cal insurance markets to facilitate further transfer of risk sponsive safety nets (to disburse cash) and effective logis- from the public to the private sector. In many developed tics systems (to deliver in-kind disaster relief such as food). nations, insurance companies are effectively used as risk car- Whether aid is provided in cash or in kind, transparent tar- riers that transfer contingent liabilities (both explicit and geting mechanisms are important to ensure that those with implicit) from government to the private sector. Insurance the greatest needs are reached. It is also worth noting that for markets in many IDA countries—and some IBRD countries— countries new to sovereign insurance, products that result in remain underdeveloped. Recognizing that donor countries more frequent payouts provide resources to test contingency will remain insurers of last resort for major humanitarian plans and delivery systems. These small but more frequent crises, and thus are likely to have a role to play in disaster tests enable government agencies to learn how to effectively response for many years to come, CIW-related TA could be disburse resources and to coordinate their activities in the linked to the insurance market development activities of aftermath of a disaster. In this way, the government builds its multiple initiatives10 to promote local market development. financial management capacity for larger events. For quicker delivery of critical infrastructure, the possi- Contingency planning bility of payouts bypassing government accounts could be considered. For example, preselected service providers Without contingency plans in place, disaster response such as construction companies could be paid directly. Sim- will be delayed, and lives and livelihoods will be lost. ilarly, payouts could be made directly to payment system The following factors can contribute to delays: (1) donors providers tasked with making social protection payments might have incentives to wait and see how much other do- to pre-identified beneficiaries. This approach could be par- nors pledge in assistance before committing funds; (2) time ticularly relevant for small island states, where getting sup- might be wasted by unnecessarily long needs assessments; plies into the country (or to remote parts of the country) (3) negotiations over the amounts of financing donors will may depend on the rehabilitation/reconstruction of critical provide, and for what purpose, take time; and (4) developing infrastructure. To expedite rehabilitation and reconstruction post-disaster plans takes further time. In addition, coordina- activities after disasters, protocols should be in place that tion failures can further delay disaster response, and can also ensure quick needs assessment and prioritization as well as render it less effective. These scenarios can be avoided, or at effective emergency procurement. least mitigated, with pre-disaster planning and exercises to put developed plans into practice. Transparency and accountability Ideally, plans would focus on outputs rather than inputs and would support the policy objectives of client coun- A CIW’s criteria for accessing funds could be designed to tries. They should specify what will be protected and against increase transparency and accountability in post-disaster spending. While there is still little evidence on what works 10 Relevant initiatives include the London based Centre for Global to combat corruption, some research suggests that auditing Disaster Protection, Consultative Group to Assist the Poor (CGAP), Access to Insurance Initiative (A2ii), Microinsurance Network, Impact Insurance and citizen monitoring can be effective in mitigating the risk Facility, and others. of corruption. These steps are discussed below. 26 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Auditing given that the mechanisms to account for such funds are al- ready in place (as required by standard IPF financial manage- Where auditing capacity is limited and there is a height- ment practices), it might be possible, on a case-by-case basis, ened risk of misappropriating funds, post-disaster expen- to have recipient countries report on payouts in the same way diture would ideally be specifically targeted for auditing as on other IPF spending. by recipient governments. Audits are an important con- trol function and can reveal outright corruption as well as In other instances, recipient countries that receive pay- expenditure inefficiencies. Audits that detect misappropria- outs for budget support could be required to provide a tion of funds can lead to the prosecution of public officials, generic report on how the funds have been used.  This is and therefore the credible threat of audits and prosecution the approach currently being adopted in Central America, can in principle lead to better public expenditure outcomes. where (potential) member countries of the Caribbean Ca- Whether such threats are credible depends on the political tastrophe Risk Insurance Facility Segregated Portfolio Com- independence of both public audit institutions and the judi- pany (CCRIF SPC) need to commit to submitting generic re- ciary, which may not be given in some countries ports to CCRIF SPC—i.e., to the risk carrier itself—if they are to receive World Bank financial assistance with their CCRIF Evidence suggests that audits can improve expenditure SPC participation fee. While the implementation details of efficiency if their results are publicized, thus allowing this approach are still being elaborated, it has two advantag- voters to “punish” officials who perform poorly (Ferraz es. First, it is not hampered by the World Bank’s inability to and Finan 2008). Thus, the possibility of linking premium require audits of government spending not directly financed subsidies with minimum audit requirements and the publica- by the World Bank. Second, the generated reports would cov- tion of audit results could be explored. If the threat of audits er all expenditure in response to a particular disaster, rath- could be credibly increased for post-disaster expenditure, er than spending financed with the payout as such—which and assistance in publishing the results could be provided, would probably not reveal much about post-disaster expen- expenditure efficiency could be improved. Audits would have diture efficiency, given that money is fungible. to be carried out by national audit institutions and follow ex- isting legal frameworks. The focus of potentially scarce au- Before establishing a CIW, potential beneficiaries and diting capacity and resources on post-disaster expenditure donors should clearly understand the scope and require- can be justified both by its typically higher-than-average rate ments of potential reports on expenditure. This step is of return, and by the particularly high risk of corruption in important to manage the expectations of all involved parties post-disaster situations. regarding the scope and type of reporting requirements that can be applied, and to provide clear guidance on the scope, If the World Bank provides grants to subsidize insurance objectives, and content of expenditure reports to potential premiums, it cannot require recipient countries to pro- CIW beneficiary countries. The approach adopted for CCRIF vide audits of insurance payouts. Under the its legal and SPC member countries could serve as a model for potential operational framework, the World Bank can ensure that re- reporting arrangements between the beneficiaries of CIW cipients use the finance it provides as intended, and only on grants and the World Bank. However, the details of what each eligible expenditures. If finance is provided to purchase or country can be expected to report might depend on its sys- subsidize insurance, the World Bank’s statutory obligation is tems for tracking disaster response spending. Task teams may to ensure that the funds were indeed used for the purchase of need to provide parallel TA to countries to improve their sys- insurance, and it is entitled to ask recipients to present evi- tems for recording and tracking disaster-related expenditure. dence to that effect. However, it is neither obliged (by its own rules) nor legally able to demand that recipients of the sub- A CIW (rather than the risk carrier) could consider re- sidy account for how they used potential insurance payouts. quiring process audits to inform and improve process- es for the implementation of post-disaster contingency This constraint applies regardless of the mechanism plans. Given the constraints to requiring detailed financial through which payouts are channeled to the ultimate audits facing the World Bank, a CIW could consider requiring beneficiaries. Imagine the case of a CIW that subsidized countries to complete process audits, following the model premiums for insurance that would backstop the increased of the African Risk Capacity. Such audits could examine the financing needed to scale up, or add financing to, an existing quality of the contingency plan implementation, and thus ex- World Bank IPF operation. The payouts would be channeled amine various associated systems and processes. They could through established delivery mechanisms—but the con- include field visits and, where beneficiaries are households, straint still holds. After all, the World Bank is not the financer could survey a statistically significant proportion of house- of the insurance payouts, the risk carrier is; it therefore has no holds to assess the responses’ quality, impact, and consisten- legal right to request that the payouts be audited. However, cy with pre-agreed response plans. The ultimate purpose of TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 27 process audits would be to identify strengths and weakness- Monitoring and evaluation (M&E) and impact es, provide feedback to all relevant stakeholders, learn les- evaluations sons, and provide suggestion for improvements. Monitoring and evaluation arrangements should be built into a CIW to improve processes and products based on Beyond audits regular feedback from the implementation of individual projects. Thus, CIW M&E should cover the placement of the Civil society has a role to play in monitoring post-disaster recipient country’s insurance product and the recipient coun- projects and activities. Civil society’s involvement in mon- try’s subsequent experience with the product, and it should itoring of post-disaster expenditure can complement formal feed into the CIW’s results framework. Ideally, the results indi- control mechanisms and may be especially useful in contexts cators of the CIW will be integrated where appropriate into the where formal control mechanisms are weak (whether for po- results framework of lending operations, which are developed litical economy or capacity reasons). Civil society organiza- in collaboration with client governments. This arrangement tions (CSOs) will often monitor government interventions would enable a CIW to systematically gather M&E data as part on their own initiative. However, their monitoring role could of regular data collection for M&E of the lending operation, be enhanced if it is formally acknowledged by government thus minimizing the reporting burden on government officials. agencies, and if channels are established for them to provide feedback to public officials. Preparing response plans before Rigorous impact evaluations could be commissioned disasters will help civil society organizations carry out mon- where possible to establish the poverty impact (or lack itoring. A CIW could explore the option of involving CSOs thereof) of insurance schemes supported by subsidies; in monitoring post-disaster expenditure and could approach additional evidence could greatly influence ongoing dis- the World Bank’s Global Partnership for Social Accountabil- cussions about sovereign risk insurance, given the prod- ity for this effort. uct’s novelty. The establishment of a CIW would represent a unique opportunity to gather further evidence on how its Countries could be encouraged and enabled to publish interventions affect a variety of relevant indicators, includ- expenditure information online. The most basic ingredient ing poverty and shared prosperity outcomes. Given the rapid for transparency and accountability is citizens’ access to rel- pace with which this agenda is advancing and the growing evant information. While formal audits can help hold public yet still small evidence base for sovereign insurance, a CIW officials accountable for misspending, in many contexts there should commit to gathering new evidence and expanding are political alliances between those charged with holding of- global learning. For example, for each insurance scheme it ficials accountable and those who have misspent funds. In subsidizes, a CIW could agree to seek to mobilize $200,000 many cases, moreover, donor pressure after reports of mis- to $400,000 for impact evaluations of payouts. Upon its es- spending is likely to have limited effect. Providing citizens tablishment, a CIW could also conduct a baseline assessment and CSOs with information on what services and projects of measures established by CIW-eligible IDA and IBRD coun- they can benefit from should lead to increased demands that tries for financial protection against natural disasters, which those services and projects be provided as planned. At a min- would provide a reference point against which a CIW could imum, keeping citizens informed in this way requires that ex- measure its impact. Collaborations with the World Bank’s penditure information is publicly available, easily accessible, Development Impact Evaluation (DIME) team, the Abdul and available in forms that are user-friendly and/or amenable Latif Jameel Poverty Action Lab, or Innovations for Poverty to analysis. Where possible, a CIW could encourage publi- Action, among others, could be sought for that purpose. cation of such information and could assist counterparts in developing the necessary technical capacity, procedures, and online tools to do so. Risk-based pricing Communication campaigns centered around plans and Risk-based pricing sends an important signal on the price their implementation are important (not least to get po- of the risk. The higher the risk, the costlier it is to insure. It is litical buy-in). Research on the politics of disasters points important that beneficiaries of sovereign risk insurance are in- to a political premium gained by politicians who are seen to formed of and understand the underlying price of any risk that raise funds after disasters (as compared to receiving pre-ar- is transferred through fully or partially subsidized insurance. ranged payouts). To increase the incentive of politicians to The advantages of risk-based pricing have been documented arrange disaster risk finance solutions ex ante, a CIW could at length (see for example Cummins and Mahul [2009]). encourage project teams to develop and implement strategies for clearly communicating the role and benefits of sovereign The cost of sovereign insurance should be quoted in a insurance (and other DRF instruments) in disaster response. standardized manner. Building on the GAD (2017) note 28 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Example: The AAL a country will finance using financial instruments is $150. Of this $150, $100 is financed using insurance and $50 is financed using contingent credit. Thus, the AAL for the insurance product is $100 and in this example the premium charged by the market is $150. The country pays $25 and a CIW pays $125. Thus, the total premium is 150 percent of AAL, with the country paying 25 percent of AAL and the CIW paying 125 percent of AAL. $50 Contingent credit. Country payment $25 $150 $100 CIW payment inanced $125 using insurance Subsidy levels should be dependent on multiple context-specific factors, which are discussed further in the section 5. “Concessional Sovereign Disaster Insurance,” the cost of in- could reflect wider development-related performance, such surance (composed of the level of subsidy and cost paid