Fiji

Cook
Islands

SolomonIslands

Samoa

Advancing Disaster Risk
Financing & Insurance
In The PacificVanuatuTonga

A REGIONAL SUMMARY NOTE & OPTIONS FOR CONSIDERATIONMarshallIslands

REGIONAL SUMMARY NOTE &OPTIONS FOR CONSIDERATION

February 2015
Disaster Risk Financing and Insurance

PCR AFI 2015

Advancing Disaster Risk
Financing & Insurance
In The Pacific© 2015 International Bank for Reconstruction and Development /International Development Association or
The World Bank
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///

///

A DVA NC I NG DI SA S T E R RI S K
FINANCING & INSURANCEPCRAFI

IN THE PACIFIC

Table of Contents
01 Acknowledgments
02 Acronyms and Abbreviations
04		Key Recommendations
06		Economic and Policy Background08		Introduction
11		Economic Impact of Disasters
13		Public Financial Management of Natural Disasters
13		Budget Mobilization for Natural Disasters
15		Ex-Post DRFI Instruments
18		Ex-Ante DRFI Instruments
22		Post-Disaster Budget Execution

23		Property Insurance of Public Assets
25 End Notes
26		ReferencesiA DVA NC I NG DI SA S T E R RI S K

PCRAFIii

FINANCING & INSURANCEIN THE PACIFICCountry Reports

27		
Fiji
61		
Cook Islands
93 Solomon Islands
123 Samoa
151 Vanuatu
183 Tonga
209		Marshal Islands
Annexes229		Annex 1237		Annex 2
Risk Profiles

239 Risk Profile: Fiji
245 Risk Profile: Cook Islands
251 Risk Profile: Solomon Islands
257 Risk Profile: Samoa
263 Risk Profile: Vanuatu
269 Risk Profile: Tonga
275		
Risk Profile: Marshal Islands

A DVA NC I NG DI SA S T E R RI S K
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IN THE PACIFIC

Acknowledgments
This note has been prepared by a team led(SPC) through its Applied Geoscience andby Olivier Mahul (Disaster Risk Financing andTechnology Division (SOPAC), the World Bank,

Insurance Program Manager, World Bank) andand the Asian Development Bank, with financial

comprising Samantha Cook (Financial Sector

support from the government of Japan and theSpecialist) and Barry Bailey (Consultant).

Global Facility for Disaster Reduction and Recovery(GFDRR).

The team gratefully acknowledges the data,
information, and other invaluable contributions

The Disaster Risk Financing and Insurance Program

made by the Pacific Island Countries. Without theiris grateful for the financial support received fromskills and expertise, the compilation of this notethe government of Japan and the Global Facility

would not have been possible.
This note benefitted greatly from the technicalexpertise of the following persons: Franz DreesGross (Country Director Timore-Leste, Papua New
Guinea. and Pacific Islands, World Bank), Olivier
Mahul (Disaster Risk Financing and Insurance
Program Manager, World Bank), Denis Jordy (Senior
Environmental Specialist, World Bank), Michael
Bonte-Grapentin (Senior Disaster Risk Management
Specialist, World Bank), Paula Holland (Secretariatof the Pacific Community), and David Abbott(Secretariat of the Pacific Community).
Inputs and reviews from Robert Utz, David
Knight, Kim Edwards, Oscar Ishizawa, Rashmin
Gunasekera, Keren Charles, Francesca de Nicola
and Susann Tischendorf greatly enhanced the final
note. Design and layout developed by Bivee.co.
The Pacific Catastrophe Risk Assessment and
Financing Initiative (PCRAFI) is a joint initiative
between the Secretariat of the Pacific Community

for Disaster Reduction and Recovery.

01

A DVA NC I NG DI SA S T E R RI S K

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02

FINANCING & INSURANCEIN THE PACIFIC

Acronyms andAbbreviations
ACRRP

Aitutaki Cyclone Recovery and Reconstruction PlanCBS

Central Bank of Samoa

CBSI

Central Bank of Solomon Islands

CFA

Compact of Free Association

CIIC

Cook Islands Investment Corporation

DAEF

Disaster Assistance Emergency FundDISMAC

Disaster Management Council

DMO

Disaster Management Office

DoFT

Department of Finance and Treasury

DRFI

Disaster risk financing and insurance

DRM

Disaster risk management

EMC

Emergency Management Cook Islands

EPC

Electric Power Corporation

ERTF

Emergency Response Trust Fund

FEA

Fiji Electricity Authority

FPCL

Fiji Ports Corporation Limited

FSC

Financial Supervisory Commission

GDP

Gross domestic product

GFDRR

Global Facility for Disaster Reduction and Recovery

GFS

Government Financial Statistics

GIICS

Group of International Insurance Center Supervisors

HFA

Hyogo Framework for Action

IAIS

International Association of Insurance Supervisors

IMF

International Monetary Fund

ISR

Industrial Special Risks

JNAP

Joint National Action Plan

LRF

Loan Repayment Fund

MDBI

Material Damage/Business Interruption

MFEM

Ministry of Finance and Economic Management

MoF

Ministry of Finance

MoFT

Ministry of Finance and Treasury

MOIP

Ministry of Infrastructure and Planning

N-DRM Plan

National Disaster Risk Management Plan

NAB

National Advisory Board

NAP

National Action Plan

NDC

National Disaster Council

A DVA NC I NG DI SA S T E R RI S K

PCRAFIFINANCING & INSURANCEIN THE PACIFIC

Acronyms andAbbreviations
NDMO

National Disaster Management Office

NDRFF

National Disaster Relief and Rehabilitation Fund (“Prime Minister’s Fund”)

NEMO

National Emergency Management Office

NPI

National Pacific Insurance

PAA

Priorities and Action Agenda

PCRAFI

Pacific Catastrophe Risk Assessment and Financing Initiative

PDNA

post-disaster needs assessment

PFEM

Public Finance and Economic Management

PIC

Pacific Island Country

PICs

Pacific Island Countries

RBF

Reserve Bank of Fiji

RBVReserve Bank of Vanuatu

RFA

Regional Framework for Action

SIDS

Small Island Developing States

SIFA

Samoa International Finance Authority

SMEs

Small and medium enterprises

SOE

State-owned enterprise

SOPAC

Applied Geoscience and Technology Division of SPC

SPC

Secretariat of the Pacific Community

SPREP

Secretariat for the Pacific Regional Environment Programme

TAL

Tonga Airports Ltd.

TC

Tropical Cyclone

TPL

Tonga Power Ltd.

UNDP

United Nations Development Programme

UNISDR

United Nations International Strategy for Disaster Risk Reduction

URA

Utilities Regulatory Authority

USAID

U.S. Agency for International Development

VUI

Vanuatu Utilities and Infrastructure

Average Annual Exchange Rates
CURRENCY UNIT

US$1 EQUIVALENTNew Zealand dollar (Cook Islands) (NZ$)

1.22

Fiji dollar (F$)

1.86

Tongan pa’anga (T$)

1.79

Samoan tala (SAT)

2.3

Solomon Islands dollar (SI$)

7.23

Vanuatu vatu (VT)9603

A DVA NC I NG DI SA S T E R RI S K

PCRAFI04

FINANCING & INSURANCEIN THE PACIFICKey Recommendations
for Cost-Effective and Sustainable Disaster Risk Finance
Solutions in the PacificPacific Island Countries (PICs) face many common

3. Explore the use of contingent credit to///challenges in their efforts to utilize disaster risk

access additional liquidity post-disaster,financing instruments. The Pacific Disaster Risk

including identification of providers of this type of

Financing and Insurance (DRFI) Program under thefinance. Contingent credit could help to finance

Pacific Catastrophe Risk Assessment and Financing

response efforts for intermediate disaster events

Initiative (PCRAFI) has generated discussion at athat exceed the capacity of options from withinregional level in order to help countries address
their common challenges. Based on that discussion,
the following recommendations have beendeveloped for consideration.

///

the budget, but that are too expensive to fundthrough risk transfer because of their frequency.
4. Develop an insurance program for key///

public properties. This program would establish///

1. Develop an integrated disaster risk///

financing and insurance strategy. This should///

establish potential sources of immediate liquidity

a centralized asset register with up-to-datevaluations, assess probable losses, and review
existing indemnity insurance to ensure that the
major perils of tropical cyclone and earthquake

post-disaster, such as a dedicated reserve fund forare included and that the government anddisaster response. A sustainable source of funds

state-owned enterprises (SOEs) are getting theshould be identified, and legislation should be

best available terms and conditions for theamended to safeguard expenditures and ensure thepremiums paid.

development of an operations manual.

5. Develop a regional framework for DRFI.

///

///

2. Develop a post-disaster budget execution

The DRFI framework should be aligned tomanual to improve awareness of post-disasterregional frameworks on disaster risk management

procedures and processes. A manual will help

and climate change adaptation to ensure that

reduce the time needed to approve post-disaster

immediate access to liquidity post-disaster is made

///

///

expenditures by ensuring normal tendering

a priority.

procedures are waived. Agencies and suppliers
alike need to be familiar with post-disasterprocesses to remove any unnecessary delays in thesystem.

Photo Credit

///

///

Kyle Post/Flickr b

A DVA NC I NG DI SA S T E R RI S K

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06

FINANCING & INSURANCEIN THE PACIFIC

Economic andPolicy Background
There is a 50 percent chance that the Pacificin the Solomon Islands drained the annual budget

region will face disaster losses exceeding

allocation for the National Disaster Management

US$1.3 billion in any 50-year period (PCRAFI

Office (NDMO) and most of the national2013). There is little doubt that PICs are extremely

contingency budget. These situations demonstratevulnerable to natural disasters; yet many of these

how costly it can be to access the outer islands

countries find it difficult to access liquidity in thewhen facilitating response efforts.

///

///

immediate aftermath of a disaster.

