Episode 6: Building sovereign disaster resilience

0:00So welcome to the Risk Reconsidered Podcast. This is Swiss Rees Podcast where we focus on a diverse array of risks and efforts by the insurance and re-insurance industries to mitigate and manage these risks. Today I have the opportunity to speak with Gary Lemke. He's the head of technical sales at public sector solutions. He's also a geologist and an environmental physicist. Welcome. Thank you. I also have the opportunity to speak with Marina Ovalholtzer. Marina is an economist by training. Also a public policy expert who early in her career worked with United Nations. Thanks for joining us. Thank you very much. So a big reason why you came today was to talk about solutions that we have for governments to mitigate their natural catastrophe risks in particular governments that have development loans or sovereign debt. But I think because public sector solutions is such a fascinating business within Swiss Re it'd be a shame not to talk a little bit about what you do at public sector

1:05solutions and what each of you do in your jobs. Marina I don't know if you would like to go first. Oh thank you John. In my role I focus on working very closely with international organizations. I lead Swiss Re's engagements with the insurance development forum and I also spend quite a bit of time in South Africa. Thanks and Gary talk a little bit about what you do on a daily basis. Yeah I mean on a daily basis maybe we have to go back a bit in history when we started the operation. It was mostly I mean colleagues like Marina are really looking after the client relationship acting as a client executive. But then we quickly realized that I've been working with the public sector is a completely different type of client right and you have to explain I mean technical content in a different language to a different audience which needs a specialized team that is able to not only understand the technical concepts be able to develop solutions but then also find the right I mean flight level of your will to talk to these public sector clients and this is when I mean

2:07shortly after the inauguration of the public sector solutions team or back in the days global partnerships we decided we have to start also more like a technical operation which is now with me I mean globally leading it in that team for public sector solutions. And when you talk about a technical operation I guess what I understand that to be would be helping to design the products that fit the risk needs or the risk mitigation needs of clients. Yeah this is why I truly love this role so much right because I mean we allow to what I always say to to operate a little bit to the edges of the normal insurance the insurance environment I mean we are very often busy in countries like Syria, Sub-Saharan Africa we are doing business in India which is a little bit outside the spectrum of where often the normal technical expertise of our industry sits and being able to be there number one to come up with novel solutions innovative products getting these products ready to be brought in front of the client and ultimately transact them together with our underwriting colleagues I mean throughout Swiss Regulatory Group beat on the direct on the reins on side is it's extremely

3:12a fascinating place to be in. I mean you mentioned that the kind of the evolution of public sector solutions one thing I think that's surprising or surprised me when I came to Swiss Re is that it's actually quite a young business within Swiss Re but it's well established over 1800 transactions since it's founding in 2011 if you look back 15 years either if you look back 15 years what was the motivation behind starting something like public sector solutions because it was quite groundbreaking I think Swiss Re was the first organization or first reinsure to establish a business unit that was dedicated to doing business with countries with sovereigns so what was the motivation behind putting together public sector solutions and does that continue today. Yeah I mean there's a subset I think public sector solutions or back in the days was called global partnerships really has a birthday right it's January 1st I mean 2011 when back in the days I mean Michelle Lea basically became the first chairman of the operation and the motivation

4:15really was was many fold I mean importantly to realize that the public sector eventually is the insure of the last resort right I mean if everything else fails I mean it's it's fundamentally the public sector has stepped in and we we clearly saw they are they are underserved right I mean there's not enough support there's not enough expertise outreach to these public sector entities be it a development organizations be the public sector itself by means of governments or be it also development banks right and then we really started to establish the idea we want to do something with with these entities supporting the developing world with these solutions and helping to really engage with these parties more often and because you asked us at the beginning our work today is not limited just to the developing world it's really it's it's global because also if you look into the well developed I mean countries and it's also our com market sites like like the US like Canada like Mexico like the UK like Germany I mean they all face fundamentally a similar problem that they