by as the World Bank’s Country Policy and Institutional Assess- the policyholder) could be quoted as a percentage of the av- ment, or more specifically measure performance with respect erage annual loss (AAL). This approach has three key advan- to disaster risk management. In addition to performance, tages: (1) it would support developing DRF capacity of client country needs—determined on the basis of GDP per capita governments through increased understanding of insurance and the number of absolute poor—could be considered when products and the key drivers of their cost; (2) it would allow devising a formula for country allocations. A country’s AAL concessional insurance to be compared across countries us- from natural disasters could also be considered as a basis to ing the same index or metric, making it possible to under- determine country needs. However, a rules-based allocation stand value for money; and (3) it would increase transparen- mechanism for available concessional insurance financing cy of pricing in what has been traditionally an opaque market, may not be practical in an initial pilot phase of a CIW. Ini- and enable comparison of loadings across policies. tially, available finances may be allocated to countries that express an interest in CIW subsidies early on and/or coun- tries that have longstanding DRF programs and are therefore Allocation of subsidies to countries readier for insurance transactions than others. But when a CIW scales up, a rules-based allocation mechanism will have Rules determining the allocation of subsidies to coun- to be developed. tries should be transparent and could consider country need and performance. It is important to note that the total Once a country allocation is determined, clear and transpar- amount of funds a CIW has available for a given time frame, ent rules are required to determine the necessary co-pay- e.g., three years, caps the total amount of subsidies it can al- ments for premiums; these ultimately determine the pro- locate to countries. Once total available subsidies are deter- portion of the premium that will be subsidized by a CIW. mined and the countries with an interest in subsidies have been identified, the available resources need to be allocat- ed across these countries in a transparent and rules-bound Level of subsidy manner. Performance criteria could be a factor in determin- ing the allocation of subsidies; this approach is analogous to International experience suggests that premium subsi- how IDA resources are allocated.11 Such performance criteria dies can be an important incentive for IDA countries to purchase sovereign risk insurance. Broadly, experience from successful sovereign risk transfer products for low-in- 11 The main factor determining a country’s IDA allocation is its performance, as measured by the Country Policy and Institutional come countries demonstrates that subsidy provision can play Assessment (CPIA) and Portfolio Performance Rating (PPR). an important role for insurance take-up. For example: TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 29 ɑɑ  aiti’s purchase of sovereign insurance from the Caribbe- H when policyholders have limited trust in and experience with an Catastrophe Insurance CIW is subsidized 100 percent insurance as a risk management tool. Furthermore, an argu- by the Caribbean Development Bank. ment could be made for high subsidies as a way to support countries in learning the advantages of risk transfer (see an- ɑɑ  icaragua paid for its CCRIF SPC policies with an IDA N nex 1). Increased take-up can increase the impact of a CIW by loan. allowing it to leverage provision of concessional insurance to work with client countries on broader DRF goals. ɑɑ  ubsidies for policies purchased under PCRAFI range S from 84 percent to 100 percent. The government of Japan Finally, subsidy levels should be considered in light of the financed 100 percent of the premiums in 2013. In 2014, potential political costs of meeting the criteria for apply- participating Pacific Island Countries contributed approx- ing to a CIW (suggested criteria are discussed in subsec- imately 5 percent of the total premium cost, a share that tion 5.2). Applications for premium subsidies would require increased to around 16 percent in 2015. Currently, insured recipient countries to meet the criteria of applying to a CIW. countries pay approximately 10 percent of premium out- In instances where countries need to increase transparency right with the remainder being financed with IDA credits of post-disaster expenditure to meet CIW criteria, this re- and grants (World Bank 2015). quirement will carry a political cost. Countries may prefer to make use of a disaster response reserve fund with limited ɑɑ  counterpoint exists in Africa, where no country in the A conditionality for when to disburse, and with no reporting re- African Risk Capacity currently receives premium subsi- quirements. In such instances, subsidy levels need to be large dies (EOD, 2016); instead countries finance sovereign risk enough to incentivize decision makers to incur the political insurance premiums from their budgets. cost of meeting the CIW criteria. For middle-income countries, which can have access to financial markets, premium subsidies play a less import- Length of subsidy provision and CIW ant role. The recent Philippines transaction, with about a graduation criteria $20 million premium, was fully paid by the Philippine De- partment of Finance, demonstrating that some IBRD coun- Exit strategies have been a key concern of donors who tries have the willingness and capacity to pay for sovereign have financed premium subsidies in the past. Donors seek risk insurance. It should be noted, however, that such trans- sustainability for the interventions they finance, and subsi- actions can take years to materialize; this one occurred after dies for sovereign insurance premiums are no exception. about three years of a technical DRF engagement with the Ensuring the financial sustainability of the insurance scheme Department of Finance. once subsidies are withdrawn is a common donor objective— one that requires beneficiary countries to take over full re- There is little evidence on the link between size of pay- sponsibility for premium payments. outs (and therefore amount of premium) that govern- ments receive from insurance and behavioral change of Two reasons for donors’ emphasis on sustainability sovereigns. It is often claimed that paying a higher propor- stand out. First, sustainability is a proxy for a results indica- tion of insurance premiums leads to greater risk ownership, tor. If a country is willing to finance premiums entirely with and that the prospect of reduced premium prices associated its own resources, it indicates true ownership of the scheme, with reduced levels of risk could incentivize governments to which in turn suggests that the country deems sovereign in- take risk reduction measures. To the knowledge of the au- surance to be beneficial. Second, short-term premium sub- thors, no empirical analysis exists that establishes a relation- sidies are easier to justify to domestic audiences than lon- ship between premium payments of governments and risk ger-term schemes. Ultimately, donors’ stance on the length reduction behavior. Efforts to evaluate the effectiveness and of premium subsidy schemes will depend on the policy objec- impact of premium subsidies provided by a CIW should seek tive(s) they try to achieve with subsidies. For instance, if the to shed further light on this link. objective is to shift from ex post finance to ex ante finance, promote greater risk ownership by countries, and eventual- High premium subsidies could be important in the initial ly reduce dependency on humanitarian assistance, then they years of sovereign risk insurance schemes. World Bank might deem a graduation point necessary. operational experience suggests that governments focus on the amount they must pay for insurance and how that affects Experience with premium subsidy schemes provides a budgets, as opposed to the relationship between the premi- mixed picture of countries achieving self-financed sovereign um and the financial impact of disasters. This is particularly insurance coverage. Except for the Cook Islands, all PCRAFI true in the initial years of sovereign risk insurance programs, participating countries could count on concessional IDA funds 30 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE through the Pacific Resilience Project (PREP) to finance premi- they compare to the merits of other projects), insofar as the ums, estimated to amount to $0.5 million per country per year. political economy of donor countries allows this. While this However, the countries have contributed $20,000 in counter- discussion outlines a clear rule for deciding how long ODA part financing in the first season of the scheme, $30,000 in the recipient countries could obtain subsidies, the formula is second, $40,000 in the third (World Bank 2015) and $50,000 very information intensive and—if the number of potential in the fourth. CCRIF SPC—which was initially set up with do- recipient countries is large—might not be practical for de- nor funding —offers parametric disaster insurance to members termining which countries should obtain subsidies and for of the Caribbean Community (CARICOM) and of COSEFIN how long. (which comprises Central American countries plus Panama and the Dominican Republic). Currently, 14 CARICOM members as Premium subsidies can overcome recipient countries’ do- well as Nicaragua participate in CCRIF SPC. Haiti’s premium mestic political economy constraints on financing insur- is fully subsidized by the Caribbean Development Bank. Nica- ance, which might be binding even in cases where insur- ragua’s premium was financed with an IDA loan. According to ance is a high-return investment. Anecdotal evidence and CCRIF SPC’s most recent strategic plan, “some 61% of respon- experience suggest that, regardless of the underlying welfare dents indicated that in a situation of fiscal constraint, the coun- benefits of buying insurance, premium payments are more try may reduce its coverage or possibly opt for no coverage” difficult for governments to justify to parliaments and the (CCRIF SPC 2015, 29). While this finding should be interpreted public than spending on activities with more immediate and/ with caution, it indicates that sovereign insurance premiums or visible returns. This might be even more true in countries could be vulnerable to short-term fiscal constraints. Overall, with low financial literacy. Premium subsidies are a powerful experience suggests that IDA countries and/or small island de- way to alleviate this constraint. veloping states find it difficult to finance sovereign insurance premiums with their own resources on a sustained basis. Behavioral considerations could justify a planned and gradual phaseout of premium subsidies. If a credible One possible decision rule for premium subsidies could commitment to gradually withdraw premium subsidies can be that the marginal benefit of funds spent on them is induce client countries to ramp up investments in risk reduc- greater than the marginal benefit of spending such funds tion, a scheduled withdrawal of subsidies could be econom- on other investments/activities. From an economic point ically beneficial. Even in such a case, however, the benefits of view, financial self-sustainability should not feature prom- from additional risk reduction investments would have to be inently as a criterion in allocation of premium subsidies. compared with the economic cost of losing rapid liquidity Conceptually, premium subsidies are not more of a subsidy injections from insurance should client governments cease than many other forms of official development assistance insurance coverage without subsidies. (ODA). ODA is limited, meaning that both donors and re- cipient countries face difficult allocation decisions. Ideally, To the extent possible, the provision of premium subsi- these decisions would be based on cost-benefit analyses that dies (and the length thereof) should be based on a mix ranked different investment opportunities by their economic of economic, political economy, and behavioral consider- (i.e., social) rate of return.12 In practice, projects are rarely, ations. If the political economy of donor countries allows, if ever, compared to each other across sectors. However, it and if subsidy withdrawal is unlikely to induce significant is standard practice for multilateral development banks to beneficial behavior by client governments, subsidies could in conduct cost-benefit analyses of individual (investment) principle be provided for longer periods of time. However, projects,13 since these projects need to be justified econom- the rationale for subsidies should be reviewed periodically. ically. If cost-benefit analyses are not conducted, narrative accounts of why particular investments are justified eco- nomically are still presented. Following this logic, premium Implementation Guidance subsidies at any point in time are justified if they provide a greater social return to marginal ODA funds than potential This section seeks to provide indicative guidance on the alternative investments. For countries that are likely to re- key considerations to be addressed in establishing a CIW, ceive ODA for decades to come, premium subsidies could with the objective of furthering the discussion on opera- therefore be provided based on their own merits (and on how tionalizing concessional risk finance. In practice, any deci- sions about establishing a CIW would have to be discussed at length with the key stakeholders and agreed upon. 12 In an ideal world this analysis would look at the global social return of investments, i.e., take account of externalities of investments. For example, if a particular investment helps avoid cross-border refugee flows, the benefits Given the evolving nature of concessional risk finance, a to neighboring countries of such investments should be taken into account. 