Developing disaster risk finance in Morocco: Leveraging private markets for sovereign risk transfer

Source(s)
World Bank, the
Simo_Ejja/Shutterstock
Simo_Ejja/Shutterstock

By Antoine Bavandi and Abdeljalil El Hafre

Climate shocks and natural disasters have long-lasting effects — human, social, economic and environmental. Managing them is a key challenge, from a financial standpoint as much as any other, for governments across the globe. Funding recovery or reconstruction in the aftermath of a disaster relies on solid, private, financial markets.  These capital and reinsurance markets offer financing options to help governments diversify the cost of risk away from their own economies.

In having a disaster risk financing strategy, governments can strengthen their resilience to risk, mainly by combining financial instruments to address a variety of different needs. Risk transfer solutions aim to shift the risk of natural hazard to third-parties, such as insurance companies, reinsurance companies, banks and other investors willing to take them on, in exchange for a risk premium. And these markets have a particular interest in catastrophe risks in developing countries as they offer a highly diversified source of income from their traditional, more concentrated exposures (for example, life or motor vehicle insurance in developed economies), where capital costs are much higher.

Combining public reserves and risk transfer instruments can strengthen a government’s preparedness to shocks. Securing financing from two different sources (ahead of disasters) and linking them to pre-defined responses allows funds to flow quickly to beneficiaries in the most cost-effective way when disasters strike. Reserves are tapped for frequent, low severity events, and insurance is only triggered for the more extreme, capital-intensive ones. In turn, governments can maximize their response to a disaster and reduce its ultimate, financial impact on the most vulnerable populations, businesses and economies.

Over the past decade, the World Bank’s Crisis & Disaster Risk Finance (CDRF) team has been supporting the Government of Morocco with technical assistance spanning risk analytics, the development of financial strategy, instrument design and policy advice. The Bank has leveraged its convening power, bringing together critical stakeholders from the public sector and insurance markets to forge a strong public-private partnership. And it has mobilized the financial support needed to develop Morocco’s capacity to address a broader agenda, including disaster risk reduction, scaled-up social protection, fiscal risk management, and the development of financial markets.

The road travelled

The Government of Morocco’s journey started back in 2008 with technical assistance from the CDRF team, supported by the Swiss State Secretariat for Economic Affairs, to assess Morocco’s exposure to natural catastrophe risks, define an ambitious risk finance strategy, and make use of complex, market-based instruments where they are most relevant.

This assistance to the Moroccan Treasury (Direction du Trésor et des Finances Extérieures) also supported the design of the country’s disaster-risk legal and governance framework by establishing the Solidarity Fund for Catastrophic Events (FSEC – Fonds de solidarité contre les événements catastrophiques) — a sustainable, public funding mechanism that aims to provide coverage to the uninsured and most vulnerable of households. It also helped expand insurance policies — backed by domestic insurers and reinsurers — to include catastrophe risk to cover damage and bodily injury for insured car owners, homeowners, businesses and industries.

Two, separate reinsurance transactions for domestic insurance markets and the FSEC have been finalized since January 2020 to provide quick liquidity (cashflow) from international markets in the case of a severe catastrophe. These are part of the national disaster risk finance strategy, providing a financial response to 99% of all potential, natural disasters that might afflict Morocco.

This vision and level of financial sophistication have largely been made possible by the Moroccan Treasury, which put a significant amount of effort into technical and analytical work to improve sound decision-making at government level and diversify risk transfer options in synergy with private insurance players. The maturity of the Moroccan insurance market and its regulator (ACAPS - Autorité de Contrôle des Assurances et de la Prévoyance Sociale) have been key, as they provided the necessary level of oversight in the government’s technical and financial capacity, as well as a willingness to define catastrophe risk insurance in Morocco as a new, long-term product in a sustainable way, backed by adequate prudential regulations and capital.

Morocco now has an edge in terms of looking at how to address other crisis risks, including those caused by epidemics and climate change . Its instruments will improve over time and may be used for events beyond their original scope to accommodate other emerging risks anticipated by the constant monitoring of threats, priorities and financing gaps.

The Bank’s CDRF team will continue to assist Morocco to improve its disaster risk finance strategy and vision with more advanced risk modelling, near real-time risk information from satellite imagery data, efficient claims’ management platforms, and broader financial protection. This is expected to result in an even more efficient financial protection program in Morocco, one designed to benefit the most vulnerable in the population and create a more resilient economy in years to come.

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