5:21really need to engage in public private partnerships to to to get moving with with their resiliency programs when I was looking at the media reports this morning I saw interestingly enough that Swiss Re has been working with Belize on a hurricane swap so that's one of the examples of the kind of projects that public sector solutions might undertake with its partners but can you give a kind of an example of the range of types of projects that you work on with your partners oh it's quite a bit I think I can start and Gary maybe you can add so when it comes to the kind of projects that we cover I could say that it's really quite a broad range so in in some cases it's really an approach where we're actually experimenting and innovating so you could have a very small project but for something that poses a difficult problem for example urban flood is something that we've been hearing quite a lot about but it's not something that you could just deploy out there and do it cookie

6:21cutter to begin with so there has been an investment in the sense of we've been looking at different places so for example Swiss Re has been involved in developing some solutions in Africa in Lagos and in Akra and Ghana and this involves typically quite a bit of investment and understanding how to structure such a product and then from the beginning to actually seeing that go to market and taking the risk on they tend to be very small but they have a large impact in the sense of once we have done this in a few places it establishes a bit of a blueprint of how we could go and replicate these in other parts of the world extreme heat would be another case and I think Gary is very well able to talk about this kind of product I guess I guess what you you mentioned something I think that is is quite interesting the idea of developing a blueprint and then being able to duplicate it in other markets around the world I suppose from the perspective of efficiency

7:21that that's a pretty important element of the work that you do yes that would be ideal if we are able to develop these blueprints and then oversee that they are replicated around the world with this idea of scale scaling and replicating has become increasingly important to us and why should this be done in a in the team like the public sector solutions you may ask it's precisely because of this kind of space where you have to stay with the product for quite a while compared to the rest of the business perhaps but it's also quite a bit of work together with other stakeholders who are not necessarily as comfortable with the notion of insurance so there's quite a bit of work to sensitize everyone to how this works how would we go about implementing so on top of actually structuring the solutions and then at the other spectrum there's really large projects you know so one of my where my heart is in a way I'm not going to say favorites but I've been quite

8:28closely and deeply involved with the project called drive which is a project primarily led by the World Bank which focuses on pastoralists and the Horn of Africa and generally this is finding ways to support these communities in times of severe drought so how do these people go about keeping the animals alive how do they stay away from the so-called distressed sales so essentially selling the animals when the drought is about to come and then get less money right so how do they continue with their livelihood and what's fascinating to me is that this is the work of many different types of organizations together so a Swissry local insurers local reinsurers the World Bank governments banks they'll cooperatives themselves in all of these communities and it has to to find a solution that's workable affordable and that can be provided to them over the long

9:33term and that's a much larger program type of program compared to the smaller pilots I mentioned and I if I may want to quickly come back to to your question because it's not only how we as a team have developed over the past 15 years it's quite fascinating to see how the overall market has developed right I mean 15 years back insurance was really something like a kind of weird add-on right it was was I mean the very experimental innovative part is you're looking to insurance was primarily considered as an extra cost today I mean insurance is a fully embedded part of the of the financing strategy of of many I mean sovereign states it's it's truly an integral part of I mean state budget and budgetary spending and in budget management right it goes from from a layered approach where you have your your tax income you have your cash layers your self-funding instruments then you have your lending your bond business and then I mean on top you might have some insurance instruments for risk transfer though many of these states

10:37really have started look at their overall budgeting and financing like like a corporate will do in their risk management processes and really see how they optimize these processes which is completely new and which really has created an entirely new market which which in in this form or shape simply did not exist 15 years back yeah in a way it's they've gone to from away from the question of whether disaster will hit it's more of a question of when and instead of having to scramble one that happens is how do we do a better job preparing for that and and have some mechanisms in place and we're very happy to see that and maybe yet another point about the last 15 years I always found very interesting so I joined the team about six years ago and some of my colleagues would say how that project it took six years seven years to to you know from from when we started discussing to when it's actually happened and that's an odd statement to hear when

11:39maybe you joined the team or you don't have that experience in the public space but then you learn that this is actually a very important thing to keep in mind that in a way the expertise that has been gathered at Swissry in the public sector has almost been used as a mirror to give back to some of these governments and the markets itself because sometimes we hear someone who is in this original exploratory phase and they're saying I want to move into the space of natural catastrophe I want to get this cover that cover I'm thinking about this and maybe they're starting at a point where we've already been and we can already build up on some of that expertise or interestingly in some other countries because of the political cycle and because there has been some kind of turnover a team like the Swiss Republic sector team can actually go back and provide some continuity and say well these are some of the discussions we've had these are some of the things that we already know