13 The Inter-American Development Bank also requires economic analyses phased approach to implementation is proposed. Conces- for policy lending operations. sional risk finance is a complex, sensitive and rapidly growing TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 31 subject area. It is therefore important to adopt a flexible ap- multiple and competing demands on the time of civil ser- proach to implementation that enables evolution over time, vants in IDA countries, the level of subsidy needs to be and that takes stock of lessons from implementation to refine sufficiently high to incentivize them to spend the time pre- and improve the implementation model. This approach also paring and submitting proposals to a CIW. Low(er) levels enables improved risk management, as risks from implemen- of premium subsidies will inevitably generate less interest tation can be identified early in the process and mitigation ac- due to the administrative work of applying to a CIW. tions can be taken. A two-phase approach could be adopted; an initial pilot phase implemented at small scale would if suc- Available IDA resources will increase by roughly 50 per- cessful be followed by a scale-up phase implemented at larger cent under IDA18,14 so establishing a CIW in the current scale. Note that some aspects discussed in the following sub- environment may present a challenge. IDA18 represents sections may become relevant only during the scale-up phase the largest replenishment in IDA’s 56-year history. This surge of the program, since they may not be practical to implement in available IDA resources could have multiple impacts on a during the pilot phase. Nonetheless, lessons learned during a CIW: pilot phase could inform all aspects of a scaled-up CIW. ɑɑ  DA resources are cheap. Thus a CIW will need to offer a I competitive financial package consisting of subsidies and/ Guidance on operational aspects of a CIW or concessional loans to compete. ɑɑ  DA resources are deployed in large tranches, following a I Level of subsidies standardized set of administrative processes (see annex 4). For example, the safety net project loan sizes are $130 For IDA countries, high subsidies through grants and/or million in Uganda, $250 million in Kenya, $400 million in concessional loans for sovereign insurance are likely ap- the Philippines, and $80 million in Niger. Thus, with a view propriate, for the following reasons: to minimizing administrative cost, countries may prefer to request additional financing from their IDA envelope to ɑɑ IDA countries have access to low-cost finance, so sub- finance disaster response (whether through a safety net or sidy levels need to be high to be competitive. Building transport/education/agriculture sector project), instead of on a recent research paper by the World Bank and other applying for subsidies through a CIW. disaster risk financing and insurance experts (Clarke et al. 2016), a technical analysis was carried out to compare ɑɑ  he focus of regional teams and Country Management T the value for money for governments offered by premium Units (CMUs) will be on programming and disbursing subsidies from a CIW versus other financing sources. The IDA18; thus to engage the CMUs, it will be important to analysis is detailed in Box 1. align a CIW with relevant lending operations. To give two examples: in Uganda, as of March 2017, the World Bank’s ɑɑ High subsidies will incentivize more countries to apply, portfolio stood at $2.46 billion (credits and grants), and it which is important for early successes for a CIW. As de- was recently allocated $500 million from the sub-window tailed in subsection 4.7, the larger the number of countries for refugees under IDA18. In Laos, the World Bank expects a CIW provides subsidies to, the greater the probability to provide $240–$270 million over the next three years for that there will be payouts, which will support sustainability. new programs, in addition to an ongoing portfolio of about $400 million. The focus of CMUs and regional teams will ɑɑ High subsidies can help overcome the imperfect infor- be on programming and disbursing these resources. mation on insurance among IDA countries, which is a function of their limited exposure to it. As explained in The amount of resources available from a CIW deter- subsection 1.2, in initial years of insurance programs high mines the extent to which it can drive policy change. If subsidies can be justified because they allow countries to a CIW offered premiums for three years to target countries, learn about the benefits of insurance for the target group. with a premium amount of $1 million per year, the total in- There is limited, if any, exposure to risk transfer in many surance protection a CIW could provide would be around IDA countries; thus, an argument can be made that there $10 million.15 Considering the increase in IDA resources, will be limited appreciation of its advantages. This would and the volume of development finance (including World reduce willingness to pay, and thereby increase the need for higher subsidy levels. 14 IDA18 total replenishment was equal to $75.0 billion. IDA 2016. 15 It is assumed that the insurance policy mirrors that used in the Philippines, which provides a full payout for a 1-in-30-year disaster, and ɑɑ High subsidies will also incentivize IDA countries a partial payout (40 percent of full payout) for a 1-in-10-year disaster. The to complete the subsidy application process. With insurance multiple is assumed to be 1.4. 32 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Box 1 Comparison of Financing Sources for Disaster Response in IDA Countries A hypothetical country is chosen to represent a medium-size diversified economy heavily reliant on agriculture for employment. The country is exposed to recurrent disaster risk with mid-sized shocks every three to five years. The risk has a relatively short tail; thus, the probable maximum loss (PML) 100 is approximately 10 times the average annual loss. The country is eligible for IDA lending, and has limited access to capital markets, which lend at high interest rates (about 12 percent). As the amount of IDA lending is limited, the country is assumed to have used its full allowance of concessional loans; thus, a risk financing strategy that includes the use of IDA credit would reduce the amount of concessional loans that can be used to finance other investments. A full list of assumptions are given in annex 3. The formula from Clarke et al. (2016) is used to calculate the financial cost of different instruments to meet the marginal cost for each layer of risk in the risk profile. This approach enables a comparison of risk financing instruments for each incremental layer of risk, and therefore identifies the most cost-effective instrument for each layer. The cost of using a single financing instrument for the entire risk profile is also calculated, to enable comparisons between instruments. Two potential financing instruments are assumed to be available to meet post-disaster losses: (1) a loan borrowed at IDA terms, and (2) market-rate sovereign insurance, which can be paid from the budget of the client or with concessional IDA credit. Six options for financing response were analyzed: 1. Using a reserve fund 2. An IDA loan 3. Insurance, paid by the government at market rates 4. Insurance, paid by the government with an IDA loan 5. Insurance, paid by the government with a 70 percent premium subsidy 6. Insurance, paid by IDA loan with a 30 percent premium subsidy The results are given in Figure 1. Figure 1. The Marginal Cost of Financing Instruments 50 45 Marginal cost (percent) 40 35 30 25 20 15 10 5 0 0 5 10 25 30 Attachement point in return periods (year) Reserve und IDA loan Insurance Insurance with IDA loan Insurance with 70% subsidy Insurance with IDA loan and 70% subsidy TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 33 Results The country will use the lowest-cost financial tool to meet post-disaster needs, so for a given return period loss on the x-axis, a country should use the line closest to the x-axis. For low-frequency events (< 1-in-3-year loss), the IDA loan provides the best value for money with the lowest marginal cost of risk. This result makes intuitive sense, given that insurance is expensive for low-layer risks and IDA loans are cheap. However, as the severity of loss increases, the cost of insurance for the marginal layer of risk decreases. This again makes intuitive sense, as insurance can be an effective tool to manage the cost of low- frequency/high-severity events. When the IDA loan is compared to the insurance at market rates, the insurance becomes better value for events with a return period greater than approximately 13 years. Option 3 uses an IDA loan to pay for insurance, which dramatically decreases the cost. This is primarily driven by the fact that IDA lending rates are low (assumed to be 1.45 percent) and that discount rates for IDA countries tend to be high (assumed to be 12 percent). This lowers the net present value (NPV) of this option. Comparing option 3 to option 4 shows that using IDA to pay for insurance costs less than a 70 percent premium subsidy. This result is again driven by the low NPV of the repayments of the IDA loan used to pay for insurance. The point at which premium subsidies become cheaper than IDA is when they reach 77 percent of premium. Therefore, for subsidies to be the lowest-cost option, the subsidy level needs to be greater than 77 percent (assuming that the nonsubsidized portion of premium is paid from the budget). Finally, option 5 is the best value option for the country, as it avails itself of both low-cost IDA lending and premium subsidies. Sensitivity analysis A critical assumption in the above analysis is the discount rate used to calculate the NPV of the IDA loan repayments. A sensitivity analysis was conducted, which investigated the impact of changing the discount rate on the percentage of the insurance premiums which is subsidized , and investigating where subsidized insurance becomes better value than IDA to pay for insurance. The results of this sensitivity analysis are given in Figure 2. Figure 2. Level of Premium Subsidy Required versus Discount Rate 0.9 0.85 Percentage o IDA equivalent subsidy 0.80 0.75 0.70 0.65 0.60 6 8 10 12 14 16 18 20 Discount rate As expected, the greater the discount rate used to calculate the NPV of the IDA loan, the lower the cost of the IDA loan. With low-cost IDA available to countries, subsidies must be increased to provide equivalent value. Please see annex 3 for more information on the analysis presented in this box. 34 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Bank credits and grants) countries can access, a CIW should Facility, the value of the grant would equal the NPV of the dif- adopt policy change objectives commensurate with the lever- ference between the repayments of the loan at IBRD and IDA age provided by the volume of resources it can deploy. For lending rates. The cost of this approach to a CIW would be instance, it might be unrealistic to expect countries to un- approximately 15–30 percent of the total premium (see box 2). dertake major public financial management reforms (often politically difficult or costly) in return for subsidies that are Target countries could use the additional credit to invest small compared to the policy lending operation amounts that in financial preparedness for disasters. Specifically, the ad- the World Bank usually leverages for policy reforms. ditional credit could be used to (1) pay for insurance premi- ums, where the insurance product would be designed in line with the guidelines of a CIW, and/or (2) act as a contingent Expanding access to IDA lending line of investment credit, which could be drawn down under pre-agreed conditions to finance disaster response. For num- Although available IDA resources have significantly in- ber (1), the triggers, delivery mechanism, and monitoring of creased, countries ultimately have a limited amount of low- the resources would be the same as for standard insurance cost credit they can access. Once a country’s IDA envelope is products approved by a CIW. A more detailed discussion of programmed, through IPFs, Program-for-Results (P4R) instru- contingent credit is given in the next subsection (5.1.3). ments, and Development Policy Loans (DPLs), the country has exhausted its access to low-cost credit from the World Bank. A CIW could consider offering this financial support to This can be a binding constraint for some IDA countries.16 an IBRD country if a significant proportion of its popu- lations is vulnerable. With many of the world’s vulnerable Select IDA countries can access credit at below-market living in IBRD countries, a CIW could provide subsidies to a rates through the Scale-Up Facility (SUF). The SUF offers country that has a credible response plan targeting vulnera- loans at 4.5–5.0 percent to eligible countries.17 IDA countries ble populations. An example is the Philippines, which in re- that are at low or medium risk of debt distress are eligible to sponse to Typhoon Haiyan scaled up the support provided access the SUF. This arrangement expands access to conces- through its safety net program to the country’s vulnerable sional credit for IDA countries. However, the loans are still households. A CIW could therefore incentivize IBRD coun- more expensive than IDA loans. tries to develop disaster response plans that target their vul- nerable populations. A CIW could offer countries financial support that would extend their access to IDA credit. A CIW could provide A key challenge of this approach is the increased debt concessional finance to target countries, lowering the rate of burden on the target country. Despite the fact that this ap- borrowing to be in line with IDA terms if given preconditions proach gives target countries access to low-cost borrowing, were met. This approach is adopted by the Global Conces- it is still borrowing, which the country must repay. There is sional Financing Facility,18 whose financial package for IBRD likely to be low demand by countries with high debt levels countries affected by the refugee crisis in the Middle East and/or an unwillingness to borrow (because of a conserva- is provided at a rate equivalent to IDA’s. A similar approach tive fiscal policy stance or borrowing limits imposed by fis- could enable a CIW to provide concessional credit for IDA cal rules). For such countries, using insurance as opposed countries that have exhausted their IDA envelope and for to contingent credit to finance part of a disaster response is IBRD countries with disaster-affected vulnerable households. likely preferable, as this would not add to a country’s debt after disasters. This approach would involve providing the recipient country with a financial package to subsidize a loan that brought the borrowing terms in line with IDA’s. Under this Financial package for financial resilience approach, a grant would be provided to the borrowing IDA/ IBRD country upon finalization of an IBRD loan (for an IDA This subsection explores some key considerations should country, the loan would be through the SUF). In line with a CIW offer countries a financial package, including in- the approach adopted by the Global Concessional Financing surance and concessional contingent loans, to finance disaster response. 16 The timeline for programming IDA envelopes tends to vary from country to country. Such a package can improve the sustainability of sov- 17 Further details about the SUF are in World Bank Treasury (2017). 18 The Global Concessional Financing Facility supports middle-income ereign risk insurance schemes. Parametric risk insurance countries impacted by the influx of refugees by providing concessional products are exposed to the risk that the insurance does not financing and improved coordination for development projects that address the impact of the refugee influx. See the organization’s website at http:// trigger a payout when a disaster response is required. Care- globalcff.org/. ful design of the insurance product, and building of users’ TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 35 Box 2. Concessional Finance to Enable Expansion of IDA Lending Terms for Target Countries The analysis undertaken here assumes a grant is given to a country to lower the cost of borrowing from IBRD to IDA lending rates. It further assumes the grant is equal to the difference between the NPV of the loan repayments under IBRD and IDA lending terms. The amount of this grant depends on multiple assumptions, including the term of the loan, the spread between IDA and IBRD interest rates, and the discount rate to calculate NPVs. The two key assumptions that have the largest influence on the NPVs are the term of the loan and the discount rate used to calculate the NPV. Given the sensitivity of the results to these assumptions, the amount of the grant was calculated under two scenarios (shown in table 3): 1. The term of the loans (both IBRD and IDA) is 20 years, and the discount rate is 10 percent. 