The PICs are restricted in their options///

The cost of damage and loss suffered in PICs

for raising post-disaster liquidity. They are

as a result of recent natural disasters ranges

constrained by their size and borrowing capacityfrom 2.6 percent to 28 percent of nationaland have limited access to international insurance

gross domestic product (GDP). Findings frommarkets. In addition, many PICs have a narrow

recent post-disaster needs assessments (PDNAs)

revenue base, are net importers, and rely on aid

demonstrate how sensitive small island economies

as an income stream, all of which place significant

///

///

///

can be to natural disasters: the estimated recovery
and reconstruction plans outlined in the PDNAs

additional constraints on the national budget.
The point in the fiscal year at which a disaster///are about as costly as the total damage and loss
incurred if not more so with values ranging fromoccurs affects how much post-disaster
finance is available. Post-disaster expenditures///

1.5 percent to 27.0 percent of GDP. These figures

are first and foremost driven by the amount ofgive an indication of the contingent liability fromcash readily available to the government. If there

natural disasters.

are no dedicated reserves for financing disaster

PICS have incurred significant costs to///facilitate travel to the outer islands for
initial post-disaster relief. Following Tropical///

Cyclone (TC) Ian in Tonga, 39 percent of initial
relief expenditures from the emergency fundrelief, there will be different amounts of funding
available depending on whether the disasteroccurs closer to the beginning or the end of thebudget cycle.
The Pacific has seen several recent cases///

went to fuel, distribution, and travel and freight.

that show the need for immediate liquidity

Similarly, the cost of facilitating travel to Santa

post-disaster from ex-ante instruments. In

Cruz following the 2013 earthquake and tsunami///

A DVA NC I NG DI SA S T E R RI S K

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07

IN THE PACIFIC

the Cook Islands, in the immediate aftermath offunding needs without compromising their fiscal

TC Pat in 2010, a delay in the receipt of travel

balance. This program is one application offunds meant that key government personnel could

PCRAFI.

not immediately commence the initial damage
assessment. Following TC Vania in 2010, Vanuatu
had to reallocate a significant amount of thenational budget. Similarly, Fiji and Samoa had toreallocate budgetary funds in the wake of TC Evan
in 2012 and 2013, and as already mentioned, theSanta Cruz earthquake of February 2013 drained
the annual budget for the Solomon Islands NDMO
and most of the national contingency budget.

As demonstrated by discussions at the Forum///

Economic Ministers Meeting for the past two
years, there is growing interest in developing
disaster risk financing tools within the Pacificregion. This regional summary report provides a///overview of the procedures used by seven PICs forpost-disaster budget mobilization and execution
and identifies five key recommendations (see page04) to support and encourage development of

A major disaster can create the political will

cost-effective and sustainable disaster risk financeto establish dedicated reserves for relief andsolutions and insurance in the Pacific region.

///

early recovery, and many PICS have seized theopportunity post-disaster to establish thesereserves. Samoa, for example, can establish a///

dedicated emergency fund only once a disaster has
occurred and then reallocate funds accordingly.
In the Marshall Islands, the government makes
an annual contribution that is then matched by
the U.S. Agency for International Development(USAID). This approach allows funds to accrue overtime, although there is a limit on how much can bewithdrawn following an event.
Efficient post-disaster budget execution in///

PICs often relies on a few key individuals
dedicated to facilitating quick response.

///

There is a risk that any established good practice
could lapse if these individuals were to leave key
response ministries or the government itself. To
eliminate this risk and do away with the needto rely on a few individuals, PICs should develop
post-disaster budget execution manuals to act as adesk reference.
DRFI is a long-term agenda requiring political///will, technical expertise, and time. The Pacific///

DRFI Program enables countries to increase theirfinancial resilience against natural disasters by
improving their capacity to meet post-disasterA DVA NC I NG DI SA S T E R RI S K

PCRAFI08

FINANCING & INSURANCEIN THE PACIFIC

Introduction
Over the last 60 years, extreme natural events

transfer options could be used to reduce the drainin the Pacific region have affected more thanon limited public funds.

///

9.2 million people and caused damage inexcess of US$3.2 billion, with tropical cyclones

Sovereign disaster risk financing and

///

///

the major cause of this loss and damage (WorldBank 2012). During 2012–2014 the Pacificinsurance offers a set of ex-ante and ex-post
financial tools to increase a government’s

experienced a number of disasters, including two

financial resilience against natural disasters.

severe floods in Fiji, TC Evan in Samoa and Fiji,

DRFI has gained increasing recognition in recent

a magnitude 8.0 earthquake and subsequent

years and is a key activity of the HFA Priorities fortsunami in the Solomon Islands, and TC Ian in

Action 4 and 51. The HFA is a result-based plan of

Tonga (which led to the first payout under theaction adopted by 168 countries to reduce disaster

Pacific Catastrophe Risk Insurance Pilot). Most

risk and vulnerability to natural hazards and torecently there were floods in the Solomon Islands

increase the resilience of nations and communities

and storm surge in the Marshall Islands.

to disasters over the period 2005–2015. In

The PICs are restricted in their options for///raising post-disaster liquidity because of
their small size, limited borrowing capacity,and limited access to international insurance
markets. The small size of Pacific Island states
///

///

the Pacific, the HFA formed the basis for thedevelopment of the Pacific Disaster Risk Reduction
and Disaster Management Framework for Action(Regional Framework for Action, or RFA).
The Regional Framework for Action cites///

limits geographic diversification of risk; subsidizing
affected regions using revenues from unaffected

DRFI activities as a key national and regional
activity. Theme 4—“Planning for effective///

regions is nearly impossible. High transaction costs,
the inability to spread risk over a large territory, andthe relatively small size of the local economies keep
insurance penetration in the region to a minimum.

preparedness, response and recovery”—hasan associated key national activity, “Establish anational disaster fund for response and recovery.”
Theme 6 of the RFA—“Reduction of underlying

PICs’ narrow revenue base, status as net

risk factors”—cites the development of “financial

importers, and reliance on aid as an income

risk-sharing mechanisms, particularly insurance,

stream serve to limit the options available forre-insurance and other financial modalities

post-disaster finance—and in turn place significant

against disasters” as both a key national andadditional constraints on the national budget.

regional activity (SOPAC 2005). These regional

Alternatives such as contingent credit and risk

implementation activities align with the three-

///

///

Photo Credit

///

///

Kyle Post/Flickr b

A DVA NC I NG DI SA S T E R RI S K

PCRAFI10

FINANCING & INSURANCEIN THE PACIFIC

tiered disaster risk financing strategy developed by(b) A contingent credit mechanism for lessthe World Bank.

frequent but more severe events; andThe Pacific DRFI Program enables countries

///

(c)

to increase their financial resilience against
natural disasters by improving their capacity

Disaster risk transfer (such as insurance) tocover major natural disasters. See figure 1.

///

to meet post-disaster funding needs withoutcompromising their fiscal balance. This program,which is one application of PCRAFI, is built upona three-tiered approach to disaster risk financing.
These layers align to the basic principles of soundpublic financial management, such as the efficient
allocation of resources, access to sufficient
resources, and macroeconomic stabilization. The
three tiers acknowledge the different financial
requirements associated with different levels of
risk:This report looks at the public financial///

management of natural disasters in seven
PICs (the Cook Islands, Fiji, the MarshallIslands, Samoa, the Solomon Islands, Tonga,
and Vanuatu) to build understanding of theexisting DRFI tools in use in the Pacific andto identify gaps where engagement could
further develop financial resilience. In addition,///

it aims to encourage peer exchange of regional
knowledge, specifically by encouraging dialogue
on past experiences, lessons learned, optimal useof these financial tools, and the effect of these(a) Self-retention, such as a contingency budget

tools on the execution of post-disaster funds.

and national reserves, to finance small but

Given the innovative nature of DRFI, capacity

recurrent disasters;building in this new area is necessary to ensurethat it forms part of a comprehensive disaster risk
management strategy.

Figure 1 — Three-Tiered Disaster Risk Financing Strategy

Risk Transfer

Low Frequency/
High Severity

International AssistanceSovereign Risk Transfer(e.g. Cat Bond/Cat Swap, (re)insurance)

Risk Retention

High Frequency/
Low Severity

Contingent Credit Lines

Post Disaster Credit

Government Reserves, Contingency Budget / Funds

Emergency Funding

Source: World Bank 2010.

Insurance of Public Assets

Reconstruction

A DVA NC I NG DI SA S T E R RI S K
FINANCING & INSURANCEPCRAFI11

IN THE PACIFIC

Economic Impact
of Disasters
Pacific economies are highly exposed to adverse

Harm to these sectors is detrimental not only

natural hazard events (e.g., tropical cyclones,

to the economy, but also to individuals’ quality

earthquakes, volcanic eruptions, and tsunamis). The
resulting disasters can affect countries’ economic,of life, especially that of individuals who rely on
subsistence agriculture. When both sectors are

human, and physical environment and harm theirlong-term development. Ten Pacific economies

affected, economic recovery can take many years

feature in the list of the top 30 countries mostunless alternative sources of finance for early

vulnerable to natural disasters (World Bank 2011).

recovery can be found.

There is a 50 percent chance that the Pacific region

The cost of damage and loss from recent///

will face disaster losses exceeding US$1.3 billion innatural disasters in the Pacific varies between

any 50-year period (PCRAFI 2013).

2.6 percent and 28 percent of national

Figure 2 shows average annual loss from tropicalGDP. Findings from recent PDNAs demonstrate///

cyclones and earthquakes in 15 PICS, as calculated

how sensitive small island economies can be toby the PCRAFI catastrophe risk model. Papua New

natural disasters: the estimated recovery andGuinea experiences the highest level of averageannual loss, approximately US$85 million; this isreconstruction plans outlined in the PDNAs arelargely driven by damage from earthquakes. Fiji’s

about as costly as damages and losses, with values

level of average annual loss is similar—US$79

ranging from 1.5 percent to 27 percent of GDP

million—but is almost solely driven by damage(table 1). These figures suggest the contingentfrom tropical cyclones. Average annual losses may

liability created post-disaster. The requirements ofbe even higher in the future, as climate change
may cause hydrometeorological events (such as

recovery and reconstruction can pose severe fiscal

tropical cyclones) to occur more frequently.

difficulty for PIC governments, which—at a time
when fiscal receipts have declined and the fiscal

In many PICs, government revenue depends///

deficit has increased—need to source additionalon the tourism sector and the agriculture,

revenue to complement any funding received fromforestry, and fishing sector, both of which are
harmed by the occurrence of natural disasters.

///

donors.

A DVA NC I NG DI SA S T E R RI S K

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FINANCING & INSURANCEIN THE PACIFIC

Figure 2 — Estimated Average Annual Loss from Natural Disasters (US$ millions) Source: PCRAFI 2011.
100
95
90
85
80
75

Average Annual Loss (Million USD)

70
65
60
55
50
45
40
35
30
25
20
15
10
5

u
ur

al
Tu
v

M

ar

sh

al

Na

u

i
at
Ki

rib

ue
Ni

u
la

lI

Pa

nd
sla

an
Isl
ok

So
Tropical cyclone

s

ds

te
Co

lo

m

Ti

m

or
-L

es

oa
Sa

m

M
FS

ga

an
Isl
on

To
n

ds

tu
ua
Va
n

PN

Fij

i

G

0

Earthquake/ground motion

TsunamiTable 1— Damage and Loss as a Percentage of GDP

COUNTRY

SolomonYEAR

DISASTERESTIMATED RECOVERYAND RECONSTRUCTIONREQUIREMENTSDAMAGE AND LOSS

Damage

Loss

Total

(US$ millions)(US$ millions)(US$ millions)

As a % of GDP

Total(US$ millions)

As a % of GDP

2014

Floods

52.4

54.6

107.0

9.2

55.0

4.6

Tonga

2014

Cyclone

38.0

11.3

49.3

11.0

49.5

11.0

Islands

Fiji

2012

Cyclone

67.2

41.2

108.4

2.6

67.0

1.5

Samoa

2012

Cyclone

103.3

100.6

203.9

28

206.0

29.0

Cook Islands

2010

9.5

4.0

117.0–167.0a

19.0–27.0

Samoa

2009

CycloneEarthquake
and tsunami

84.8

39.3

124.1

20.0

Sources: Solomon Islands Government 2014; Government of Tonga 2014; Government of Fiji 2012; Government of Samoa 2012, 2009; Government of Cook
Islands 2010.
a. The range provided shows the two options presented to the government, one for building back (the lower cost) and the other for an option that includes buildingback and relocating some villages, schools, etc.