12:44about risk in this particular country or jurisdiction and then we can help to continue that conversation but not from the beginning but actually to progress it quite a bit. I suppose this is what you mean by speaking a slightly different language than Swissry might speak to perhaps traditional insurance clients that talking to sovereigns, talking to countries about their risk needs demands a little bit different approach. Yep totally I mean just just I mean typically in our industry you have a professional reinsurance buyer right it's an expert it's a single person you talk to with with the decision taking authority right try to superimpose this concept to the government of Mexico I mean you have the treasurer you have to you have basically the minister I mean you have all of all of these entities who have to basically jointly come come come to a decision and agreement and don't forget that the public sector client I mean what they're spending they're spending taxpayer money in the end though it's a completely different decision cycle and a completely different way to to argue

13:46but but also again to Brodner I think it's it's important because we talk a lot about insurance and about the work we do and it's it's not focused on insurance right it's really this preduring and after right and in preparatory work I mean adaptation measures getting increasingly important also for the work we do right that we have to really dive into understand the problem I mean together with Swissry with teams like our risk solutions teams that way I had before something might even happen or I mean we we talk to these people with with our risk insights and and alert them to to potential I mean troubling spots right I mean where we're to invest to really improve I mean overall resilience and then insurance is only one element in this in these overall value chain right I mean there is it then we we argue very often in this way that I mean there are many many aspects where insurance is of very little help right because I mean if something happens every second year is being destroyed every second year insurance is no help right you really have to find other mitigants to help that and and that's also something that that has changed which is

14:47which is really very very important in the work with you right if you just step in there and say insurance will help you I mean this is this is the wrong approach it's not what we stand behind yes in a space where essentially government is the insurer last resort we're not coming in and say hey Swiss tree will take it all we're saying let's think about your toolkit how is it that you're dealing with some of these risks and how can we enable you to have essentially a broader toolkit and also pass some of that more residual risk to the private sector so companies like Swiss Realtor. Okay so obviously many of the the the clients the country clients the public sector solutions work with the half-sauver and debt development loans other types of public sector finance instruments that they're working with many of the countries most of them in fact also face peak risks earthquake hurricanes this combination of having debt obligations while also facing natural catastrophe risk it can be quite a challenge can it yeah absolutely I think the the

15:50the prime example really is and I mean where this idea was born was in 2004 with with Herrick in Ivan I mean who struck basically Grenada right and this was just a devastating event I mean creating basically a lost equivalent of 200 percent GDP right and this on top of a of a situation where the state was already highly indebted fundamentally leading to to default right refinancing couple of years later I mean 2013 it basically happened again and this is when then investors said look it doesn't make any sense right I mean if you just have such a distressed situation just to inject more money more money more money it doesn't doesn't really help right we if such thing happens we have to provide them some form of relief and in this particular case then when they introduced in their contracts that what was called or what's now named the the Herrick in clause or more modern what we call to the post clause basically which fundamentally means if something happens you basically give them a payment holiday and after the year you have a bit of

16:51that that breathing space basically to get back on on your feet and then then you start basically repraising your alone but that actually made us think right because we felt and then also with many others in the industry I mean why why simply just just having a payment holiday right it's kind like kicking the can down the road fundamentally because I mean after that year you're back and you have to ultimately repay that should be a very attractive spice and a very meaningful space for for an insurance solution then instead of just postponing the repayment having insurance come in and basically take care of that though providing a true risk relief and and this is where these idea around these shock resilient loans or as we call them these insurance linked loans is born and where now many many in the industry increasingly look at and and try to really get this get this off the ground I mean the fundamentally it means embedding risk transfer within the loan so that if something happens a triggering event that they don't just have to defer their dead payments