2. The term of the loans (both IBRD and IDA) is 30 years, and the discount rate is 5 percent. Both options make the following assumptions: ɑɑ Insurance premium (financed through credit): $1 million ɑɑ IBRD fixed interest rate: 4.09 percent ɑɑ IDA fixed interest rate: 1.25 percent Table 3. Comparison of Loan Scenarios Term of loan (years) NPV discount rate Subsidy amount (difference between NPV of IDA & IBRD loans) Option 1 20 10 percent $147,000 (15 percent of premium) Option 2 30 5 percent $281,000 (28 percent of premium) Discussion with reference to market interest rates Should a CIW wish to lower the cost of borrowing for a target country from market rates to IDA lending rates for that country, the cost dramatically increases. For example, if the country can borrow from the market at 12 percent, the grant needs to be approximately 66 percent of the loan amount. financial awareness, can reduce but not eliminate this risk. table 2), and pose a threat to the sustainability of sover- Ensuring countries have access to other sources of finance, eign risk insurance schemes. like contingency funds and contingent lines of credit, is crit- ical to address this inherent limitation of parametric insur-  financial package, with instruments to disburse resources A ance. Examples of situations where parametric insurance under these scenarios, helps clients manage the limitations could fail to trigger a payout include the following: of parametric risk transfer and thus improves sustainability. ɑɑ Disaster events within the deductible of the insurance As part of a financial package including insurance, a CIW product. These events impact governments/vulnerable house- could consider providing concessional contingent finance holds but are not large enough to trigger an insurance payout. to target countries to support financial resilience. In this case, grants from a CIW could be used to increase the size of ɑɑ Basis risk events. These disaster events cause large finan- an IDA loan, enabling a recipient country to mobilize further cial losses, but are not captured by the index. There are resources in the event of a disaster. The resources could be multiple examples of sovereign risk transfer products (in disbursed by a CIW as a grant, with no obligation to repay, Malawi, Ethiopia, Kenya, Solomon Islands, etc.) that have or used to buy down additional IDA investment credit as de- not triggered due to these issues. scribed in subsection 5.1.2, with an obligation of repayment. ɑɑ Perils that are not covered by the insurance. These situ-  he discussion below assumes that CIW resources are add- T ations lead to very high reputational risk for development ed to a component within an IPF or a contingent emergen- partners, multilateral development banks, and clients (see cy response component (CERC) of a World Bank lending 36 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Table 4. Options for CIW Subsidy Provision Modality of subsidy provision Situation where instrument is applicable Grant premium subsidy IDA/IBRD country has limited willingness and/or ability to pay for insurance. IDA loan IDA country has limited willingness and/or ability to pay for insurance, but has an investment project with a DRF component, and is willing to use its IDA resources to finance insurance premiums. Subsidized SUF loan IDA country has limited willingness and/or ability to pay for insurance, has programmed all its IDA resources, and/or is unwilling to use its IDA resources to pay for insurance premiums. Subsidized IBRD loan IBRD country is unwilling to pay for insurance with budgetary resources and is unwilling to finance insurance premiums at IBRD rates. operation, given the growing development partner demand the overarching objective will be to ensure that the country, for transparency of post-disaster spending and the limited and donors, get the best value for their money from a prod- ability to track resources disbursed through DPLs. uct. A CIW should remain agnostic as to the selection of the specific risk carrier to manage the financial product (condi- The rules for disbursement of the concessional contin- tional on the risk carrier meeting the technical and financial gent finance would be detailed in an operations manual, requirements to provide the service). By having an open and which the World Bank would have to approve, as dictat- fair competitive bidding process for products sought by ap- ed by World Bank Group standard operating procedures. plicant countries, a CIW can ensure that countries receive The operations manual could clearly state the conditions un- value for money for risk transferred to risk carriers.19 This der which the resources are mobilized. The scope of these approach also ensures that the applicant country has access conditions could range from hard triggers (for example, the to a variety of product options. Independent technical and Uganda NUSAF project has satellite-based triggers for dis- financial experts will evaluate all applications to a CIW and bursing resources from its DRF component; see annex 2) to assess the value for money they represent (see subsection soft triggers (for example, CERCs can be disbursed with a 5.2.1 below). letter from a ministry stating a disaster has occurred). Benefits of certain risk carriers beyond value for money As the concessional contingent finance is disbursed could also be considered. Sovereign catastrophe risk pools through an IPF, funds would be monitored and reported could provide additional benefits for countries beyond low- on according to IPF reporting procedures. As discussed cost products, including political ownership, the ability to in subsection 4.4.1, the World Bank can ensure the finance mobilize donor support and operational efficiencies, and it provides is used as intended by the recipient. In this case, transparency in use of payouts; these are discussed in detail the resources used to finance the disaster response would in the World Bank (2017) technical report for the G20. Using come from the World Bank (as opposed to the risk carrier of public sector (re)insurance companies as risk carriers can a sovereign risk insurance product), so the concessional con- support development of insurance capacity in local markets, tingent finance would be subject to standard IPF reporting an important objective in itself. procedures. This approach increases the visibility and trans- parency of expenditure. An example here is the NUSAF III The recipient country should take the lead in deciding project in Uganda, where the government of Uganda reports how to take sovereign risk insurance to the market. Op- to the World Bank on all resources mobilized through the erational experience in executing sovereign risk insurance concessional contingent finance component (called the “Di- transactions shows that the needs of client countries vary. saster Risk Finance” component). This component contains As clients face different financial, political, regulatory, and a contingent line of credit that is disbursed based on a combi- capacity constraints, the process for how the product will be nation of hard and soft triggers (more details are in annex 2). taken to market will vary country to country, and will be de- termined by the client. Options include transferring the risk  able 4 outlines the different situations under which each of T through regional risk pools, identifying a local/internation- the instruments described above could be applicable. al broker, and using the World Bank Treasury to execute the transactions. Insurance product selection 19 Selection of an insurance product requires competitive reinsurance The recipient country and its unique needs will deter- markets. If at any time it is determined that these markets are not mine the selection of an insurance product. For a CIW, competitive, then the selection process will need to be amended. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 37 Box 3. Likelihood of Payout The number of countries insured and the frequency of payout both influence the likelihood of a payout being triggered: Three different scenarios were analyzed looking to achieve a 65 percent chance of a payout in a given year, assuming payouts are statistically independent. As the number of countries insured decreases, the attachment point of the insurance must be reduced to achieve the same likelihood of payout (assuming zero correlation of risk between countries). 1. If a CIW insures 10 countries, each with a 1-in-10-year attachment point, there is a 65 percent of payout in given year. 2. If five countries are insured, each country must have a 1-in-5-year attachment point to maintain the same probability of a payout in a given year. 3. If three countries are insured, each country must have a 1-in-3-year attachment point to maintain the same probability of a payout in a given year. Sustainability of insurance and graduation from drought). The greater the diversification of the portfolio, the a CIW more frequently the insurance is expected to payout, increas- ing the likelihood of a payout in a given year. Box 3 discusses International experience suggests that a CIW might need the likelihood of payout in more detail. to provide subsidies for 5–10 years before insurance is sustained by client countries themselves. There is limited The criteria determining when a country “graduates” if any international experience showing early (1- to 4-year) from CIW eligibility need to be transparent and could exit of subsidies for insurance programs by IDA countries. At reflect the reaching of relevant developmental and/or least for low-income countries, the continued provision of poverty reduction milestones. Developmental milestones subsidies over a 5- to 10-year time horizon might be neces- could include a country’s GDP per capita rising above the sary to ensure sustainability of the product. Some evidence IDA threshold; or the proportion of its absolute poor fall- (see section 1) Role of Public Subsidies in Achieving Policy ing below a specified threshold. Other relevant milestones Objectives on household-level insurance suggests that in- could reflect general needs for concessional finance in terms sured beneficiaries are more likely to pay themselves once of access to debt capital markets; or they could include spe- payouts have been made, but there is no sovereign-level be- cific milestones in insurance market development, such as a havioral evidence to that effect. specified non-life insurance penetration rate (although this would have to be weighed against the potential risk of disin- Early sovereign insurance payouts will support sustain- centivizing countries from building their insurance markets). ability of a CIW. This is supported by the evidence present- ed in subsection 1.2, which shows that both receiving payouts While graduation criteria focused on relevant develop- and seeing neighbors and peers receive payouts can increase ment and market indicators have clear advantages in recipient countries’ understanding and appreciation of insur- terms of transparency, they might be hard to justify po- ance, and thereby stimulate demand. litically in some instances.21 For example, if persisting low per capita GDP and/or low levels of market development There are multiple factors to consider should a CIW wish give countries access to insurance subsidies over many years to increase the likelihood of early payouts and thereby (possibly decades), both CIW donors and their constituents demonstrate the product’s success.20 The likelihood of hav- might raise questions about countries’ ownership of the in- ing a payout will depend on (1) diversification of risk between surance scheme or about sustainability. Experience suggests countries, which will be driven by the perils insured and the that increased contributions to premium payments by client geographical spread of risk, and (2) the conditions under countries are viewed as a sign of increased ownership of in- which an insurance contract will make a payout for a given surance schemes and of sustainability. If a gradual phaseout country (e.g., if an insurance contract makes payouts for both of subsidies is preferred to an indicator-based graduation droughts and floods, it would make payouts more frequent- from a CIW, a schedule of subsidies could be developed up ly, on average, than a contract that just makes payouts for front and be applied to all countries equally. Alternatively, 20 As a CIW intends to support recipient countries in accessing 21 Applying adequate graduation criteria might not be relevant for the pilot international insurance markets, it is assumed that insurance principals phase of a subsidy program. However, when the operations manual for a will be applied to the products supported by a CIW, and therefore that only CIW is developed, it might include these criteria for discussion and to set legitimate payouts will be made (i.e., there will be no ex gratia payouts). expectations at the outset on when countries lose access to a CIW. 38 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE several subsidy schedules could be developed and applied to trainings, capacity development, and investments in DRF-re- different groups of countries, e.g., one for IDA countries and lated activities. one for IBRD countries. One major drawback of such a sched- ule would be that it decouples the length of subsidy provision Linking insurance to lending operations would lower the from any developmental or performance-related criteria. administrative burden on clients, in addition to reducing risks of misappropriation. Aligning with the processes of Key criteria and rules should be transparent and valid for such operations would limit additional work for recipient all countries, specifically rules determining (1) eligibility countries. For investment lending operations (IPFs), all for subsidies, (2) the allocation of subsidies to countries, funds spent by clients must be tracked and reported to the (3) the proportion of premiums that can be subsidized, World Bank. This reduces (but does not eliminate) the risk and (4) the point at which a country graduates from sub- of misuse of funds. In the case of development policy lending sidies. These rules and criteria would also apply to countries operations, where resources are provided as budget support, that already pay for sovereign insurance premiums with their the client does not report to the World Bank on how funds own funds. Such countries might revert to a situation where are spent. However, certain macroeconomic and fiduciary re- they pay only a proportion of premiums until they graduate. quirements need to be met to obtain budget support from The risk that this is perceived as a step backward needs to the World Bank. weighed against the reputational risk and political difficulty of excluding countries if they already pay for premiums. Potential criteria for accessing concessional Should a premium subsidy program be implemented by financing the World Bank, it would initially develop criteria for a pilot phase in an operations manual for the program.  aking into account the limited financing available for con- T Should the pilot be successful and scale up, the criteria and cessional insurance and the proposed policy objectives for a rules listed above should be developed as part of a more potential CIW, some criteria are suggested here to identify comprehensive operations manual for a program reviewed target countries for concessional premium finance during and endorsed by World Bank management. The World Bank the pilot phase. The criteria listed in table 5 are not meant as could implement a pilot phase of a premium subsidy program definite recommendations, but rather as potential criteria to without (fully) developed rules for determining the alloca- inform discussion. tion of subsidies across countries, the proportion of premi- ums that can be subsidized, or the point at which a coun- Rationales for the suggested criteria: try graduates from subsidies. In fact, the pilot phase could serve to provide lessons that would inform the development Criteria 1 and 7: T he World Bank implements its country of such criteria. While a pilot phase would require eligibility programs according to Country Partnership Frameworks criteria, these could also be refined and/or amended based on (CPFs), which are agreed on with the client country and lessons learned, before being recommended for adoption by then implemented by the CMU. The CMU is the gatekeeper a scaled-up premium subsidy program. for all operational work in target countries, and therefore must approve of any sovereign risk transfer products fi- nanced with World Bank resources, along with linked tech- Link to lending operations nical assistance. The letter of request from the client coun- try demonstrates a level of buy-in from decision makers in Linking to lending operations (for both IDA and IBRD government, and a minimum level of commitment to the countries) will enable a CIW to piggyback on existing, risk financing agenda. and tested, implementation processes. The World Bank and other development banks have developed a complex set  his criterion seeks to ensure that a CIW reach- Criterion 2: T of implementation processes, including but not limited to es the most vulnerable countries as well as households. technical, procurement, fiduciary, and auditing issues, in ad- dition to government-led monitoring and evaluation. These While the overarching goal of a CIW is to enhance the finan- processes have enabled the World Bank to implement proj- cial capacity of governments to respond to disasters, a CIW ects at scale. Aligning subsidies provided through a CIW to seeks to ensure that it is the most vulnerable households lending operations allows a CIW to build on these existing that ultimately benefit. Countries with access to IDA funds systems and checks, without need to duplicate them or create are either the world’s poorest countries or countries with their own. There is growing experience in the World Bank other characteristics that make them particularly vulnera- Group in developing DRF-related components in lending op- ble to shocks (e.g., various small island states that are blend erations, where the objective of the component is to finance countries). Hence it is suggested that all countries eligible for TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 39 Table 5. Potential Eligibility Criteria for Accessing Concessional Finance from a CIW Criteria for accessing concessional risk finance Means of verification 1. Demand for technical and financial assistance from the client and Letter of request for technical and financial assistance from World Bank CMU client to the World Bank CMU Approval of Mission Announcement Letter from CMU stating that project team will engage on risk transfer solutions 2. Countries have access to IDA funds or have a poverty head count ɑɑ Official World Bank country classification ratio above a pre-defined threshold (TBD) or are a member of the ɑɑ Official World Bank poverty data Small Island States Forum. (If subsidy is for regional government, the relevant regional figure applies.) 