A DVA NC I NG DI SA S T E R RI S K

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IN THE PACIFIC

Public Financial
Management of
Natural Disasters
Public financial management in the Pacificmarkets, a large portion of the economic losses

is dictated by the fact that many PICs arestemming from adverse natural events are borne

classified as Small Island Developing Statesby governments and households, with support(SIDS). Typically, countries in this classificationfrom development partners.

///

///

have a narrow revenue base, are net importers,
and have a consequential reliance on aid as anincome stream. These characteristics can limit theoptions available for post-disaster finance. It is
unlikely that a SIDS government could afford toreallocate the capital budget, and a tax increase
could make many items unaffordable and hence be
detrimental to citizens’ quality of life. Given these
constraints on the national budget, alternatives

This report provides a review of the///procedures used by seven PICs for postdisaster budget mobilization and execution.

///

The information presented here is taken from aseries of individual country notes [[ (see country
notes 1–7), which should be consulted for a morein-depth analysis of DRFI in each of the sevencountries.

such as contingent credit and risk transfer options
should be used to reduce the drain on limited
public funds.
PIC governments face critical challenges for

Budget Mobilization for
Natural Disasters///

financial resilience to natural disasters. Most///

The time at which a disaster occurs relative to///

PICs have restricted options for securing immediate

the fiscal year affects how much post-disasterliquidity for swift post-disaster emergency response

finance is available. Post-disaster expenditures

without compromising their long-term fiscal

are first and foremost driven by the amount ofbalance. In addition, PICs are constrained by their

cash readily available to the government. Simply

size, borrowing capacity, and limited access toput, different amounts of funding will be available

international insurance markets. In the absence ofdepending on whether the disaster occurs at theeasy access to debt and well-functioning insurance

beginning or the end of the budget cycle.

///

A DVA NC I NG DI SA S T E R RI S K

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FINANCING & INSURANCEIN THE PACIFIC

Table 2— Availability of Financial Instruments Over TimeSHORT TERM
(1-3 MONTHS)MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)

Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Tax Incentives (Flash Appeal)
Ex-ante Financing
Reserve FundContingency Budget
Contingent Credit
Sovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance
Source: World Bank 2013.

A country’s access to DRFI instruments

optimal mix of finance instruments will be unique///depends on its current economic conditions.

///to each country and based upon its associatedFor example, if a country is running a fiscal

hazard and exposure. A list of potential financedeficit, is deeply indebted, or is investing heavily

instruments is given in table 2. Those that are

in development programs (e.g., to reduce poverty

shaded in blue indicate the generic timelines forand eradicate epidemics), then its budget flexibility

mobilizing and executing these funds, although

is more likely to be constrained. Such a country

timings may vary in each country depending on

may therefore rely on international response to

its internal processes. The table can be adaptedfacilitate post-disaster expenditures. Internationalby countries to reflect these differences according

assistance will always play a valuable role, but

to the financial instruments they have utilized and

it is often conditional, and the levels of financethe time it takes to mobilize these funds. Given theavailable may be limited or tied to countries’

innovative nature of the work in this area and theincome classification: grants may be available

number of products under development, this list isfor the least developed countries, while middle-

not exhaustive.

income countries will have to utilize loans frominternational financial institutions.
An optimal DRFI strategy aims to combine///

ex-ante and ex-post financial instruments
to secure adequate and timely funding. The///

Ex-Post DRFI Instruments

A DVA NC I NG DI SA S T E R RI S K

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IN THE PACIFIC

A disaster exceeds a country’s capacity to cope

Intraministry transfers from the operational///with an event, and there will therefore always bebudget can be made with the approval of thea need for ex-post practices and arrangements.

minister. This can be a good solution for someEx-post arrangements benefit from being able

ministries, such as agriculture, where additionalto establish the extent of the disaster andpurchases, such as seeds and seedlings, may

prioritize the response needs. As a result thesebe needed to help recovery. Transferring funds

arrangements take longer to implement than ex-from wages and salaries or commitments is notante arrangements, but they can often mobilize

permitted.

larger amounts of finance. This section discusses
the ex-post practices and arrangements that havebeen used in the Pacific.

///

The amount of cash available for reallocation///

will vary significantly depending on whenin the fiscal year the event occurs. Should an///

event occur at the beginning of the fiscal year, theBudget reallocation

government may be better placed to reallocate
Budget reallocation across ministries requires

funds; the same is true if a disaster occurs at thecabinet approval and can take some time toend of the fiscal year (see box 1).

///

operationalize. For larger amounts of funding,///reallocation is sometimes necessary, although it
is permissible only for operational funds. Because
reallocation can delay key development projects,
it may require donors’ agreement to divert funds
from the planned expenditures to financing ofdisaster recovery. Table 3 provides an indication of
the total budget that can be reallocated.

Donor assistance for relief
and recovery
While donor funds will always be required,///

there will always be an element of
uncertainty surrounding how much will be
provided, what will be provided, and when the///

donations will arrive in country. Consequently,
overdependence on international relief as a

Table 3— Indicative Percentage for Budget Reallocation
COUNTRY% OF TOTAL BUDGET THAT CAN
BE REALLOCATED FOLLOWING A
NATURAL DISASTER

Cook Islands

24

Fiji

17

Marshall Islands

10

Samoa

Discretionary

Solomon Islands

Discretionary

Tonga

Discretionary

Vanuatu34

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Box 1— Tropical Cyclone Evan, 2012: Fiji.
In December 2012, TC Evan struck Fiji, causing damage on the northern island of Vanua Levu and the western part of the main island, Viti Levu. The
fiscal year in Fiji coincides with the calendar year, so the government had a good idea of what the full year’s expenditures had been, and as a result wasable to swiftly reallocate US$3.7 million from the 2012 national budget, equivalent to approximately 0.3 percent of the total budget (Government of Fiji2012). This money was used to finance the initial disaster response for TC Evan. A further US$9.1 million was reallocated from the 2013 budget to financehousing rehabilitation, equivalent to 0.7 percent of total expenditures.

Box 2— Tropical Cyclone Evan, 2012: Samoa
In the month following TC Evan, Samoa received cash donations from the international community worth over US$2 million; in addition, the

///

///

local and international community also donated significant supplies to help with initial relief. Experience shows that donations continue even after relief
work ends and recovery and reconstruction programs begin. For example, the completion report for the tsunami fund states that a total of US$26.7 million
was received from development partners and private individuals and organizations (Government of Samoa 2011.). This serves to demonstrate that while
donor assistance for reconstruction may take some time to mobilize, significant amounts of finance can be raised.

Box 3— 2014 Floods in Solomon Islands: Flash Appeal
During the 2014 flash floods in the Solomon Islands, an account was established at the Central Bank of Solomon Islands to receive funds///

from a flash appeal conducted by the National Disaster Council (NDC). The appeal collected SI$2.3 million (US$318,000), which has been used///

for emergency relief and recovery needs. Donations came from private companies, individuals, embassies of the Solomon Islands, and other governments
such as Papua New Guinea and China. This account was opened to receive funds from external parties following an event and has acted as a replacement
to the National Disaster Council Fund, giving the NDC greater control over and accountability for expenditures.

External credit

source of post-disaster financing can delay theprovision of initial relief and inhibit ex-antecontingency planning. Development partners,
international organizations, local nongovernmentalorganizations, businesses, and individuals
contribute in the form of cash grants and aid
in kind. The provision of aid in kind, while vital,
can pose additional costs for distribution thatgovernments must assume. Box 2 gives an exampleof the amount of donor funds that Samoa received
following Tropical Cyclone Evan.

Many PICs are classified as low-income
countries and qualify for grant funding, sothey do not always need to utilize external
credit. Depending on a country’s economic status,
external credit can be a good way to meet thelarger finance requirements of reconstruction.
///

///

Before a country takes a loan to financerecovery, it should duly consider its level ofexisting debt and be aware that a loan often
requires a lengthy negotiation period withthe provider. In the Cook Islands, for example,
the Asian Development Bank provided a US$4
million loan to help with the recovery efforts
following a series of cyclones in 2005. This loan
///

///

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took four months to approve and significantly
delayed the necessary relief and recovery work—
which suggests that contingent credit may be more
beneficial.
The majority of PICs have manageable levelsof debt, and their associated risk of debt
distress is low to moderate. Thus they appear
well placed to explore the use of contingent
credit as a DRFI tool. The only exception is
the Marshall Islands, which has been cited ashaving a high risk of debt distress under theInternational Monetary Fund (IMF)/World Bank
debt sustainability analysis (see table 4).
///

Tax incentives and flash appeal
Tax concessions to encourage donations have///been successful in many PICS. For example, the///government of Fiji implemented tax concessions
to encourage donations in the wake of TC Evan. A
200 percent tax deduction of the donation amount
was available to those who contributed US$537
and above to the National Disaster Relief and///Rehabilitation Fund. In addition, duty-free status
was applied to goods donated in kind.
Flash appeals have proved a good way///

for PICs to centrally control financial
contributions from members of the public,Tax increase

donors, and development partners. The///

A tax increase could generate additional
revenue to finance recovery but could also
make many items unaffordable and hence
be detrimental to citizens’ quality of life. It
is not known whether any PICs have levied taxes
to finance post-disaster recovery. It is difficult
to attribute any tax increases with disaster
expenditures, since the government would needto explicitly indicate that the funds were spent on
disaster relief.
///

///

Marshall Islands, Tonga, Samoa, Solomon
Islands and Fiji have all conducted flash appeals
following recent events. Specific accounts havebeen established to enable ease of deposit andto allow the countries to execute all contributions
to finance post-disaster relief and recovery. Box 3
gives an example from the flash appeal conductedin the Solomon Islands in 2014.

