Sovereign risk pools bring together countries, often neighbours in a region, that have a shared exposure to specific natural hazards. By combining resources, the risk can be spread more widely and financial protection becomes more achievable. Risk pools are already in place in the Pacific Islands (PCRAFI), the Caribbean (CCRIF) and Africa (ARC). The latest of these sovereign risk pools to be formed is the South-East Asia Disaster Risk Insurance Facility, known as SEADRIF.
SEADRIF
SEADRIF is a regional initiative of the ASEAN+3 countries. It aims to build efficient financial solutions for a community of approximately 650 million people in an area that is highly prone to natural hazards, particularly flooding, tropical cyclones and seismic hazards.
Since it was first established, the SEADRIF initiative has focused on flood. Over the last three years it has developed a system for assessing the level of flood risk and monitoring live flood events for two countries in the region - Lao PDR and Myanmar. In parallel to these technical activities, the newly formed SEADRIF Insurance Company has worked with the re/insurance market to develop options for structuring a catastrophe risk insurance product. These two elements combine in the implementation of a flood monitoring system that interfaces with the insurance product. The successful establishment of this overarching solution is the result of a collaboration between the World Bank, SEADRIF Insurance Company, CIMA Foundation, Deltares, reinsurers, regional governments and JBA Risk Management, whose flood risk expertise and experience within the re/insurance industry helped to bring together the different elements of the solution.
The initiative went live for Lao PDR in February 2021 with disaster risk finance in place and daily flood monitoring. So, how does the scheme work?
Payments based on flooding impacts
SEADRIF provides parametric flood insurance cover to member countries. Parametric insurance is distinct from traditional indemnity insurance in that payments are made on the basis of a pre-defined trigger level of a relevant parameter being met. This removes the need for post-event loss assessment and speeds up payment to beneficiaries, enabling faster recovery from the event and creating improved resilience within the community affected.
In this SEADRIF scheme, the trigger that generates payment is the number of people affected by the flooding. There are two trigger levels in place, one each for moderate and severe events, with different payment levels.
In the development phase of the system, hydrological modelling was used to create an extensive set of flood scenarios. The flood extents from this event set were combined with population data to generate estimates of the number of people affected for each scenario. The catalogue of scenarios was used to determine the probability distribution of impacts so that the insurance product could be priced appropriately.
When the scheme is in operation, flood extents are modelled on a daily basis using a weighted combination of hydrological modelling, flood extent estimates derived from satellite data and, where available, real-time local river and coastal gauge measurements. The daily model output is compared to the previously prepared catalogue of scenarios to find the closest match and, if the trigger point is reached, the process for payment is initiated.
The combination of a pre-built, validated event scenario catalogue and its comparison to real-time multiple source data and daily modelling ensures that the scheme is practical and reliable, and that “basis risk” is minimised. Basis risk is the potential mismatch between the impacts of an event on the ground (e.g. losses incurred or number of people affected) and the value of the parameter (measured or modelled) that is actually used to trigger a payment. The components of the system and the workflow are shown below.
Looking ahead
The successful establishment of the SEADRIF solution increases preparedness, resilience and cooperation in response to climate and disaster risks in South-East Asia. The operational contract with Lao PDR is now at the end of its third year, with JBA Risk Management in the role of Calculation Agent, responsible for officially notifying SEADRIF Insurance Company of events that trigger payment under the scheme. CIMA Foundation and Deltares continue to support the live feed of hydrological and satellite inputs, and monitoring of the system. The first three years of SEADRIF have provided valuable lessons and insight for all involved and whilst SEADRIF has focussed initially on flooding in Laos and Myanmar there are plans to expand the project to incorporate additional perils and more countries. We look forward to benefitting from our experience thus far as we embrace the challenges ahead.
Further information
ASEAN -Brunei Darussalam, Myanmar/Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand, Vietnam.
ASEAN+3 ASEAN + China, Japan, Korea
eDRIFT - http://edrift.cimafoundation.org/DRF/
CIMA https://www.cimafoundation.org/
Deltares - https://www.deltares.nl/en/