3. Disaster Risk Finance Strategy adopted or being drafted, which Draft of Risk Finance Strategy with contingency plan shared details the role of insurance and other financial instruments in a with World Bank financial package and includes an adequate contingency plan for how funds will be spent. 4. Budget published in the last fiscal year. Data from International Budget Partnership’s Open Budget Survey;a for countries not covered by the survey, this information will be obtained from CMUs. 5. Commitment to publishing data on post-disaster expenditures as Government letter stating such commitment part of the government reporting process. 6. Development of a product summary report with the following Report transmitted to the World Bank information: a. Policy objective government seeks to achieve with the insurance product b. Basic risk profile/loss data, with justification for selection of risk insured c. Clear articulation of index used to capture losses if parametric; this could include explanation of the risk the index seeks to capture, the limitations of the index, proposed studies to strengthen index moving forward, and historical loss information of the index d. Key information on the structure of the insurance product and how it fits within the broader DRF strategy 7. CMU clearance to execute the transaction for the proposed insurance Decision meeting chaired by CMU on technical proposal to product move to implementation a. International Budget Partnership, “Open Budget Survey,” https://www.internationalbudget.org/opening-budgets/open-budget-initiative/open-budget-survey/. IDA funds and all members of the Small Island States Forum ɑɑ  t would be in line with the established World Bank frame- I could have access to a CIW. work for providing concessional finance. However, a very large proportion of people in absolute pover- ɑɑ  t can be easily explained and justified to external stake- I ty live in middle-income countries (as defined by the World holders, including client countries and donors. Bank). To effectively target the most vulnerable, a CIW could therefore also be made accessible to countries with a poverty ɑɑ  here would be a clear per capita GDP threshold limiting T head count ratio above a pre-defined threshold.22 eligibility. However, it can be argued that concessional insurance, like ɑɑ  dedicated World Bank unit exists that establishes which A IDA funding, should be available to low-income countries countries fall under this category, so no new methodology and blend countries only. Such an approach would have the or effort is required to establish eligibility. following advantages. However, there are also advantages to including IBRD coun- 22 The agreed ratio should be validated with poverty specialists before tries with significant shares of poor people: being adopted. Guidance from a poverty specialist should also be sought on a case-by-case basis if necessary data are not available for an applicant country. ɑɑ  This approach would help increase shared prosperity. 40 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE ɑɑ  t would be in line with the suggested PDO of increasing I to publishing post-disaster expenditure data. Such data could vulnerable households’ financial resilience to disasters be published on a government website, which would allow through rapid response, and with similar objectives of key citizens to understand what activities and/or projects were development partners. financed after disasters. It could be made available in ma- chine-readable formats (e.g., Excel) so that citizens, CSOs, ɑɑ  t would include countries with greater technical capacity, I think tanks, etc. can analyze it. thus facilitating transactions that might lead to valuable demonstrations of the benefits of insurance against disas- Criterion 6: A key challenge of past sovereign risk transfer ter risk. programs has been that recipient countries often lack aware- ness of the product. In combination with basis risk events, Should a premium subsidy program be implemented by the this drawback has led to the discontinuation of multiple sov- World Bank, the World Bank would have to decide which ap- ereign risk transfer pilots. By clearly articulating what index proach to take. Before scaling up the program, it would have the product is tied to, what its drawbacks are, and how it to review the approach chosen for the pilot phase and then supports policy objectives, governments will be required to choose an approach for the scaled-up program after adequate develop a sound understanding of the insurance product and internal and external consultations. the underlying risk data that drive it. Criterion 3: T  his criterion seeks to ensure that only coun- tries that have (or currently are developing) a comprehen- Technical analysis to support country sive policy and financial framework for disaster risk finance implementation are eligible for concessional insurance. Moving toward effec- tive financial protection against disasters can entail an array This subsection discusses a proposed technical analysis of of policy reforms or measures to improve systems for risk the insurance package (more information is in subsection identification and risk assessment, guidelines on the use of 5.3), which could be conducted in parallel to the CIW deci- available funds, coordination between relevant government sion-making process for providing subsidies and could ul- units, business continuity, etc. Insurance is most effective timately be used to inform the recipient country about the as a financial risk management instrument if embedded in design of the sovereign risk insurance. a larger framework of financial protection. As mentioned in the discussion of the relative cost-effectiveness of different Recognizing the capacity limitations in client countries, financial instruments for different risks (box 1), insurance it is proposed that independent expert(s) perform a is most cost-effective for low-frequency and high-impact technical analysis of the risk information and risk trans- events, and should be complemented by other instruments fer product.23 These independent experts could form an to decrease the impact of disasters on public finances and to Investment Review Board (more in subsection 5.3.3), which smooth costs over time (hence the need for a financial pack- could develop a report to be shared with the Steering Com- age, discussed in subsection 5.1.3). mittee of a CIW to increase global knowledge on sovereign risk insurance, and with the recipient country to inform  ontingency planning for how to spend resources is import- C product design and build the recipient country’s technical ant for effectively and promptly utilizing funds for disaster capacity. Note that certain sensitive aspects of the analysis response, including insurance payouts. Ideally, plans should (for example, exposure data of key government assets, or define the following: which people and public assets will be proprietary loss models) cannot be shared publicly. In these prioritized in disaster response; how much funding is likely instances, the findings could be presented in way that en- to be allocated to pre-defined groups of people and public ables easy sharing of information that is not sensitive. This assets; how and by whom such response measures will be work would most likely be a desk-based review of available implemented, and through which delivery channels; and how information and models, primarily provided by the recipient the response measures will be financed. country.  dditional financial resources received after Criteria 4 and 5: A The analysis could focus on two areas: (1) risk informa- disasters are only useful for mitigating their economic and so- tion/catastrophe (CAT) risk model, and (2) financial cial impact if not wasted or misappropriated for illegitimate product. Each is summarized here, and further details are purposes. Greater transparency of government spending can given in annex 5 minimize the risk of corruption by enabling greater citizen and civil society oversight. Criteria 4 and 5 would ensure 23 If a CIW maintains the view that it will provide resources only for subsidies, additional resources will need to be mobilized to pay for this that access to premium subsidies is granted only to coun- work. This possibility further strengthens the need for a CIW to align with tries that at a minimum publish their budgets and commit other DRF-related initiatives to provide complementary financing. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 41 Risk information/CAT risk model align with the questions listed in annex 5. The experts could include a recommendation for approval based on their pro- This section of the analysis should seek to provide assurance fessional judgment. to the recipient country and the CIW that the risk informa- tion/CAT risk model used to calculate losses is fit for pur- A CIW could maintain a public roster of independent pose. The tests that the independent expert could conduct technical and financial experts who provide these analy- include the following: ses. Independent review by members of the roster of experts would mitigate the risk of conflict of interest in proposal re- ɑɑ  recision analysis, which varies one and many parame- P view (detailed in subsection 5.3). The reviews could then be ter(s) at a time provided to a CIW’s decision makers to guide their approval determinations. The operations manual for a CIW could in- ɑɑ  ccuracy analysis, which calculates the probability of cat- A clude a roster of experts. astrophic basis risk and the catastrophic performance ra- tio24 for the product CIW commitment to transparency ɑɑ  robability of catastrophic basis risk describes the P probability of not receiving a claim payment when the A CIW would present an important opportunity to pro- insured has a catastrophic loss mote transparency in DRF, from the application process to use of post-disaster claims payments. A CIW could pro- ɑɑ  atastrophic performance ratio describes the amount, C mote transparency during the application phase by requir- on average, that the insured receives back relative to ing that catastrophe risk information underlying insurance the premium paid in the event of a catastrophic loss products is to the extent possible open. Exceptions to this requirement may need to be made in certain cases, for ex- ɑɑ  istoric analysis, which compares modeled loss, if appro- H ample, when government asset data are confidential. In such priate, to actual losses (if available) cases, a CIW could make exceptions while requiring that oth- er components of the catastrophe risk information remain  he summary should highlight the model’s strengths and T open. More broadly, throughout the application and imple- limitations, and should recommend additional analysis to mentation cycle, a CIW could strive to make information improve the model’s quality and robustness. public whenever possible. Financial product Potential governance structure of a CIW This section of the analysis, developed by a financial expert This subsection discusses possible options for the gover- (for example, an actuary), should provide an overall review nance structure of a CIW and the processes by which pro- of the financial product and a professional judgment on its posals for concessional risk financing could be submitted, quality. The report should consider the appropriateness of reviewed, and approved or rejected for funding. Ultimately, the insurance product, and of concessional premiums, for the should steps be undertaken to operationalize a CIW, the gov- recipient country’s unique needs. It should identify key risks ernance and process for application will need to be discussed and provide guidance on the level of such risks as well as po- and agreed on with donors. In line with the previously pro- tential mitigating actions. The key areas to focus on include posed phased approach to implementing a CIW, the initially basis risk, pricing, appropriateness of insurance to manage adopted governance structure could be reviewed after a pilot the risk, and possible mitigation factors, including ways to phase. Based on the review’s recommendations, the gover- strengthen the value of the insurance product for the recip- nance structure and the application process for financing of ient country. insurance premiums could then be refined before scale-up of the program. Technical and financial experts’ reviews could be based on predetermined technical and financial criteria and could culminate in a recommendation to a CIW’s deci- Governance model sion-making body to inform the decision on grant approv- al. The technical and financial criteria could be developed to Trust funds (TFs) are the financial vehicle within the World Bank to deliver grants, as would be done under a CIW. There 24 The terms “catastrophic basis risk” and “performance ratio” are defined are several governance options that could be considered when in Morsink, Clarke, and Mapfumo (2016). structuring such a window. The World Bank has standardized 42 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE the set of governance models that can be adopted to stream- responsible for (1) maintaining a roster of independent tech- line negotiations and operations of TFs and to ensure that nical and financial experts that could conduct the technical best-practice governance models are used.25 The B.2 model, for analyses proposed in subsection 5.2.1; (2) presenting applica- example, provides donors with relatively greater degrees of de- tions for concessional insurance to the SC for approval; (3) cision-making authority than two of the three other standard elaborating and annually reviewing the criteria for accessing options; it provides a balance between efficiency and develop- concessional insurance; (4) coordinating and facilitating the ment partners’ input in decision making. Under this model, the provision of complementary TA required for the successful Steering Committee (SC) of the TF has an endorsing role. The preparation of applications for concessional insurance; and SC would