Table 4— Current Debt-to-GDP Ratio and Risk of Debt Distress
COUNTRY

DEBT-TO-GDP RATIO (%)

RISK OF DEBT DISTRESS(IMF/WORLD BANK DEBT SUSTAINABILITY ANALYSIS)Cook Islands

18

Not available

Fiji

50

Sustainablea

Marshall Islands

55

High

Samoa

46

Moderate

Solomon Islands

25

Moderate

Tonga

45

Moderate

Vanuatu

40

Low

Sources: IMF 2011a, 2011b, 2011c, 2012a, 2012b, 2013a, 2013b.
Note: a. Referred to as sustainable in IMF Article IV consultation report 2013,

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Ex-Ante DRFI Instruments

national budget. Similarly, Fiji and Samoa had to

The uncertainty surrounding internationalin 2012 and 2013, and the Santa Cruz earthquake

assistance has put pressure on countries toin the Solomon Islands in February 2013 drained

establish domestic sources of finance for post-

the annual budget for the NDMO and used thedisaster relief, such as national reserves or the

majority of the national contingency budget.

transfer of risk to the international insurance
market. The ex-ante practices and arrangements insome PICs are discussed below.

reallocate budgetary funds in the wake of TC Evan

The seven PICs in this report have at least///

one ex-ante DRFI instrument to help facilitate
early recovery. Table 5, which details the ex-ante///

The Pacific has seen several recent cases

DRFI instruments utilized by PICs involved in thethat show the need for immediate liquidity

Pacific DRFI Program, shows that each country

post-disaster from ex-ante instruments. In

holds some level of contingency budget and that

the Cook Islands, in the immediate aftermath ofmany have established dedicated reserves to

TC Pat in 2010, a delay in the receipt of travel

help meet early recovery costs. These funds arefunds meant that key government personnel could

complemented with catastrophe risk insurance

not immediately commence the initial damage

via the Pacific Catastrophe Risk Insurance Pilot

assessment. Following TC Vania in 2010, Vanuatu

and traditional insurance for key government

had to reallocate a significant amount of theproperties.

///

///

Table 5— Ex-Ante DRFI Instruments Used in PICs

RESERVE FUND
(US$ thousands)

CONTINGENCYBUDGET AS% OF TOTALAPPROPRIATIONSSELECTED LAYER
OF COVERAGEFOR SOVEREIGN(PARAMETRIC)
CATASTROPHE RISKINSURANCEAMAXIMUM PAYOUT
COVERAGE
FROM PACIFIC
CATASTROPHE RISKINSURANCE PILOT AS% OF CONTINGENCYBUDGET

TRADITIONALDISASTER
INSURANCE

Government and SOEs

Cook Islands

409

1.50%

Low

200%

Fiji

1,600bDiscretionary

-

-

SOEs

Marshall Islands

1,500

US$200,000

Medium>300%

Government and SOEs

Samoa

Needs basis

3%

High

188%

Government and SOEs

Solomon Islands

-

2.50%

-

-

SOEs

Tonga

2,400

5%

Low

>300%

SOEs

Vanuatu

256

1.50%

High

>300%

SOEs

Source: World Bank, 2014 a,b,c,d,e,f,g
Note:
F$F$a. Low layer = 1-in-10-year attachment point; medium layer = 1-in-15-year attachment point; high layer = 1-in-20-year attachment point.
b. Composed of F$1 million annual allocation to the Prime Minister’s Fund and F$2 million for the NDMO budget for rehabilitation.
c. - = Not available

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Box 4— Cook Islands Disaster Emergency Trust Fund
In 2010, TC Pat struck the Cook Islands and caused widespread devastationon the island of Aitutaki. National agencies wanted to respond, but had to
wait while funds were mobilized and executed.

Following its establishment and receipt of an initial appropriation, theERTF received additional funds from the Small Islands State Development
Fund administered by the Small Island States Program Unit of the PacificIslands Forum Secretariat. The government has established a minimum

Following TC Pat, the prime minister of the Cook Islands announced thatlevel of reserves, and the fund has accrued almost US$10,000 in interest

his country would look at ways to become self-reliant and seek to generate

to date. The government will continue to explore ways to grow the ERTF.

new income streams to invest in a fund specifically for disaster management

The country’s experience with the ERTF demonstrates the importance of

response and recovery.

ex‐ante cooperation between government agencies and suggests how
quickly procedures can be developed when several agencies work together

Emergency Management Cook Islands (EMCI) collaborated with the Ministry

to remove barriers to effective post-disaster budget execution.

of Finance and Economic Management and the Ministry of Infrastructure
and Planning to establish the Emergency Response Trust Fund (ERTF).
Led by EMCI, these agencies were able within one year to draft a policy
for the ERTF that was approved by the cabinet. This policy details thebudget execution process, the reporting requirements to ensure that
expenditures are transparent and accountable, and the role of the trustees’
management committee. The ERTF was fully operational and had received
an appropriation from the annual budget by December 2011.

Dedicated reserve funds

purchase essential relief supplies the day before TC
Ian, a category 5 cyclone, made landfall.

Many PICs have established dedicated///reserves to facilitate relief and early recovery.

The demand for establishing dedicated

///

///

These funds are governed by legislation inreserves for disaster response is createdtheir respective financial management acts andwhen a major hazard event occurs, and thisvary in complexity. In Samoa, for example, aopportunity should be capitalized on. The

dedicated emergency fund is established only

experience of TC Pat in the Cook Islands, foronce a disaster has occurred, and funds are thenexample, led to discussions about establishing thereallocated accordingly. In the Marshall Islands,

Emergency Response Trust Fund, and the fund was

the government makes an annual contribution

fully operational by December 2011, less than 12that is then matched by USAID; this approach has

months after it was initially proposed (see box 4).

///

the benefit of allowing funds to accrue over time,Contingency budget

although there is a restriction on how much can bewithdrawn following an event.

Contingency budgets, while not exclusively///

designed for post-disaster expenditures,

Reserve funds have been shown to///

can provide a timely source of limited cash.

significantly reduce the time it takes to
expedite funds and operationalize staff. A///

Many PICs have contingency budgets worth///

declaration of disaster normally acts as the trigger
to gain access to dedicated disaster reserve funds,
although Tonga used its emergency fund to

1.5–5.0 percent of total appropriations (theMarshall Islands allocates a nominal amount of
US$200,000). These funds are normally accessedfollowing a declaration of disaster, but someA DVA NC I NG DI SA S T E R RI S K

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Box 5— Pacific Catastrophe Risk Insurance Pilot
The Pacific Catastrophe Risk Insurance Pilot provides an off-budget injection of liquidity following an eligible disaster event. The insurance is

///

///

designed to cover emergency losses, which are estimated using a modeled representation of the event based on hazard parameters and a calculation of totalmodeled physical damage. Unlike a conventional insurance scheme, where a payout would be assessed against actual incurred costs, this scheme pays out on
the results of a model. The advantage of this approach is that it results in a much faster payout. The payout would act as a form of budget support and would
go some way to cover the costs incurred by the government in the aftermath of a severe natural disaster that disrupts the provision of government services.
Countries can choose between three layers of coverage—low, medium, and high—depending on the frequency of events. The lower layer will

///

///

cover events with a return period of 1 in 10 years—that is, more frequent but less severe events. The medium layer covers events with a 1-in-15-year return
period, while the higher layer covers less frequent but more severe events, or those with a return period of 1 in 20 years. However, countries may also requestthat a more customized option be developed for them.

countries, such as Samoa and Tonga, requirecabinet approval for expenditures from thisbudget line.

Cook Islands, the Marshall Islands, Samoa, Tonga,
and Vanuatu. Further information on the coverage
provided can be found in box 5.

The amount of cash available from thecontingency budget will vary significantly
depending on when in the fiscal year the
event occurs, and it should be complemented
with other sources of cash. For example, theSolomon Islands allocated US$5.4 million fordisaster purposes in 2013, a 28 percent reduction
from 2011. This variability raises questions about
reliance on the contingency budget as a source of
post-disaster finance.

The catastrophe risk insurance purchased
by PICS can provide them with an injectionof liquidity equivalent to almost double
their respective contingency budgets. Five
PICs (Vanuatu, Tonga, Marshall Islands, Solomon
Islands3 and Samoa) purchased tropical cyclone
and/or earthquake catastrophe risk insurancewith support from the government of Japan andcontributions from the national budget. The Cook
Islands paid its premium in full. For each of thesesix countries the annual coverage limit represents
between 185 percent and over 300 percent of thenational contingency budget (see table 6).

///

///

Sovereign catastrophe risk insurance
A regional initiative, the Pacific Catastrophe
Risk Insurance Pilot was established in January
2013 to test the viability of market-based
sovereign risk insurance. The program was
jointly implemented by the Secretariat of the PacificCommunity (SPC) and the World Bank with thegenerous financial support of the government ofJapan. The objectives of the pilot were twofold:it sought to test whether there was interest fromthe international reinsurance market in supplying
such a product, and whether there was demand
from the PICs for such coverage. Five countries are
involved in the third season of the pilot (which runs
from November 1, 2014, to October 31, 2015): the

///

///

///

///

A catastrophe risk insurance payout was
disbursed to Tonga within two weeks of TC
Ian, a category 5 cyclone that caused extensive
damage in Tonga on January 11–12, 2014. The
government of Tonga received US$1.27 million
under its policy. Tonga is the first country toreceive a payout under the Pacific Catastrophe Risk
Insurance Pilot, launched on January 17, 2013.
The payout is equivalent to more than the 2013
contingency budget or half of the current reservesof the Tonga National Reserve Fund.
///

///

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Table 6— Pacific Catastrophe Risk Insurance Pilot, 2014–2015 Season

COUNTRYPERILS COVEREDSELECTED COVERAGEAAGGREGATE COVERAGE LIMIT AS% OF NATIONAL CONTINGENCYBUDGET

Vanuatu

TC + EQ/TSU

Medium layer

>300

Tonga

TC + EQ/TSU

Low layer>300

Marshall Islands

TC

Medium layer>300

Cook Islands

TC

Low layer

200

Samoa

TC + EQ/TSUHigh layer

188

Source: World Bank, 2014 a,b,c,d,e,f,g
Note:
TC = tropical cyclone;
EQ = earthquake;
TSU = tsunami.
a. Low layer = 1-in-10-year attachment point; medium layer = 1-in-15-year attachment point; high layer = 1-in-20-year attachment point

Not every disaster event that occurs will

“ The cash received from the catastrophe risk///

generate an insurance payout, as theexperience of the Solomon Islands shows.

insurance pilot makes an important financial
contribution [to] carrying out the government
strategy for mitigating natural disasters, [andhelps] to ensure that response efforts to help
the people of Ha’apai recover and returnto their normal everyday lives can continue
without interruption or delay.