17:55but they ultimately get permanent insurance relief for a period what what does that allow a country to do that's been hit by a natural catastrophe let's say like Grenada or Hurricane yeah this is another interesting thing because very often when we discuss this and say I mean yes I mean what are you doing here you you're helping us for a one year I mean payment relief and yes insurance covers this is this is meaningful just give you an example I mean Mexico currently has roughly around 600 million US dollars in insurance protection by means of the what's called these cat bonds or insurance linked linked securities out there this is 1% of the annual debt repayment obligations I mean they pay 3% of the GDP that that's around 60 billion what they pay annually though it's 1% though if you turn this around if only 1% of these loans were actually protected by these insurance linked loans the amount is equivalent to their entire current

18:57in force insurance linked security book and that's that's one thing though it's it's very very meaningful if you just see something happens and they get they get all the payments from the insurance linked securities they would also have this payment relief they can reappropriate these funds do something else with it which is more urgent than having to repay their loans it's massive let me add two examples that I think about quite a bit so one came to us anecdotally actually because you know I think that it would be forgivable in the way if someone you know thinks well there's the paused clauses that got the industry to think right let's add this component of risk transfer so the insurance part but you could think well this is just something for developing countries or really impoverished countries but this notion that came to us anecdotally was actually talking to municipality in a developed country and they're saying well look we we have these events that

19:58happen and they can be quite severe and at some point we are unable to clear the trash off of the streets because of the way the budgeting goes and the way that you know like we're dealing with our funds and that's an example where if you did have this kind of mechanism some that cash that you would have to be using to service your debt can actually literally be used to clean the streets after something bad happens like a hurricane so that to me was anecdotally a very interesting example and it made me think well this could actually be done at many different levels in many different contexts and then the other figure that I was just thinking quite a bit about was I had recently read a report about Africa and there was a figure in there which was saying that by 2025 the medium kind of percentage of of funds going into servicing debt in African countries was

21:01about 14% of their government's revenue which is staggering if you think about it 13 of those countries were spending more than 20% on that and in some cases they were spending more on debt servicing than health so these are some of the kind of context really the figures you're looking at and then you're saying well if you could provide some risk transfer would that be meaningful would that make a difference well the scenario is very particular you're a country who's exposed to some kind of potential shock this shock happens and then your government revenue potentially goes down even more and on top of that you have to deal with that crisis wouldn't it be nice to have that kind of breather for a year or two in case that event happens so to me the answer is very clear yes this can be a very meaningful kind of thing if done smartly and together as part of the broader

22:04toolkit on how to deal with some of these emergencies okay so it's I mean it sounds like risk transfer in the form of insurance think loans is a way to prevent a country from having to sort of decide between servicing its debt obligation and also meet the needs of people who are suffering following some type of a peak catastrophe that's exactly it right that's exactly it because I mean this is funds were appropriated right it's it's a pre-finance we also often discuss these ex-anti-exposed type mechanisms right do are you are you prepared are you ready with insurance I mean do you have the liquidity do you have the reserves in case something happens and here you have them right because I mean the the budget is appropriated it's it's it's a line item in in your in your financial statement and then if something happens irrespective without these instruments you have to spend this money on your debt service right you you don't default for example on a on a mega-type credit right you you serve your credits I mean we also know many developing countries I mean that it's a typical story about also of women and and families

23:09in smallholder farms I mean before I mean not repaying your your debt I mean you don't send your kids to school the very same example in a smaller scale right but but having that freedom not to do this but to then reuse the money for something else this is a huge benefit right and it's all pre-agreed it's just there no questions asked and then you you deployed and is the is the the the risk transfer for a year is it for two years I mean how do you decide the the period of time in some ways I suppose the answer it depends and there's certain flexibility so there are many questions that are being asked at the moment but as a consortium we're working through those and I think that it's very clear that the possibility is there the demand is there pause clauses for example are increasing in popularity so if that's the case then a wish for actual risk transfer follows very shortly after that and there's quite a bit of flexibility in terms of designing