endorse a CIW’s annual work plans (which could in- (5) developing and submitting a CIW’s annual work plan to clude a list of potential subsidy recipient countries) and bud- the SC for endorsement. gets. It would also review a CIW’s annual progress. This model is appropriate for most projects and programs. Investment Review Board For politically sensitive issues such as concessional in- surance, the joint development partner (DP)–World Bank An Investment Review Board (IRB) could be established decision-making model could be considered for the pilot to review investment proposals and provide technical phase. Under this model, the SC has decision-making author- recommendations to the SC on whether to approve the ity over grant requests to a CIW. The rationale for joint de- financial package. In addition, the IRB could contribute cision making between the World Bank and the donor(s)—a to the review of a CIW with the World Bank after the pilot process to be based on transparent, objective criteria in CIW phase. grant approval for sovereign risk insurance subsidies—rests on the following points: The Program Implementing Unit could develop a long list of experts, as described under subsection 5.2.1, who could ɑɑ  CIW would be a major advance in the programmatic A sit on the IRB. The SC could be given the opportunity to provision of premium subsidies for sovereign catastrophe review the roster on an annual basis and could suggest names insurance, and there is currently a lack of experience with to be added or removed. such approaches undertaken on a large scale. The IRB’s review could focus on two key areas: (1) the ɑɑ  ecision making about the provision of premium subsi- D risk information/catastrophe risk model, and (2) the risk dies, whether for farmers, households, or sovereigns, can transfer product. Details of the technical analyses the IRB be complex and even controversial, which could justify could undertake are presented in subsection 5.2.1. A ToR out- involving more parties in the decision-making process at lining the scope and limitations of these analyses could be the proposal level. developed by the Program Implementing Unit. Over time, as a CIW moves from a pilot phase to a scaled- up phase, a case can be made for a model where donors Premium subsidy application and selection cannot approve/reject individual proposals, but have an process endorsing role on CIW strategic priorities, annual work plans, and budgets. World Bank experience suggests that The process shown in Table 6 is an example of the steps that such a model ensures more agile operations of trust funds could be established to apply and receive grant finance for and avoids delays in approval processes. premium subsidies under a joint decision-making model. This paper does not argue that the process ultimately estab- For further information on the different types of governance lished must be like it. Rather, the eventual process will have models along with examples, see annexes 6 and 7. to be discussed and agreed on with the key stakeholders of the TF, and will depend in part on the chosen decision-mak- ing model. Program Implementing Unit The World Bank could act as the Program Implementing Unit for a CIW. The Program implementing Unit could be 25 The World Bank (2016a) publication “Governance Models: An Overview and Proposed Approach” describes in detail the four governance models and the rationale for their adoption by the World Bank. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 43 Table 6: Concessional Insurance Application and Selection Process Step Description 1 Initial CMU approval and application submission Countries / task teams submit applications to the Program Implementing Unit, including documentation verifying countries’ eligibility based on criteria 1–5 (table ES.1). There are two types of applications, requiring the following types of documentation: Type A projects: Type B projects: Stand-alone insurance purchase Integration of insurance premium component into World Bank operation under preparation Letter of request for technical and financial assistance to Project Concept Note (PCN), developed with CMUs approval, purchase insurance policies, which is approved by CMU for a World Bank lending operation or for an additional finance which demonstrates eligibility criteria 1–5 are met Documentation that country meets eligibility criteria 1–5 As part of the application, the countries / task teams will develop supplemental document which will detail: ɑɑ The financial structure of the insurance product, including how it sits within the DRF strategy ɑɑ Indicative numbers on results / number of beneficiaries reached ɑɑ Indicative approach to engage with risk carriers ɑɑ Methodology to coordination with InsuResilience partners 2 Review and approval of funding application The SC evaluates countries’ applications against eligibility criteria 1–6, accounting for: ɑɑ Availability of funds in the Multi-Donor Trust Fund (MDTF) to finance premium subsidies; ɑɑ Availability of resources (in the MDTF or elsewhere) to provide technical assistance for the development of a financial package, including insurance If the above conditions are met, the SC approves the funding request. The World Bank team begin preparing Project Appraisal Document (PAD), with funds committed from the MDTF, in accordance with World Bank operational procedures. 3 Preparation of financial package Type A (stand-alone) projects: The PAD must be approved by the Country Director / Regional Vice President. After approval, the recipient country develops the financial package with World Bank technical assistance as required. The financial package is submitted to the IRB. Type B (World Bank operations under preparation) projects: Once the project becomes effective (e.g., six months to two years from PCN approval), the World Bank team will support the recipient country in preparing the financial package, including design of the insurance product. The proposal for financial package is then shared with the IRB. 4 Technical review of financial package IRB reviews the financial package based on its ToR as a quality assurer. The IRB provide their professional judgment on the financial package. The IRB prepares a summary report for the SC. In the event where improvements can be made to the insurance product, the IRB prepares a response to the client with recommended actions to improve product quality. The IRB will prepare a summary report to the SC on the technical review and product design for their endorsement on a no objection basis. 5 SC endorse summary report on a no objection basis 6 Placement process The recipient country decides on how the product will be placed on the market, depending on (1) the insurance capacity in country; (2) the availability of risk pools in its region; and (3) its preferences for how the insurance product and premium payment are structured. Competitive and transparent placement should prevail. 7 Final CMU approval The financial package including placement process is presented to CMU through a decision meeting chaired by the country director (or delegated person). The CMU provides input and a decision on whether to bring the product to market. 44 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Step Description 8 Insurance transaction is executed 9 Monitoring and evaluation (M&E) The M&E for approved premium subsidies should cover placement of the recipient country’s insurance product and the recipient country’s subsequent experience with the product. In addition, M&E should assess the meeting of results indicators of a CIW’s results framework. Where appropriate, task teams should seek to integrate CIW results framework indicators into the results frameworks of lending operations. This should enable a CIW to systematically gather data on the impact of activities, without duplicating ongoing data collection for monitoring and evaluations, and hence should minimize the reporting burden on government officials. Learning should be a key component of the program, given the rapid pace of this agenda. As lessons are learned from ongoing monitoring and evaluations conducted throughout individual projects, implementation modalities should be shaped and refined. It is recommended that with each successful applicant, $200,000–$400,000 be mobilized to carry out impact evaluations of payouts. The evidence base for sovereign risk transfer is small, but growing. A CIW has a unique opportunity to gather further evidence on how its interventions affect poverty and shared prosperity outcomes. Collecting this evidence, however, requires resources. Thus a CIW should seek to commit/mobilize funds from other sources to carry out impact evaluations in the event that payouts are made. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 45 References Arze del Granado, F. J., David Coady, and Robert Gillingham. EOD (Evidence on Demand). 2016. Understanding the Role of 2012. “The Unequal Benefits of Fuel Subsidies: A Review Publicly Funded Premium Subsidies in Disaster Risk insurance of Evidence for Developing Countries.” World Development in Developing Countries. Report. 40 (11): 2234–48. Ferraz, C., and F. Finan. 2008. “Exposing Corrupt Politicians: Baicker, K. 2005. “Extensive or Intensive Generosity? The The Effect of Brazil’s Publicly Released Audits on Electoral Price and Income Effects of Federal Gants.” Review of Eco- Outcomes.” Quarterly Journal of Economics 123 (2): 703–45. nomics and Statistics 87 (2): 371–84. GAD (Government Actuary’s Department). 2017. “Conces- Bhargava, S., and D. Manoli. 2015. “Psychological Frictions sional Sovereign Disaster insurance.” Background paper and the Incomplete Take-Up of Social Benefits: Evidence for the InsuResilience Working Group on Concessional from an IRS Field Experiment.” American Economic Review Climate Risk Insurance. 105 (11): 3489–29. Gordon, N. 2004. “Do Federal Grants Boost School Spending? Cai, J., A. de Janvry, and E. Sadoulet. 2016. “Subsidy Policies Evidence from Title I.” Journal of Public Economics 88: 1771–92. and Insurance Demand.” NBER Working Paper, National Bureau of Economic Research, Cambridge, MA. Hallegatte, S., A. Vogt-Schilb, M. Bangalore, and J. Rozenberg. 2017.  Unbreakable: Building the Resilience of the Poor in the CCRIF SPC (Caribbean Catastrophe Risk Insurance Facil- Face of Natural Disasters.  Climate Change and Develop- ity). 2015. “Strategic Plan 2015–2018.” http://www.ccrif. ment Series. Washington, DC: World Bank. org/sites/default/files/publications/CCRIF_Strategic_ Plan_2015_2018.pdf. Hines, J. R. Jr., and R. Thaler. 1995. “Anomalies: The Flypaper Effect.” Journal of Economic Perspectives 9 (4): 217–26. Clarke, D. J., and S. Dercon. 2016. Dull Disasters: How Planning Ahead Will Make a Difference. Oxford: Oxford University IDA (International Development Association). 2016. “IDA18 Press. Overarching Theme: Towards 2030: Investing in Growth, Resilience and Opportunity.” IDA Resource Mobilization Clarke, D. J., O. Mahul, R. Poulter, and T. L. Teh. 2016. “Eval- Department (DFiRM). May 31. uating Sovereign Disaster Risk Financing Strategies: A Framework.” Policy Research Working Paper 7721, World IMF (International Monetary Fund). 2008. The Balance of Bank, Washington, DC. Payments Impact of the Food and Fuel Price Shocks on Low-In- come African Countries: A Country-by-Country Assessment. Cohen, Jessica, and Pascaline Dupas. 2010. “Free Distribution or Washington, DC: International Monetary Fund. Cost-Sharing? Evidence from a Randomized Malaria Preven- tion Experiment.” Quarterly Journal of Economics 125 (1): 1-45. Knight, B. 2002. “Endogenous Federal Grants and Crowd- out of State Government Spending: Theory and Evidence Cummins, J. D., and O. Mahul. 2009. Catastrophe Risk Financ- from the Federal Highway Aid Program.” American Eco- ing in Developing Countries. Washington, DC: World Bank. nomic Review 92 (1): 71–92. Dupas, P. 2014. “Short-run Subsidies and Long-run Adoption Kriesel, W., and C. Landry. 2004. “Participation in the Na- of New Health Products: Evidence from a Field Experi- tional Flood Insurance Program: An Empirical Analysis for ment.” Econometrica 1: 197–228. Coastal Properties.” Journal of Risk and Insurance 71 (3): 405–20. El-Katiri, F., and B. Fattouh. 2015. “A Brief Political Economy of Energy Subsidies in the Middle East and North Africa.” Lagomarsino, G., A. Garabrant, A. Adyas, R. Muga, and N. Oxford Institute for Energy Studies Paper. Otoo. 2012. “Moving towards Universal Health Coverage: 46 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Health Insurance Reforms in Nine Developing Countries ———. 2015. “Pacific Resilience Program: Project Appraisal in Africa and Asia.” Lancet 380: 933–43. Document.” World Bank, Washington, DC. Maher, B., Tadesse, E. 2017. Disaster Risk Financing and In- ———. 2016a. “Governance Models: An Overview and Pro- surance Program, Uganda Country Case Study posed Approach.” World Bank, Washington, DC. Morsink, K., D. J. Clarke, and S. Mapfumo. 2016. “How to ———. 2016b. Making Politics Work for Development: Harness- Measure Whether Index Insurance Provides Reliable ing Transparency and Citizen Engagement. Washington, DC: Protection.” Policy Research Working Paper 7744, World World Bank. Bank, Washington, DC. ———. 2017a. “Pacific Islands Take the Lead on Financial Skees, J. 2001. “The Bad Harvest.” Regulation. Protection from Disasters.” Press release. March 31. World Bank, Washington, DC. Tougher, S., M. Taylor, S. Torres Rueda, M. Wamukoya, F. Ar- nold, K. Hanson, the ACTwatch Group, et al. 2014. “Im- ———. 2017b. “Sovereign Climate and Disaster Risk Pooling: proving Access to Malaria Medicine through Private-Sec- World Bank Technical Contribution to the G20.” World tor Subsidies in Seven African Countries.” Health Affairs 33 Bank, Washington, DC. (9): 1576–85. World Bank Group. 2016. “Disaster Risk Finance as a Tool for De- Wolfensohn, J. D. 1997. “The Challenge of Inclusion.” Boards velopment: A Summary of Findings from the Disaster Risk Fi- of Governors of the World Bank Group Joint Annual Dis- nance Impact Analytics Project.” World Bank, Washington, DC. cussion. Hong Kong, China, September 23. https://openknowledge.worldbank.org/handle/10986/24374. World Bank. 2014. Financial Protection Against Natural Disas- World Bank Treasury. 2017. “IDA18 Scale-Up Facility Financ- ters: An Operational Framework for Disaster Risk Financing ing.” June 5. http://treasury.worldbank.org/bdm/htm/doc- and Insurance. Washington, DC: World Bank. uments/IDA18SUFFinancing_Handout.pdf. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 49 Annex 1: Takeaways from a Literature Review on the Role of Premium Subsidies in Achieving Policy Objectives Further general considerations Key reasons for failures of public A CIW’s design should ensure that targeting, screening, subsidy programs identified in distribution, and monitoring of subsidies can be imple- literature review mented effectively. If a CIW will not cover the administra- tive costs associated with providing subsidies, these func- Public subsidy programs often fail to achieve policy ob- tions must be provided by other components of the trust jectives due to one or more of the following key reasons: fund or by other trust funds. For example, administrative hurdles to access a CIW, absent a mechanism to support pro- ɑɑ Public subsidy programs can cause crowd-out. Inter- spective applicants through the application process, could governmental subsidies often aim to increase a govern- result in limited take-up of the subsidies. ment’s spending in a certain area. But achieving this out- come is difficult because budgets are fungible (with time), The screening effects of a CIW’s application system and income effects for government goods and services are should be considered during the design phase. The eligi- typically small (Hines and Thaler 1995; Knight 2002). In bility requirements and application process for concession- the United States, for example, the federal government al sovereign insurance will impact what types of countries subsidizes school districts that serve low-income chil- successfully access subsidies. This screening effect may be dren to boost their educational expenditures. However, desirable if it selects for the “right” dimensions, but these di- it was found that while an increase in a federal subsidy mensions should be carefully considered in light of policy ob- for education initially increases state and local education jectives. Complicated application systems can have outsize expenditure, poor school districts’ educational spending impacts on the probability of taking up a subsidy; see for ex- has reverted three years later to what it would have been ample Bhargava and Manoli (2015). In developing countries, without the federal subsidy (Gordon 2004). Crowd-out it is often the case that a couple of key decision makers need of spending has been documented in various programs in to champion the application process, and providing simple, which national governments subsidize subnational gov- clear information to these decision makers will increase the ernments (Knight 2002; Baicker 2005). likelihood that they advocate taking up the insurance. ɑɑ Subsidy programs can alter incentives in ways that undermine the achievement of policy objectives. For insurance premium subsidies, adverse selection and 50 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE moral hazard are common problems. Subsidized insur- ɑɑ Lack of fiscal sustainability can jeopardize subsidy ance programs often result in some degree of adverse programs’ ability to achieve policy objectives. Several selection and moral hazard.26 The extent to which these factors commonly contribute to undermining a subsidy are problematic, though, varies greatly with the insurance program’s fiscal sustainability, including leakage to non- subsidy program’s design. For example, adverse selection target groups, which often arises because program admin- has been especially problematic in agricultural insurance istrators lack sufficient information or necessary mecha- programs that provide higher subsidies for higher risk nisms to distinguish between target and nontarget groups levels.27 (IMF 2008; El-Katiri and Fattouh 2015). Relatedly, effec- tive targeting, monitoring, and evaluation require sub- ɑɑ Private sector engagement in public subsidy programs stantial administrative capacity. Administrative costs can is often critical to their success, but if it is not care- be significant and need to be considered when assessing a fully conceived and overseen, private providers may program’s fiscal sustainability (Lagomarsino et al. 2012). capture some of the benefits intended for recipients, and private sector competition may be reduced. En- ɑɑ Political influences on the design and implementation gaging the private sector in providing or distributing a of subsidy programs can result in poor performance. subsidized good or service can increase efficiency and re- Subsidies can be extremely political, and political influ- duce crowd-out of private supply, among other benefits. ence often distorts the design and targeting of subsidies, Common risks with private sector engagement, however, leading to perverse effects and making it difficult to re- include capture of subsidies by private providers and re- form poorly performing programs (Skees 2001; Arze del duced competition among providers (Tougher et al. 2014). Granado, Coady, and Gillingham 2012; El-Katiri and Fat- These risks are greater when subsidy programs lack access touh 2015). For example, many governments in the Middle to information about providers’ costs. In the U.S. crop in- East defend fuel subsidies as promoting social safety and surance program, for example, all insurers are reimbursed energy access, even though they mostly benefit energy-in- for selling and servicing policies at 24.5 percent of unsub- tensive industries and medium- and upper-income house- sidized premiums,28 which does not reflect variation in ad- holds (El-Katiri and Fattouh 2015). Even when subsidy ministrative and operating costs across different regions. programs are initially technically and financially sound, This one-size-fits-all approach leads to cost inflation and politically motivated changes often erode their effective- reduced competition (Skees 2001). ness over time. 26 Universal mandates are sometimes seen as a way to prevent adverse selection, although in practice, they are very difficult to put in place and to sustain. Furthermore, even when governments mandate insurance purchase, mandates are not always effectively enforced (Kriesel and Landry 2004). 27 India’s National Agricultural Insurance Scheme and the U.S. Crop Insurance Program are examples of such programs. Note that the potential for adverse selection and moral hazard in insurance subsidy programs is well-covered in a recent report by EOD (2017). 28 The government also provides servicing insurers with a risk-sharing arrangement that limits the loss for companies by state, which reduces their costs of capital (Skees 2001). It is worth mentioning that government coverage of private insurers’ administrative and operating expenses and risk sharing of catastrophic risk is not bad per se, but can be difficult to implement in ways that do not provide perverse incentives and that are scalable. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 53 Annex 2: Case Study of Uganda’s Scalable Safety Net Background: Uganda’s rural population is predominantly smallholder farmers and pastoralists who are subject to several production constraints and have limited capacity to cope with recurrent shocks. Vulnerable households in Uganda face considerable climatic risks, primarily related to drought. World Bank engagement: The $130 million Northern Uganda Social Action Fund (NUSAF) III is a World Bank lending operation seeking to build the resilience of poor households in Uganda through income support. It has a $12 million disaster risk finance component that provides additional post-disaster support to vulnerable households through an automatic expansion of the NUSAF III labor-intensive public works (LIPW) activities. The component seeks to develop and test a system for rapidly scaling up LIPW in response to shocks. The DRF component was initially piloted in Karamoja, where households are acutely vulnerable to drought. The World Bank Group team worked closely with the government of Uganda to (1) streamline data collection and analysis to help officials better understand drought conditions in Karamoja and develop an appropriate index to monitor drought; (2) establish clear triggering rules for disbursement of funds from the DRF mechanism; and (3) establish a $10 million contingent line of credit (using project resources) that can be drawn down to finance the expansion of LIPW. Once the conditions for a scale-up of the LIPW are met, the government of Uganda sends a letter of request to the World Bank to withdraw funds from this contingent line of credit. The amount of resources requested is in accordance with the DRF component triggering rules, which are detailed in a DRF handbook approved by the World Bank on an annual basis. The funds are then disbursed through scaling up of LIPW activities, another component of the project, and the government must monitor the disbursements and report back to the World Bank through the standard monitoring and reporting procedures applicable for investment projects. The rules for when to trigger the DRF component are a combination of “hard” triggers, which include an index derived from satellite data, and “soft” triggers, the results of the Integrated Food Security Phase Classification (IPC) Food Security Classification report for the Karamoja region, done in August/September each year. If the satellite index falls below a set threshold, or the IPC report says there is a food security crisis in Karamoja, funds are drawn down from this line of credit and delivered through NUSAF. One key advantage of this approach from a monitoring point of view is that the M&E system established for the broader NUSAF project is used to track these resources from the government to the household. Impact: The 2016 El Niño caused widespread drought in the Karamoja region. The index developed under the project captured the drought and triggered a scale-up of LIPW. As a result, $4.1 million was disbursed to finance disaster assistance to approximately 30,000 households, or 150,000 people, in Karamoja. These numbers were in addition to the core beneficiaries of approximately 5,000 households, or 25,000 people, who were already receiving assistance. Over the life of the operation, the DRF component of NUSAF III is estimated to finance the cost of scaling up LIPW to a total of 80,000 additional households (400,000 people). Source: Maher and Tadesse (2017) TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 55 Annex 3: Assumptions for Comparison of Financing Sources for Disaster Response for IDA countries Category Parameter Value Comment General Interest rate on sovereign debt 12% http://www.finance.go.ug/download/ Publications/DSB-DEC-2016-FINAL.pdf https://www.bou.or.ug/bou/bou-downloads/ research/BouWorkingPapers/2013/All/Interest- rate-pass-through-in-Uganda.pdf Discount factor 12% http://data.imf.org/regular.aspx?key=60998111 Attachment and exhaustion points for insurance 0 and 6,000 This depends on the set of data we have Contingent IDA Interest rate 1.45% loan Arrangement fee ratio 0% Treatment of contingent loans 1 Maturity 42 Grace 8 Insurance Multiple 1.4 Ceding 1 Insurance with Yes/no buttons No loan Principal percentage of insurance cost if yes 100% Interest 1.45% Fixed fee 0% Treatment of contingent loans 1 Maturity 42 Grace 8 Donors’ Yes/no button No contribution Percentage if yes 80% 56 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE The method behind the results shown in figure 1 and the corresponding layer was computed from 10,000 years of figure 2 relied on the assumptions above to compute simulated losses. Instruments’ costs were then calculated us- the costs of contingent credit and insurance premiums ing formulae adapted from the above-mentioned paper. The based on the paper ‘Evaluating Sovereign Disaster Risk major change from the cited document is the amortization Financing Strategies: A Framework’ (Clarke et alia 2016). of drawn loans’ opportunity cost using the discount factor, For insurance, different scenarios were considered, namely the maturity, and the grace periods. This change influenced the possibility of paying the premium using IDA credit, using the costs of contingent credit and insurance when financed, donations to subsidize a portion of the premium, and com- partially or fully, by a loan. Finally, the value of the cost was bining loans and subsidies. expressed in terms of a percentage of the step. Regarding figure 1, costs of instrument are marginal, and There are two important points that the reader should layers defined by attachment and exhaustion points were bear in mind. First, insurance premiums were proxied as considered. The difference between exhaustion and attach- a multiple of the average annual loss. Second, for the IDA ment points for a single layer should ideally be unitary, but credit, any drawn amount would decrease the country’s IDA for implementation purposes, 10 was the chosen value for envelope by a proportional amount. The multiplicative coef- the step. Thus, attachment point varied from 0 to 6,000 by ficient is called “treatment of concessionary loans ratios” and steps of 10. For each attachment point, the average loss for is equal to 1 for World Bank IDA loans. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 59 Annex 4: World Bank Investment Project Financing (IPF): Preparation Phase This annex provides an overview of the preparation stage of Projects in Situations of Urgent Need of Assistance or the most common type of World Bank Lending Instrument— Capacity Constraints (from Policy on IPF, paragraph 12, Investment Project Financing. The processing of IPF oper- effective August 18, 2017) ations is governed by the Bank Policy on IPF and the Bank Directive on IPF. In cases where the Borrower/beneficiary or, as appropriate, the member country is deemed by the Bank to: (i) be in urgent need World Bank lending aims to promote poverty reduction and of assistance because of a natural or man-made disaster or con- sustainable development of member countries, which are flict; or (ii) experience capacity constraints because of fragility or defined in the International Bank for Reconstruction and specific vulnerabilities (including for small states); the Bank may Development Articles of Agreement (2012). IPF supports provide support through Investment Project Financing under nor- projects with defined development objectives, activities, mal Investment Project Financing policy requirements with the and results. The World Bank disburses IPF loans against following exceptions: specific eligible expenditures described in the Loan Legal Agreement signed by both the Bank and the borrower. a. The fiduciary and environmental and social requirements set out in OP/BP 4.01, OP/BP 4.10, OP/BP 4.11, OP/BP 4.12, the During the IPF project preparation phase, the borrower prepares IPF Directive, and the Procurement Policy/Directive, the project for which an IPF loan is sought, along with related that are applicable during the Project preparation phase may project documents; and the World Bank appraises the proposed be deferred to the Project implementation phase. The environ- project in accordance with its policies. To finance a project’s mental and social requirements exception for Category A Proj- preparation, the borrower can request a Preparation Advance ects under OP 4.01 is only applicable to cases referred to in (PA), which is an advance from the IPF loan for the proposed sub-paragraph 12(i) above of this Policy. project. The World Bank Task Team (TT) prepares PA docu- mentation upon the borrower’s request, and World Bank Man- b. Such Projects are subject to special limits on the use of (i) PAs agement decides whether to provide a PA and the PA amount. (see paragraphs 17-18 of this Policy) and, (ii) in the case of Projects supported by a Bank Loan, retroactive financing. There are five main steps in this phase: identification, con- cept, appraisal, negotiation, and approval. The flowchart be- c. When the beneficiary’s capacity to implement the needed activ- low shows the processing of a regular project. ities is insufficient, the Bank may, at the request of the benefi- ciary, agree to the following alternative legal and operational Some exceptions are made for projects that may have spe- Project implementation arrangements: (i) the Bank may en- cific policy requirements or require special considerations, ter into arrangements with relevant international agencies, as provided by the Bank Policy on IPF; see details below. For including the United Nations, and national agencies, private more on World Bank policies and procedures, please visit the entities, or other third parties; and (ii) where no viable im- World Bank Operations Manual Website. plementation alternatives exist, the Bank may execute start-up 60 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Identi ication Concept Appraisal Negotiation Approval WB TT prepares WB TT conducts WB TT prepares WB TT inalizes Project In ormation analysis based on negotiation board package Document/Integrat borrower’s dra : package ed •Technical Sa eguards Data •Financial WB managements Sheet •Risk concurs with board WB managements (PID/ISDS), •Environmental & package authorizes including social negotiation, also Environmental •Governance & in orms the board Screening corruption when the negotia- •Economic Board approves tion has been •Procurement project scheduled & when •Legal WB management it has been decides to proceed completed with the prepara- WB discloses WB management tion o the IPF Project Appraisal approves PID/ISDS World Bank Loan, sa eguards, Document (PAD) & analysis results WB Tt sends the and other key and other eatures borrower invitation in ormation per to negotiatie a er agreement with WB discloses conditions met (i the borrower appraisal stage any) WB discloses concept stage PID/ISDS, analysis, PID/ISDS and project sa eguards doc. WB & the borrower negotiate and inalize legal WB TT appraises agreements & loan the project documents, and WB consults the jointly sing the borrower to minutes o identi y project negotiation objetives, timeline, WB TT & the inancing needs, borrower inalize and key per o- project documents mance indicators Borrower prepares project, including: strategic content, project development objetives (PDOs), key per ormance indicator, monitoring and evaluation (M&E) arrangements, project design, implementations arrangements, procurement, inancial management, environmental Borrower and social sa eguard, inancing plan, risk and mitigating actions, legal aspects, etc. The borrower The borrower discloses project discloses PAD & sa eguard doc. other in o Borrower Borrower WB management Public WB board Joint e ort responsibility responsibility decision point disclosure decision activities financed under a grant from the Project Preparation include capacity-building measures to enable a timely transfer Facility (see paragraphs 17-18 of this Policy) or a trust fund, of implementation responsibilities to the Borrower or the Im- following applicable internal Bank procurement rules. plementing Entity. Proposals for Bank-executed start-up ac- tivities are limited to activities which involve the procurement d. Alternative implementation arrangements referred to under of small contracts for goods and works, and the provision of subparagraph (c) above are limited to the time necessary to technical assistance necessary to enable the Borrower or the establish or restore the Borrower’s or the Implementing En- Implementing Entity to undertake the execution of subsequent tity’s capacity and, in all cases, are adopted in Projects that Project activities. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 61 Disaster prevention and preparedness and capaci- through a contingent emergency response component that, once ty-building activities (from Policy on IPF, paragraph 13, triggered, is subject to the exceptional policy requirements set effective August 18, 2017) out in paragraph 12 above. A Project contingent emergency re- sponse component may be used to finance a catastrophe deferred Disaster prevention and preparedness and capacity-building ac- drawdown option under IDA Development Policy Financing. Dis- tivities may be supported by a stand-alone Project with a contin- bursements of funds allocated to this component are based on a gent financing feature, or may be embedded in a regular Project pre-specified Development Policy Financing trigger or triggers. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 63 Annex 5: Technical Analysis of the Insurance Package CAT risk model ɑɑ  f insurance is not the most cost-effective option, is I there an alternative rationale (e.g., tied to contin- The work of the catastrophe risk modeling expert(s) will be gency planning or other requirements that are diffi- focused on analyzing the CAT risk model that has been devel- cult to value) for using insurance compared to other oped for the insurance product. The analysis will be written alternatives? up in a catastrophe risk modeling report, which will include a brief summary of the model (how it operates, and which ɑɑ  f insurance is an appropriate option for the country, are I aspects of the hazard and loss the model enables insurance to concessional insurance premiums the most cost-effective be written for). It will address the following questions: use of donor funds in this context? ɑɑ  s the modeling methodology a reasonable and appropri- I ɑɑ  s the approach taken to convert loss data into an insur- I ate approach to modeling the impact of this risk in this ance policy reasonable? context? ɑɑ  Is the level of basis risk reasonable? ɑɑ  ow robustly has the model been validated by the appli- H cant, and how has this validation been documented? Are the ɑɑ  s the price reasonable, as compared to other potential in- I validation and documentation of the validation fit for pur- struments that could offer the same coverage and to simi- pose?  Are there sufficient relevant data to adequately val- lar insurance products offered by other providers? idate the model? How have any data gaps been overcome? ɑɑ  hat potential risks do any identified limitations create W ɑɑ  o what extent do the simulated outputs of the model T for (1) countries that are purchasing insurance cover, and match countries’ historical losses? (2) the insurance provider in ensuring that it provides val- id insurance cover? ɑɑ  ow stable is the model?  What level of basis risk is there?  H How accurate is it? ɑɑ  ow does the recipient country propose to manage iden- H tified risks? Are the approaches proposed reasonable and Financial analysis likely to be effective? The financial analysis in the report will provide a view on all ɑɑ  oes the methodology for calculating premiums fairly D questions addressed in the catastrophe risk modeling report represent the risk insured and the cost of reinsurance? as well as the following questions:  he report should include a summary of the proposed prod- T ɑɑ  s insurance a cost-effective risk financing option com- I uct, with recommendations for strengthening it. pared to plausible alternatives available to the country? TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 65 Annex 6: World Bank Trust Fund Governance Models World Bank Governance Pre-TF Post-TF TF management progress Key advantages Key disadvantages model establishment establishment and administration reporting Model A DPs and Bank DPs are not Mainstreamed As agreed in the Faster decision Inability to agree on TF involved in within World Bank. AA. making and adapt in case of objectives and guiding or making more efficient changing context. Provides other parameters decisions on TF management. standard Risk of or on list of implementation. Bank financial misalignment with activities that TF and progress DPs’ priorities. will implement; reporting. these are reflected in the Administration Agreement (AA). Model B.1 Bank and DPs Partnership Commensurate Provides periodic Ability for key Compared agree to TF Council (PC) has with governance reporting to PC stakeholders to to Model A, development an advisory role arrangements. as agreed in the provide guidance possibility of objectives on strategic AA. on TF direction slower decision and types of direction and and reform, making. Provides activities that priorities of TF; balanced with standard Risk of delays the TF will meets 1–2 times ability for TF Bank financial in activity implement; these per year, and management and progress implementation are reflected in meeting minutes to make timely reporting. with target AA. recorded. decisions. recipients. Model B.2 Bank and DPs PC has an Commensurate Prepares annual Key stakeholders Compared to agree to TF endorsing role in with governance work plans and determine Model B.1, slower development strategic priorities arrangements. budgets for priorities and decision making objectives and annual work endorsement. work program of and greater risk of and types of plans and budgets the TF, ensuring delays in activity Provides periodic activities that of TF; meets 1–2 alignment implementation. reporting to PC the TF will times per year; with DP’s own as agreed in AA. Risk of hold-up or implement; these decisions made by priorities. political influence are reflected in consensus or as Provides on activities. the AA. per arrangements. standard Bank financial and progress reporting. 66 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE World Bank Governance Pre-TF Post-TF TF management progress Key advantages Key disadvantages model establishment establishment and administration reporting Joint World Bank and DPs A governance Commensurate As agreed In politically More time- Bank–DP agree to TF body with DP, with governance in AA, often sensitive, risky, consuming and Model development World Bank, arrangements. prepares annual or innovative costly to manage objectives and often other work plans and contexts, than all other and types of stakeholder budgets based facilitates governance activities that participation on strategic building of model options. the TF will makes decisions guidance. consensus Requires implement; these for all individual and sharing of As agreed in AA, significant are reflected in activities and knowledge with provides periodic commitment of the AA. determines downstream reporting to expertise by DPs strategic direction; funding governance and stakeholders meets 1–2 activities. body. that can be times per year; difficult to sustain. decisions made by Provides consensus or as standard Creates risks per arrangements. Bank financial of delay in and progress implementation reporting. due to divergent views. Greater risk of hold-up or political influence on activities. The choice of TF governance model does not affect the customization outside of these basic functions provided by World Bank’s standard financial and progress reporting the World Bank. For both the B.2 and Joint World Bank–DP nor the provision of a set of pre-defined program man- Models, specific forms of reporting may be provided to the agement and administration (PM&A) functions. The SC, and PM&A activities will be commensurate with the com- governance arrangements provide for governance structure plexity of a CIW’s activities. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 69 Annex 7: World Bank Trust Fund Governance Models: Examples Governance Programmatic vs. Governance World Bank progress TF example TF purpose model freestandinga arrangements reporting Multi-donor Model A Freestanding Supports the operation The REF’s annual work The Bank provides its Trust Fund of the REF, an NGO plan and budget are standard financial and (MDTF) to established to close approved by its Board progress reporting. Support Roma educational achievement of Governors. They are The Bank does not Education gaps between Roma shared with donors and provide any reporting Fund (REF) and non-Roma, primarily the Bank each year. on REF’s use of funds. in Eastern European Donors and the Bank do REF is responsible to countries. not approve the work provide reporting as per plan and budget but can its agreement with the request clarification. World Bank. Umbrella Model B.1 Programmatic Supports the World The PC for the UGFE Bank provides annual Facility for Bank Group’s strategy to includes all of its results to report to Gender strengthen awareness, donors. It meets twice donors. Equality (UFGE) knowledge, and capacity annually. It provides Bank provides its for gender-informed strategic guidance on the standard financial and policy making. World implementation of the progress reporting. Bank Group’s strategy UGFE. and results framework The World Bank Group’s articulated and endorsed Gender Leadership within the World Bank Council, comprising Group. manager-level representatives from all of the Bank’s regions and Global Practices, is the UFGE’s main decision- making body and makes individual funding decisions. a. A “programmatic” TF is a TF that finances multiple grants, under a two-stage mechanism. In the first stage, the Bank and DPs agree to a thematic framework with criteria for supporting a program of activities. The DPs commit their funds to the TF on this basis. In the second stage, grants are approved for specific activities based on the agreed governance arrangements. A “freestanding” TF is a TF that supports a pre-defined activity or set of activities in a specific country or region, or globally. 70 TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE Governance Programmatic vs. Governance World Bank progress TF example TF purpose model freestandinga arrangements reporting Global Index Model B.2 Programmatic GIIF TFs support advisory GIIF has 3 tiers of The EC provides the Insurance services related to index- governance: DC with annual reports Facility (GIIF) based insurance and on the work programs The GIIF Donors grants to governments (comprising individual Committee (DC) includes and regulatory agencies country operations, all donors and two to design and implement portfolio performance, representatives each policy, legal, and and exposures). from IFC and IBRD. It regulatory frameworks is chaired by the IFC The Bank provides its for index-based and director. The DC (1) standard financial and catastrophe insurance advises on the overall progress reporting. markets. direction of the GIIF Program and reviews its progress; (2) approves annual work programs; and (3) approves significant changes to GIIF activities. The GIIF Executive Committee (EC) is below the DC. It includes members from IFC and IBRD, and it approves biannual work programs/ budgets and activity reports as well as large and complex projects, including premium support. The Technical Committee (TC) sets priorities and provides technical guidance, including approving country action plans. It prepares large and complex projects for EC review/approval. MDTF for Joint World Programmatic Supports the GPSA The GPSA Steering The GPSA Secretariat the Global Bank–DP through (1) providing Committee includes a prepares annual call Partnership Model grants to CSOs; (2) World Bank member and for proposals for the for Social supporting knowledge equal representation SC’s approval, as well Accountability generation and exchange from donors, as annual reports. (GPSA) activities through participating developing The Secretariat also a platform; and (3) country governments, provides other forms of supporting a Secretariat and civil society. It reporting as required by to implement the GPSA. provides strategic the SC. direction for GPSA The Bank provides its and approves all CSO standard financial and applications for funding. progress reporting. GPSA relies on a multi-stage application process, reporting, and transparency requirements to maintain legitimacy. a. A “programmatic” TF is a TF that finances multiple grants, under a two-stage mechanism. In the first stage, the Bank and DPs agree to a thematic framework with criteria for supporting a program of activities. The DPs commit their funds to the TF on this basis. In the second stage, grants are approved for specific activities based on the agreed governance arrangements. A “freestanding” TF is a TF that supports a pre-defined activity or set of activities in a specific country or region, or globally. TECHNICAL DISCUSSION PAPER ON CONCESSIONAL INSURANCE 71 Governance Programmatic vs. Governance World Bank progress TF example TF purpose model freestandinga arrangements reporting Partnership Joint World Programmatic Provides grant financing The PMR’s Partnership The PMR’s Secretariat for Market Bank–DP to countries to prepare Assembly includes proposes budgets Readiness Model markets for climate all donors who have and issues progress (PMR) change mitigation contributed financially to reports on the individual policies; provides the PMR and all countries activities of the PMR assistance to pilot or that have submitted an and on the PMR as a implement new market- Expression of Interest whole. based instruments that has been accepted for climate change by the Partnership mitigation; supports Assembly. The Assembly knowledge generation provides strategic and sharing activities. guidance, confirms participation of countries, allocates resources (including approving budgets), and monitors operations, among other responsibilities. a. A “programmatic” TF is a TF that finances multiple grants, under a two-stage mechanism. In the first stage, the Bank and DPs agree to a thematic framework with criteria for supporting a program of activities. The DPs commit their funds to the TF on this basis. In the second stage, grants are approved for specific activities based on the agreed governance arrangements. A “freestanding” TF is a TF that supports a pre-defined activity or set of activities in a specific country or region, or globally. World Bank contact details: The World Bank 1818 H Street NW Washington, DC 20433 www.worldbank.org