///

The Solomon Islands discontinued its insurance inthe third season in part because neither the Santa
Cruz earthquake nor the 2014 flash floods had
generated a payout or had in fact been eligible
under the terms of the insurance. The Santa Cruz”

earthquake generated emergency losses thatwere below the attachment point of the policy,—Hon. Dr. ‘Aisake Valu Eke, Minister for Finance andand flood risk is not covered under the terms of

National Planning in Tonga

the insurance. Both of these events financiallyconstrained the government (see box 6).
The experience of the Solomon Islands

Contingent credit///

highlights the importance of building a DRFI
strategy that uses different tools to address

Contingent credit can be a useful tool for///different layers of risk. Countries need toaccessing additional funds post-disaster, but

decide exactly what type of risk they wish to cover

it has not been used in the Pacific to date. An

and what tools are best suited for this purpose.

advantage of contingent credit is that it is accessed

Insurance cannot be used as a singular solution

only following an event of a pre-agreed upon

to hazard risk. The experience of the Solomon

magnitude and is therefore off-budget. This type

Islands has also given impetus to developmentof tool may be subject to conditionality to ensureof additional DRFI products tailored to countries’

effective management upon receipt.

///

specific needs.

///

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Box 6— NDMO Budget Allocation, Solomon Islands
The disaster relief budget allocated to the Solomon Islands National Disaster Council is small—SBD1.9 million (US$262,000)—and was quickly exhausted
following the floods in 2014. That was the second year in a row that a single disaster exhausted not only the relief budget of the NDC but also theoperational budget. Both the floods in 2014 and the Santa Cruz earthquake in 2013 occurred in the first four months of the fiscal year (which is the sameas the calendar year), and each left the NDMO with only enough funds to cover its fixed costs for the remainder of the year. There were serious concerns
about what would have happened if another event had struck the Solomon Islands after the relief budget was exhausted.

Box 7— Tropical Cyclone Ian, 2014: Staff Relocation in Tonga
Following a statement of emergency, staff from the Ministry of Finance are relocated to the National Emergency Management Office. This

///

///

move helps to ensure that procurement of emergency supplies occurs as quickly as possible; normally it is senior staff with signing authority who are
relocated.

Post-Disaster
Budget Execution

Facilitating travel to the outer islands in///

PICs can account for a significant amount ofinitial relief and recovery funding and can

Anecdotal evidence from PICs suggests that///even countries with emergency procurement
procedures do not always adhere to themduring a disaster. Ministry of Finance staff were///reportedly often unaware of relevant procedures,
since they were not part of business as usual. To
address this issue, some PICs—among them Fiji andTonga—have established the practice of relocatinga Ministry of Finance staff member to the NDMO
to expedite purchases (see box 7).
Efficient post-disaster budget execution in

///

///

There is a risk that any established good practice
could lapse if these individuals were to leave key
response ministries or the government itself. To
avoid this risk in the future, PICs should develop a
post-disaster budget execution manual to act as adesk reference.

///

Tonga, for example, fuel, distribution, and traveland freight accounted for 39 percent of initial
relief expenditures from the emergency fund. Thissituation demonstrates how costly it can be toaccess the outer islands when facilitating response
efforts.
Many PICs have expressed their support for///allocating a higher level of response funding
to the NDMO to facilitate initial response.

PICs often relies on a few key individuals
dedicated to facilitating quick response.

drain limited public funds. Following TC Ian in///

Failure to do so can result in delayed initial damage
assessments and the development of relief
packages on “best guess” information. Following
TC Ian in Tonga, the Ministry of Finance itself
cited the need to allocate additional funds to the
National Emergency Management Office. The lackof budgetary allocation has also posed problems
for the Solomon Islands, where two years in a row
a single event has drained the annual budgetary
allocation.

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Property Insurance of
Public Assets
The insurance market in the Pacific is small,

US$111 and US$342, respectively, which suggests

served by only 34 companies (PFIP 2013). Thesehigh insurance penetration in these countries

companies themselves tend to be small; they havecompared to other PICs. However, these high rates

no independent financial security rating and pass

may be driven by the well-developed commercial

on their high administrative costs to the consumer

and tourism sectors in these countries, given thatin the form of higher premiums. Except for thosehouseholds remain largely uninsured.

///

///

that are a subsidiary of a large multinational
insurer, the companies tend to have low capital andCapacity within the reinsurance market is limited

solvency.

and associated premium costs are high, which
limits the size of risk accepted and keeps premiums

PICs are price takers when accessing

high.

///

insurance, as the market is small and has high
Most SOEs in PICs have some form of

exposure to catastrophic events relative to///premium incomes. Table 7, which shows non-life

property insurance, but the purchase of

insurance premium per capita for 2012, gives aninsurance is not centrally coordinated or///indication of insurance penetration in the region.

4

recorded (see table 8). All of the PICs studied///

Fiji and the Cook Islands, for example, haveexpressed their concern at not being able tonon-life premium per capita of approximately ofpurchase infrastructure insurance from theTable 7— Pacific Non-life Insurance Premium per Capita 2012 (US$)
COUNTRY

GDP MILLIONSPOPULATION

GDP PERCAPITA

MARKET
PREMIUM

PREMIUM PER
CAPITA

Cook Islands$305

19,300$15,823$6,600,000

$342

Fiji

$3,908874,700$4,467$97,500,000

$111

Samoa

$683

188,900$3,619$17,000,000$90

Solomon Islands$1,008549,600$1,130$13,000,000

$24

Tonga

$471

104,900$4,495$4,400,000$42

Vanuatu$781

247,300$3,182$16,500,000$67

Source: World Bank, 2014 a,b,c,d,e,f,g

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marketplace. It was either too expensive or simply

governments to attain better prices. This approach

not available.

should be complemented with a centralized
insurance register containing key information on

Accessing cyclone insurance for property

the assets insured and the exact coverage that has///

requires an engineer’s report certifying thatbeen purchased.

the insured property meets the building

There is a need to strengthen the regulatorycode. In order to better underwrite the cyclone
///

///

peril, insurers require that buildings be inspectedbodies for insurers across the region, or toand certified by local structural engineers. Given

introduce a regulator for those countries thatthe low number of qualified civil engineers

are unregulated at present. All PIC insurers

in the region, this can be both expensive andreport to the regulator (where there is one) on atime-consuming. Weak enforcement of building

quarterly basis. However, the reported information

codes is not uncommon in the region, given

could be used more effectively to encourage

limited capacity; and some countries, such as thefurther growth and expansion in the industry.

Marshall Islands, have no building code in place toGiven that the insurance industry is in its infancy

begin with.

in many PICs, it is expected that the regulation of///

insurance will improve over time.

PICs lack up-to-date centrally held asset///

registers or insurance registers, and thislack is potentially problematic. Assets could///

be undervalued if replacement values are out ofdate. Identifying a pool of key public properties toinsure and approaching the market could help PIC

Table 8— Pacific Government Property Insurance

COUNTRY

GOVERNMENTPROPERTY
ENSURED

SOE PROPERTYINSUREDINFRASTRUCTURE
INSURED

INSURANCELEGISLATION

Cook Islands

Yes

Yes

No

Insurance Act (2008)

Fiji

No

Yes

No

Insurance Act (1998)

Marshall Islands

Limited

No

No

None

Tonga

No

Yes

No

None

Samoa

Yes

Yes

No

Insurance Act (2007)

Solomon Islands

No

LimitedNo

Insurance Act (1985)

Vanuatu

No

Yes

No

Insurance Act (2005)

Source: World Bank, 2014 a,b,c,d,e,f,g

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End Notes

1 Priority for Action 4—“Reduce the underlying<sup></sup>

risk factors”—has an associated key activity of financial risk-sharing mechanisms, such as insurance,
while Priority for Action 5—“Strengthen disaster
preparedness for effective response at all levels”—
includes the establishment of emergency funds
such as contingency budget, national reserves, andannual budgetary allocations. See UNISDR (2005).
2 Normally 14 countries are classified as PICs, but<sup></sup>

for the purposes of the PCRAFI initiative Timor-Leste was included.
3 The Solomon Islands participated in the first two<sup></sup>

seasons of the insurance pilot and only. They are
not featured in the table below which covers thethird season. The coverage limit for the two expired
policies was equivalent to 185% of their contingency budget.
4 Please note data was not available for the Mar-

<sup></sup>

shall Islands

25

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References
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Disaster Risk Management Programs for Priority Countries.
Washington, DC: World Bank and ISDR.

Pacific Disaster Risk Reduction and Disaster Management
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2005–2015. SOPAC, Suva, Fiji.

———. 2012. The Sendai Report: Managing Disaster Risks for a
Resilient Future. Washington, DC: World Bank.
Government of Samoa. 2011 “Post Tsunami (Samoa September
2009–June 2011).” Government of Samoa, Apia, Samoa.

UNISDR (United Nations International Strategy for Disaster
Reduction). 2005. Hyogo Framework for Action 2005–2015:
Building the Resilience of Nations and Communities to Disasters. UNISDR, Hyogo, Japan.

IMF (International Monetary Fund). 2011a. “Fiji 2011 Article IV
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———. 2011b. “Republic of the Marshall Islands 2011 Article IV

World Bank. 2010. Financial Protection of the State against Natural Disasters: A Primer. Washington, DC: World Bank.

Consultation.” IMF, Washington, DC.
———. 2011. Acting on Climate and Disaster Risk for the Pacific,———. 2011c. “Solomon Islands 2011 Article IV Consultation.” IMF, Washington, DC.
———. 2012a. “Samoa 2012 Article IV Consultation.” IMF,
Washington, DC.
———. 2012b. “Tonga 2012 Article IV Consultation.” IMF,
Washington, DC.

Washington, DC: World Bank.
———. 2014a. Cook Islands: Disaster Risk Finance and Insurance
Country Note, Washington, DC: World Bank.
———. 2014b. Fiji: Disaster Risk Finance and Insurance Country
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———.2013a. “Cook Islands 2013 Article IV Consultation.” IMF,
Washington, DC.
———. 2013b. “Vanuatu 2013 Article IV Consultation.” IMF,
Washington, DC.
PCRAFI (Pacific Catastrophe Risk Assessment and Financing Initia-———. 2014c. Marshall Islands: Disaster Risk Finance and Insurance Country Note, Washington, DC: World Bank.
———. 2014d. Samoa: Disaster Risk Finance and Insurance
Country Note, Washington, DC: World Bank.

tive). 2011. “Country Risk Profile: Fiji.” PCRAFI, www.pacris.
sopac.org.
———. 2013. Catastrophe Risk Assessment Methodology. Wash-———. 2014e. Solomon Islands: Disaster Risk Finance and Insurance Country Note, Washington, DC: World Bank.

ington, DC: World Bank.
———. 2014f. Tonga: Disaster Risk Finance and Insurance CounPFIP (Pacific Financial Inclusion Program) 2013. Enhancing Supervisors Capacity in the Pacific to Create Inclusive InsuranceMarkets in the Pacific, PFIP, Suva, Fiji.
SOPAC (Pacific Islands Applied Geoscience Commission). 2005.

try Note, Washington, DC: World Bank.
———. 2014g. Vanuatu: Disaster Risk Finance and Insurance
Country Note, Washington, DC: World Bank.