24:09this kind of solution depending on the context yeah when you go out and you talk to your partners whether it's a multi lateral financial institution whether it's a partner at a government or and any of the other groups that you work with what's the level of receptiveness for this idea how much do you have to discuss with them the the features of this and and the advantages that it might have over a simple debt deferral maybe I start on on on on on this I mean the reception fundamentally is positive right because I mean what we really saw is that these these these debt referral pause clauses I mean they they they got some traction right contractual workers down I mean it's it's it's there the challenge I see where it is and and this is what we have to break through is you have to have strong partners to work with I mean in informal banks you have to have a client you really also push a look I mean we need we need in a better more effective instrument I mean to to deal

25:10with our debt burden following a disaster we have to have this this partner on the banking side on aggregator side we have to have a stronger push from from the client side and then very fascinating that's the point I will actually make is that from the get go you you try to marry to industries right I mean these governance estates they are extremely literate they are extremely proficient when it comes to banking landing mortgages sovereign debt dealing with all these instruments and then there comes insurance and and this this never was kind of like sitting in the same boat right I mean to to get to to to learn about this different languages to marry these two instruments is is one of the the biggest challenges though the finding a partner willing to to basically drive this experience and this is in my mind a lot more the discussions are going on it's a lot of where development efforts go in I mean can we learn speak the same language how do we formulate contracts treaties that are easy to understand how we design trigger neckman's is where are easy scalable replicable well I maybe it's worth saying that this concept

26:15itself is not new right it it first came up about 10 years ago and back then I believe their reception was what are you talking about and now I think people just get it you know you explain people get it and it's more of a question of well how do we do it and then this trying to wrap your mind around the potentially staggering scale of the whole thing because once you really start looking into making this an easy add-on add-on mechanism the scale is actually huge so it's like how we are the how do we do it not at the what is it and and again the entire market has changed right I mean to do to have risk resilience financial risk resilience as part of your overall budgetary planning process and to have insurance risk trends for mechanisms adaptation investments as part of this package I think this is new now you start to have creditors you have rating agency slowly but surely looking into into the risk relief and if this can give them given some

27:17credits right if you have this insurance and play this is this is all developments which have to come together because obviously also clients will ask okay if I have this loan protected I mean it should really reduce my probability of default this must have something to my credit cost and that's a question and a rating agency so there is a lot of moving part at this point which would really have to find itself and then ultimately you will have that that breakthrough and maybe to get a bit philosophical we are living in a bit of a different world now than 15 years ago there's all sorts of geopolitical crises and this kind of sense of urgency perhaps that we need to be smarter about and and the ways in which limited funds are deployed so I do believe that we are sensing quite a bit of this even in our industry because we do see new partners different partners turning to us and asking okay how can we be a bit more innovative a bit more inventive in the ways

28:22in which we devise these solutions to prepare for the bad things happening out there and to be specific sometimes I like to look through the disaster risk management strategies of various countries and there's this this one particular one not going to name I thought it was very interesting because the kind of general conclusion there is yeah we're covered you know like we we have mechanisms in place of what we're going to do with the floodcams or you know if a drought comes and then you look at the how and then the the strategy itself for example in the case of a flood they describe a prolonged 18 month process of how this budget line and this budget line will be reallocated the money will be moved from here to there it's grants they have to go through this

29:23prolonged process of demonstrating that something happened there have to be an assessment process long story short in practice what actually happens is from the time of the flood to the time where the community gets some sort of assistance it can be easily eight months that's too long exactly and then you say well yes there's a strategy there but is that acceptable can't we do something a little bit different and then you say for example we could put in place a parametric structure in this case right it takes about two weeks for you to have that cash in hand that's a solution to a place where you seemingly have a strategy and sometimes it works but not necessarily at all times I mean what I'm seeing is since the beginning of public sector solutions that there has been a shift in how your partners think about risk there's been a shift in how to manage peak risk I'm not waiting

30:27until after a catastrophe has happened but arranging the financial resilience beforehand so that you're ready once something happens but the journey continues it's still a process it's still something we're going to continue to work on going forward Marina Gary thank you very much for joining us on this episode of risk reconsider thank you very much it's been a pleasure to join you thank you for having us yeah thank you very much and that's it for this episode of risk reconsidered we look forward to coming back soon with another episode and in the meantime it's a risky world out there stay safe and we look forward to seeing you again soon