FIJI
February 2015
Disaster Risk Financing and Insurance

CHAPTER 01

Country Note

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28

FIJI

Executive Summary
This note aims to build understanding of thedisaster budget execution. During the response

existing disaster risk financing and insurance

to TC Evan, an internal memo was produced(DRFI) tools in use in Fiji and to identify gaps

detailing the finance procedures and processes

where potential engagement could further

to be followed. This document has since beendevelop financial resilience. In addition thetransformed into a finance manual that sets out

note aims to encourage peer exchange of regionala step-by-step process, details the structure ofknowledge, specifically by encouraging dialogue on

the operation, and establishes key focal points,

past experiences, lessons learned, optimal use ofprocesses, and procedures before and during thethese financial tools, and the effect they may haveoperation and the acquittal process.

///

///

///

on the execution of post-disaster funds.
Fiji has F$3 million (US$1.6 million) available///

In 2012 alone Fiji experienced three major

in DRFI instruments to facilitate disasterevents with estimated total damage of F$146

response. It has established two sources of

///

///

million (US$78 million) (Government of Fiji

dedicated funds, the National Disaster Relief and2013c).These include the severe flooding in January

Rehabilitation Fund (NDRRF), which can release up///

in the areas of Ra, Tavua, Ba, Lautoka, Nadi,
Nadroga, Sigatoka, and Rewa; even more intense
flooding in these same areas in March; and Tropical
Cyclone (TC) Evan in December. The governmentof Fiji estimated that damage from the 2012 floods
was approximately F$71 million (US$38 million).
Fiji is expected to incur, on average over theto F$1 million (US$0.5 million), and the recently
established Rehabilitation Fund, which receives anannual appropriation of F$2 million (US$1 million).
In any given year, there is a 57 percent chancethat Fiji will experience government emergency
losses that exceed the F$3 million (US$1.6 million)
contingency provision.

///

long term, annual losses of F$158 million(US$85 million) due to earthquakes andtropical cyclones. In the next 50 years Fiji has a///

50 percent chance of experiencing a loss exceeding
F$1,500 million (US$806 million) and a 10 percent
chance of a loss exceeding F$3,000 million (US$1.6
Sectionbillion)(PCRAFI 2011).

(US$3.7 million) from the national budget
in 2012, equivalent to approximately 0.3
percent of the total budget (Government ofFiji 2013c). This money was used to finance the///initial disaster response for TC Evan. Fiji’s fiscal year
is the same as the calendar year, and given thatFiji has a taken a proactive approach to DRFITC Evan happened in December, a further F$17

and developed a finance manual for post-

million (US$9.1 million) was reallocated from the

///

01

The government of Fiji reallocated F$7 million///

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29

2013 budget to finance housing rehabilitation,

major transportation assets such as roads andequivalent to 0.7 percent of total expenditures.

bridges. This situation could result in delays in

The government of Fiji implemented tax///

concessions to encourage donations in thewake of TC Evan. A 200 percent tax deduction

reconstruction following a catastrophic event.
Some ministries and departments may insure
physical property assets on an individual basis.

///

was available to those who contributed F$1,000

A number of options to support ongoing///(US$537) and above into the NDRRF. In addition,

DRFI improvements in Fiji are presented

duty-free status was applied to goods that were

for consideration:

donated in kind.

///(a) the finance manual developed by the Ministry

The Fiji non-life (general) insurance market

of Finance for post-disaster procedures should

is the second-largest in the Pacific Island

be finalized, and cabinet approval should be

Countries, with a total premium of F$174.5

sought;///million (US$95 million). Seven local insurers are///

currently operating with a total premium income(b) an overarching disaster risk financing andinsurance strategy should be developed thatof F$145.5 million (US$78 million). The balance ofincludes options for risk transfer; andF$29 million (US$16 million)—17 percent of themarket—is placed with offshore insurers by thefour local brokers.

(c)assets should be identified in order to develop
an insurance program for critical public assets.

The government of Fiji does not have a///property insurance program in place forkey public or infrastructure assets, including///

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Introduction
Fiji is located in the tropical cyclone belt andthe need for a comprehensive approach to///experiences on average one cyclone per year.

///

disaster reduction, including community

This exposure poses problems for the Government

preparedness, disaster mitigation, and theof Fiji, as the maintenance and repair of national

integration of the impact of disasters into national

infrastructure following cyclones drains limited

development planning.

financial resources. In addition, Fiji is located in the
Pacific Ring of Fire and is exposed to geophysicalhazards, such as volcanoes, earthquakes, tsunamis,
and landslides. Fiji has a land area of 18,273 km2
and comprises 332 islands, of which 110 are
populated by approximately 860,000 inhabitants.1
The majority of the population live on the twomain islands of Viti Levu and Vanua Levu.

The government of Fiji is seeking to developa Joint National Action Plan for Disaster Risk
Management and Climate Change Adaptation.
These efforts are led by the NDMO, which isin discussions with the Ministry of Strategic
Planning, National Development and Statistics,
and the Department of the Environment, as well
the Secretariat of the Pacific Community Applied

In 2001 Fiji established the National DisasterGeosciences Division (SPC-SOPAC), the Secretariat

Management Office (NDMO), which isof the Pacific Regional Environment Programme

responsible for the coordination of response(SPREP), United Nations Development Programme///

to natural disasters. The NDMO operates(UNDP) Pacific Centre, the United Nations

under the jurisdiction of the Natural Disaster

International Strategy for Disaster Reduction

Management Act (1998), which sets out the(UNISDR), and other partners. The institutional

provisions for the government and relevant

frameworks that are already in place are these:///agencies in relation to management of natural
disasters and related activities. The act provides

•

2015

the legislative basis for the Fiji National Disaster
Management Plan (1995), which outlines in some

Hyogo Framework for Action (HFA) 2005–•

Pacific Disaster Risk Reduction and Disasterdetail the roles, responsibilities, and proceduresManagement Framework for Action (Regional

relevant to the conduct of disaster preparedness

Framework for Action or RFA) 2005–2015

and emergency operations (NDMO 1995).
•
SectionIn 2007 the Government of Fiji approved theSustainable Economic and Empowerment
Development Strategy 2008–2010///

Sustainable Economic and Empowerment

01

Development Strategy 2008–2010, one of•Fiji National Disaster Management Plan 1995•

Cyclone Support Plan 1997•

Fiji National Disaster Management Act 1998///

whose goals is “reducing vulnerability to disasters
and risks and promoting sustainable development”
Government of Fiji 2007). The strategy recognizes

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Disaster risk financing and insurance (DRFI) is///a key activity of the HFA Priorities for Action
4 and 5.2 The HFA is a result-based plan of action
<sup>

///

</sup>

adopted by 168 countries to reduce disaster risk
and vulnerability to natural hazards and to increase
the resilience of nations and communities todisasters over the period 2005–2015. In the Pacific,
the HFA formed the basis for the development of
the Regional Framework for Action.
The RFA cites DRFI activities as a key national31

is one application of the Pacific Catastrophe Risk
Assessment and Financing Initiative (PCRAFI).
The Pacific DRFI Program is built upon a threetiered approach to disaster risk financing. Theselayers align to the basic principles of sound publicfinancial management, such as the efficient
allocation of resources, access to sufficient
resources, and macroeconomic stabilization. The
three tiers acknowledge the different financial
requirements associated with different levels of
risk:

///

and regional activity. Theme 4—“Planning for///effective preparedness, response and recovery”—
has an associated key national activity, “Establish anational disaster fund for response and recovery.”
Theme 6 of the RFA—“Reduction of underlying
risk factors”—cites the development of “financial
risk-sharing mechanisms, particularly insurance,(a) Self-retention, such as a contingency budget
and national reserves, to finance small but
recurrent disasters;(b) A contingent credit mechanism for lessfrequent but more severe events; and(c)re-insurance and other financial modalities
against disasters as both a key national andDisaster risk transfer (such as insurance) tocover major natural disasters. See figure 1.

to meet post-disaster funding needs without

This note aims to build understanding of
the existing DRFI tools in use in Fiji and to
identify gaps where potential engagement
could further develop financial resilience.
In addition, the note aims to encourage peer
exchange of regional knowledge, specifically byencouraging dialogue on past experiences, lessons
learned, optimal use of these financial tools, andthe effect of these tools on the execution of post-compromising their fiscal balance. This program

disaster funds.

regional activity” (SOPAC 2005). These regional
implementation activities align with the three-tiered
disaster risk financing strategy developed by theWorld Bank.

///

///

The Pacific DRFI Program enables countries///

to increase their financial resilience against
natural disasters by improving their capacity///

Figure 1 — Three-Tiered Disaster Risk Financing Strategy

Risk Transfer

Low Frequency/
High Severity

International AssistanceSovereign Risk Transfer(e.g. Cat Bond/Cat Swap, (re)insurance)

Risk Retention

High Frequency/
Low Severity

Contingent Credit Lines

Source: World Bank 2010.

Insurance of Public Assets

Post Disaster Credit

SectionGovernment Reserves, Contingency Budget / Funds

01
Emergency Funding

Reconstruction

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32

Economic Impact ofNatural Disasters
Since 2003, climate-related hazards have

Figure 2 — Land Cover and Land Use in Fiji///caused damage and loss in Fiji estimatedin excess of F$590 million (US$317 million)///(Government of Fiji 2013c). This figure includes
damage and loss from major events such as TC
Ami in 2003, which resulted in estimated damages
in excess of F$100 million (US$54 million). The
costs associated with disasters pose problems forthe government of Fiji, as the repair of national
infrastructure following floods and other hazard
events drains limited national financial resources.
In 2012 alone, Fiji experienced three major///

events with estimated total damage of F$146
million (US$78 million) (Government of Fiji
2013c). These include severe flooding in the///areas of Ra, Tavua, Ba, Lautoka, Nadi, Nadroga,
Sigatoka, and Rewa in January; even more intense
flooding of the same areas in March; and TC Evanin December. The government of Fiji estimatedthat damage from the two 2012 floods wasapproximately F$71 million (US$38 million).
Total damage and loss from TC Evan in///

December 2012 was reported in the PostDisaster Needs Assessment to be F$200
Sectionmillion (US$108 million); the recovery andreconstruction needs were estimated to be
F$135 million (US$73 million). In comparison,///

01

the Initial Damage Assessment by the government

Source: PCRAFI 2011.

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33

Figure 3 — Direct Losses by Return Period

DIRECT LOSSES (MILLION USD)

2000
1500
TC + EQ
TC

1000

EQ

500
Source: PCRAFI 2011
Note: TC = tropical cyclone; EQ = earthquake.

0
0

100

200

300

400

500

600

700

800

900

1000

MEAN RETURN PERIOD (YEARS)

estimated damage at approximately F$75 million

the largest tourism industry of any Pacific Island(US$40 million) (NDMO 2012). TC Evan caused

Country (PIC), and an estimated 24 percent ofwidespread damage to property, infrastructure,

its population work in tourism (Scheyvens andand crops in northern Vanua Levu and western

Russell 2010). Because it relies heavily on coastal

Viti Levu.

attractions, this sector is highly vulnerable tocyclones and their consequent storm surge, as

Agriculture and tourism are major drivers

well as disruptions to key transport links. Figure///of the Fiji economy, and both sectors are
susceptible to damage from natural hazards.

2 shows Fiji’s land use/land cover. The coastal
location of fields for growing Fiji’s main productive///

Agriculture was the most heavily impacted sector

crop, sugarcane (depicted in yellow), suggests thefollowing TC Evan: it experienced damage and loss

extent of this crop’s exposure and vulnerability.

amounting to F$44 million (US$24 million), with
86 percent of damage occurring to the private
sector and 14 percent to the public sector. Fiji has

Figure 4 — Average Annual Loss by Area

Main Islands
0

25

50

100

Labasa180°

Kilometers

178° E

15° S

20° S

Suva Total Average Annual

178° W

Fiji

Main
Islands

0200

178° E

400

15° S

Section20° S

178° W

01

Loss (million USD)

Suva

0 1 2

4

0 - 0.05

0.5 - 1.0

0.05 - 0.1

1.0 - 2.5

0.1 - 0.25

2.5 - 5.0

0.25 - 0.5

5 - 10Source: PCRAFI 2011

PCRAFI

34

FIJI

Fiji is expected to incur average annual losses///

over the long term of F$158 million (US$84
million) due to earthquakes and tropical
cyclones. In the next 50 years Fiji has a 50 percent///

chance of experiencing a loss over F$1,500 million(US$806 million) and a 10 percent chance of a loss
exceeding F$3 billion (US$1.6 billion) (see figure 3).
Figure 4 shows the average annual loss by area,with red indicating high levels of average annual
losses—those with a range of US$5 million to
US$10 million. The full risk profile for Fiji can befound in annex 4.

Photo Credit

///

///

Kyle Post/Flickr b

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35

Public Financial
Management of
Natural Disasters
By relocating members of staff to the NDMO

Effective post-disaster financial response relies on

to facilitate rapid execution of funds, thetwo fundamental capabilities:///

Ministry of Finance plays an integral role indisaster response. This practice has thus far been///

carried out on a goodwill basis, however, and is not(a) The ability to rapidly mobilize funds postdisaster; andformally documented or required. There is a risk(b) The ability to execute funds in a timely,that this could lapse should key individuals leavetransparent, and accountable fashion.

the department.

This section discusses the existing procedures forFiji has a taken a proactive approach to DRFI

post-disaster budget mobilization and execution///

and developed a finance manual for Disaster
Management Council (DISMAC) operations.

and where possible provides examples of their use.

///

During TC Evan, an internal memo was produced
that detailed disaster-related finance proceduresand processes. This document has since beentransformed into a finance manual that sets out
a step-by-step process, details the structure of
the operation, and establishes key focal points,
processes, and procedures before and during theoperation and the acquittal process.

Section01

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36

Post-Disaster
Budget Mobilization

FIJI

Clauses 32 and 33 of the Finance Instructions///

2010 detail the process for emergency
purchases and immediate relief assistance,
respectively.3 They stipulate that when procuring

The government of Fiji utilizes ex-ante

///

///

financial instruments and combines these with
innovative ex-post financial tools such as tax
incentives to finance the costs of disasters.

///

Fiji has established the National Disaster Relief andRehabilitation Fund (NDRRF), also known as thePrime Minister’s Fund, as well as the Rehabilitation
Fund, which is an annual appropriation to the
NDMO. To complement these ex-ante tools, thegovernment implements ex-post financial tools,
such as flash fund appeals and tax incentives toencourage donations from the private sector aswell as members of the public. Budget reallocation
reportedly takes between one and three months,

goods and services, existing contracts with
suppliers must be utilized; should a new supplierbe needed, the normal legal purchase orderprocess is waived and immediate payment is madeto suppliers. Approval of the minister of finance isneeded before emergency procurement operations
can commence. Any such emergency expenditure
should then be acquitted in a report back to the
Ministry of Finance. The procedures for ongoingrelief assistance and rehabilitation are set out inClause 34 and include a transition phase backtoward business-as-usual procedures.
While a member of staff from the Ministry///

but additional budget support, if required, can beof Finance is generally relocated to NDMO asprovided to ensure the response effort continues

part of the DISMAC to assist with emergency(see Table 1).

Table 1— Sources of Funds Available
SHORT TERM
(1-3 MONTHS)
Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Flash Appeal
Ex-ante Financing
Emergency FundContingency Budget
Contingent Credit

SectionSovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance

01

Source: Government of Fiji; World Bank.

MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)PCRAFI

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37

operations after a disaster, this transfer is not

Those sections highlighted in gray are for genericdocumented as a requirement. It is required,instruments that to date have not been used in Fiji.

///

Ex-Ante Practices and Arrangements

Finance be appointed and assume responsibility
DISMAC. The finance procedures and processes
for DISMAC contain the authorization process
and signatories for expenditures, a template
for acquittals, and a process to begin seeking
additional assistance once expenditures exceed 67
percent of the emergency budget.

///

Kyle Post/Flickr b

however, that a team leader from the Ministry offor verification of purchases before handover to

Photo Credit///

The uncertainty surrounding international
assistance has put pressure on countries toestablish domestic sources of finance for postdisaster relief, such as the establishment of
national reserves or the transfer of risk to theinternational insurance market. Fiji’s ex-ante
practices and arrangements include budgetary

The various ex-ante and ex-post financial tools

appropriation, the NDRFF, a contingency budget,used in Fiji take significantly different lengths

and external debt.

///

of time to mobilize and execute. Building on the

Budgetary appropriation///

World Bank disaster risk financing and insurance
framework (see annex 1), table 1 shows the ex-

Since 2012 the National Disaster Management///

ante and ex-post financial tools available, indicates

Office has received an annual budget of

those utilized by Fiji, and gives indicative timings.

F$2 million (US$1 million) for rehabilitation

The tools utilized by Fiji are highlighted in blue.

work. When these funds were rapidly exhausted///

Section01

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38

FIJI

following TC Evan, the NDMO requested a F$3

in the housing sector, F$1 million (US$0.5 million)

million (US$1.6 million) contingency fund to

was allocated from the NDRRF.

help with response. The NDMO would also like

Contingency budget

dedicated funds to be established at the provincial
level to reduce the time lag for procuring urgent

In 2014 a general reserve allocation of///relief supplies.

F$$5.3 million (US$2.9 million) was made for
unforeseen and unavoidable expenditures.

National Disaster Relief and Rehabilitation Fund///

While some of this might be used to facilitate
In 2004 the National Disaster Relief anddisaster response, it is unlikely that the whole///

Rehabilitation Fund, also known as the Prime
Minister’s Fund, was approved by the cabinet.

amount would be available, given that the general///

The NDRRF is held and managed by the Prime

reserves are drawn down from the beginning of
the financial year.

Minister’s office, and monies from this accountExternal debt

can be released when necessary in the wake ofan event. It is utilized following a Statement of
Natural Disaster and for response purposes only.
It receives an annual contribution of F$1 million(US$540,000F$) from the government of Fiji. It
is also possible for individuals and private sector
entities to deposit funds into the account, whichhappens frequently throughout the year. This fundis able to accrue and the balance was F$2.2 million(US$1.17 million) as of October 1, 2013.
Following TC Evan, additional donations from///the private sector, members of the public, andinternational partners totaled F$0.5 million(US$0.27 million). To assist with reconstruction///

In 2012 the ratio of debt to gross domestic///

product (GDP) in Fiji was 51.1 percent (IMF2013), down from a ratio of 53.0 percent in2011 (Government of Fiji 2013b). One-quarter///of the stock of debt was attributable to externalsources.
Fiji’s level of external debt is set to decline///

significantly in 2016 if full settlement of its///

F$465 million (US$250 million) global bond isachieved; in 2013 the government’s external
debt sinking fund had a balance of F$238 million(US$128 million). The government still faces
the challenge of a heavy maturity program ofTable 2— Fiscal Year 2013 Composition of Operating Payments

Personnel

FISCAL YEAR 2013
(US$ MILLION)% OF TOTAL BUDGET

674

362

39.8

724

389

42.8

Operationsb

294

158

17.3

Total budget

1,692

910

100%

Commitments

SectionFISCAL YEAR 2013
(F$ MILLION)a

Source: Government of Fiji; World Bank.
Note:
a. “Commitments” refers to the sum of transfer payments and interest.

01

b. “Operations” refers to the sum of supplies and consumables, purchase of outputs, and other operational costs.

PCRAFI

FIJI

domestic debt in the next five years (Government

39

In 2012, the floods resulted in reallocation///of almost 2 percent of the total budget. Thisof Fiji 2013b).

///

Most of the budget deficit has been financed
by domestic bonds, with the remainder being
the drawdown of external loans. Economic andpolitical uncertainties have constrained investment,
including private sector and foreign direct
investment, which averaged around 15 percent
of GDP between 1996 and 2012 (IMF 2013).

equated to F$36.1 million (US$19.4 million). The
majority of this money was to meet the flood
rehabilitation and reconstruction requirements,
which amounted to F$29.4 million (US$16 million),and a further F$6.7 million (US$3.6 million) went
for other unbudgeted commitments.
A maximum of F$294 million (US$158 million),///

The successful conclusion of the 2014 election,or 17.3 percent of operating payments, could

however, is expected to boost investment as policy

potentially be reallocated following a disaster.

uncertainty is reduced.

The remainder of operating payments cannot be

Ex-Post Practices and Arrangements
Because disasters generally exceed a country’s
capacity to cope with them, there will always be aneed for ex-post practices and arrangements. An
optimal strategy for DRFI relies on a combination///

reallocated because it comprises personnel costs
and commitments (see table 2).

Donor funds for relief
and reconstruction
While donor funds will always be required,///of ex-ante and ex-post financial instruments.

there will often be an element of uncertainty

Ex-post arrangements benefit from being able

surrounding how much will be provided,

to establish the extent of the disaster andwhat will be provided, and when funds willprioritize the response needs. As a result these

arrive in country. Consequently, overdependence

arrangements take longer to implement than ex-

on international relief as a source of post-ante arrangements, but they can often mobilize

disaster financing can create delays in thelarger amounts of finance. This section discusses

provision of initial relief and can inhibit ex-antethe ex-post practices and arrangements that havecontingency planning. Development partners,

been made by Fiji.

international organizations, local nongovernmental///organizations, businesses, and individuals

Budget reallocation

contribute in the form of cash grants and aid in

The Financial Management Act 2004 underkind. The provision of aid in kind, while vital, can///section 22 sets out the process for theredeployment4 of funds. The minister of<sup></sup>

affect the costs borne by governments for the
distribution these goods.

///

finance, subject to the approval of the cabinet,

Following TC Evan, the government of Fiji///can reallocate funds in the Annual Appropriation

received approximately F$9 million fromAct. The reallocation should be laid out in a billinternational organizations, nongovernmental

to be submitted for cabinet approval and is often

organizations, development agencies, local

based on the quarterly expenditure review. Givenbusinesses, and individuals. Of this amount,///the reporting requirements, it is estimated that the

60 percent was provided as aid in kind, while theredeployment of funds takes two to three weeks,remainder was provided in the form of conditional

although it reportedly took two to three months

cash grants (Government of Fiji 2013c).

following TC Evan.

Section01

PCRAFI40

Tax incentives

FIJI(US$1 million). There is a 57 percent chance that

The government of Fiji implemented tax///

concessions to encourage donations in thewake of TC Evan. A 200 percent tax deduction ofFiji will experience government emergency losses
of F$3 million (US$1.6 million) or greater in any
given year.

///

the donation amount was available to those who
contributed F$1,000 (US$540) and above into the

While Fiji has established some dedicated///reserves, the funds are limited and will be

NDRRF. In addition, duty-free status was applied toexhausted quickly. To avoid any funding gap that

goods donated in kind.

could impede disaster response, it is recommended///

that Fiji consider the use of other ex-ante financial

Total Response Funds Available
Fiji has F$3 million (US$1.6 million) available///

in ex-ante instruments to facilitate disaster
response. Fiji has established two sources of///dedicated, yet limited, funds: the NDRRF, which
can release up to F$1 million (US$0.54), and therecently established Rehabilitation Fund, which
Section01

receives an annual appropriation of F$2 million

tools such as contingent credit. Fiji has expressedinterest in participating in the Pacific Catastrophe
Risk Insurance Pilot, but it could also benefit frominsuring its critical public assets.

Photo Credit

///

///

Kyle Post/Flickr b

PCRAFI

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41

Post-Disaster
Budget Execution

was reallocated from the 2013 budget, equivalent

The Ministry of Finance developed a financewith support from the World Bank, conductedmanual for the NDMO to help ensure that

post-disaster needs assessment training in

staff are aware of the correct post-disaster

Suva, Lautoka, and Labasa. A total of 119

finance procedures. However, this document

government staff have now been trained in thisdoes not stipulate the need to reallocate staff

internationally recognized methodology—anfrom the Ministry of Finance to the NDMO andachievement that demonstrates the dynamic

has not been approved by the cabinet. The

environment that exists within Fiji for ongoing

document should be reviewed and approved by

improvement in disaster response. Adopting a

the cabinet in order to embed the good practices

standardized approach to the post-disaster needs

already established.

assessment will make it possible to produce theseto 0.7 percent of total expenditures.
In September 2013, the government of Fiji,

///

///

///

///

assessments more quickly and expedite access to

The government of Fiji reallocated F$7 million

additional donor support through the associated///(US$3.7 million) from the national budget inrecovery and rehabilitation framework.

2012, equivalent to approximately 0.3 percentof the total budget (Government of Fiji 2013c).

///

This money was used to finance the initial disaster
response for TC Evan. Fiji’s fiscal year is the same as
the calendar year, and since the event happened in
December, a further F$17 million (US$9.1 million)

Figure 5 — Amount of Ex-Ante Funds Available for Immediate Response

Disaster risks

Disaster risk ﬁnancing
instruments

Amount of funds
available

High-risk layer(E.G. Major earthquake,major tropical cyclone)

Disaster risk insurance

N/A

Medium-risk layer(E.G. Floods, small earthquakes)

Contingent credit

Low-risk layer(E.G. Localized ﬂood, landslides)

Contingency budget,
national reserves, annual
budget allocation

Source: World Bank.

Rehabilitation budget:
F$2M (US$1M)
NRRRF:
F$1M (US$0.5M)

Section01

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FIJI

Insurance of
Public Assets
The Fiji non-life (general) insurance market

Fiji is exposed to the catastrophic perils of

///

///

is the second-largest in the PICs, with a total
premium of F$174.5 million (USD$93 million).

cyclones and earthquakes. Fiji is in the Southern
///

///

Hemisphere tropical cyclone zone. Earthquakes

Seven local insurers are currently operating withare known to have occurred in Fiji. The last majora total premium income of F$145.5 million. The

earthquake in a built-up area (Suva) was in 1953

balance of F$29 million (US$16 million) is equal
to 17 percent of the market and is placed with
offshore insurers by the four local brokers.
Fiji has legislation in place—the Insurance

and was large enough to trigger a tsunami.
The total general insurance market, in the///context of the size of the Fijian economy and///Act (1998) and regulations—to regulate thepopulation, suggests relatively high insurance

insurance industry. The Reserve Bank of Fiji

penetration. The country’s non-life premium is(RBF) is the regulator. The RBF undertakes

approximately F$206 (USD$111) per capita, which

reviews to ensure that solvency margins are met,is high for PICs. The commercial sector is the majorthat there is adequate reinsurance protection

contributor to this apparently high penetration,in place for insured catastrophe risks, and thatbased on premium volume. Households remainproperty and other accumulations are monitored.

largely uninsured.

///

///

Offshore insurance placements must be approvedby RBF before premium is remitted overseas.

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43

Insurance for catastrophe insurance perils

bridges, are uninsured, which could result in delaysof earthquake and cyclone are available inin reconstruction following a catastrophic event.

the market and can be included in property

Some ministries and departments may insure

insurance products. Cyclone insurance is

physical property assets on an individual basis.

///

///

available only as an extension to property policies
once an engineer’s certification of compliancewith the building code has been received. Storm
surge caused by cyclones is normally excluded.
Earthquake is underwritten by insurers on differingbases. Tsunami is included as an earthquake peril
by some insurers but excluded by others. Property
insurance rates for the cyclone peril are aroundthe Pacific average (0.30 percent); rates for theGovernment-owned commercial companies///

and statutory authorities arrange theirown insurance programs, including property///

insurance for key assets. Each public authority
must make its own arrangements for property
insurance. Most of these programs insure
earthquake, but the cyclone insurance extension is
not always taken.

earthquake peril (0.08 percent) are lower than in

Please refer to annex 3 for the full market

most other Pacific countries.

insurance review that was conducted in Fiji.

The government of Fiji does not have a///property insurance program in place for key
public or infrastructure assets. This means that///major transportation assets, such as roads andPhoto Credit

///

///

Kyle Post/Flickr b

PCRAFI

44

FIJI

Options for
Consideration
The government has well-documented processes
and procedures for DRFI and has taken steps

Recommendation 2: Develop an overarching///disaster risk financing strategy aligned toto improve the post-disaster budget execution

existing processes. Fiji has taken a proactive

procedures for the next event. To assist with

ex-ante approach to DRFI. The funds available

the continuous improvement underway in Fiji,are limited, however, and options for risk transfer

the following recommendations are suggested

should be considered. It is proposed that an///for consideration.

overarching DRFI strategy be developed andRecommendation 1: Finalize the existing

document to articulate the available financing

finance manual for the NDMO and seek

options and the associated policies behind thesecabinet approval. Good progress has been madetools. An action plan for implementation activities

to develop and document current procedures.

is also recommended.

endorsed by the cabinet. This would create a single

///

///

Some procedures, however, such as the relocation

Recommendation 3: Identify assets to be///of staff from the Ministry of Finance to the NDMO
during the initial response phase, are not currently

included in an insurance program for critical
public assets. This process would investigate///

included and should be added. It is important thatexisting insurance coverage provided in country

staff know and understand the correct procedures

and develop a table detailing coverage options by

to follow in the event of a disaster. A manual thatprovider to assist with decisions about which assets

brings together all relevant procedures in a single

to include and what appropriate coverage would

document and that has been approved by thebe. Barriers to accessing catastrophe insurance

cabinet would institutionalize current processes,

would be identified, and solutions developed forand it would guard against the risk of lapse even if

facilitating appropriate coverage of critical public

key staff members were to leave their positions.

assets. This work would build on the annual

Photo Credit

///

///

Kyle Post/Flickr b

insurance report produced by the RBF.

PCRAFI

FIJI

45

End Notes
1 Figure is based on the 2012 projections by the Fiji Bureau<sup></sup>of Statistics

2 Priority for Action 4—“Reduce the Underlying Risk Factors”—<sup></sup>

has an associated key activity of financial risk-sharing mechanisms, such as insurance, while Priority for Action 5—“Strengthen
disaster preparedness for effective response at all levels”—includes the establishment of emergency funds such as contingency
budget, national reserves, and annual budgetary allocations. See
UNISDR (2005).

3 The Finance Instructions 2010 are available on the Ministry of<sup></sup>

Finance website at http://www.finance.gov.fj/legislation.html.

Section01

PCRAFI

46

References
GFDRR (Global Facility for Disaster Reduction and Recovery)
2012 The Sendai Report: Managing Disaster Risks for Resilient
Future, Washington D.C., U.S.A.

SOPAC (Pacific Islands Applied Geoscience Commission). 2005.
Pacific Disaster Risk Reduction and Disaster Management
Framework for Action (Regional Framework for Action or RFA)

Government of Fiji. 2007. “Sustainable Economic and Empower-

2005–2015. SOPAC, Suva, Fiji.

ment Development Strategy 2008–2010.” Ministry of Finance,
National Planning and Sugar Industry, Suva, Fiji. November.
www.planning.gov.fj.

SPC (Secretariat of the Pacific Community) 2011 Cook Islands:
Investment in DRM, Suva, Fiji———. 2013b. “Government Debt Report Fiscal Year 2012.”
Government of Fiji, Suva, Fiji.
———. 2013c. “Post-Disaster Needs Assessment: Tropical Cyclone

SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment
in DRM, Suva, Fiji

Evan 17th December 2012.” Government of Fiji, Suva, Fiji.
SPC (Secretariat of the Pacific Community) 2011 Republic of
IMF (International Monetary Fund). 2011. “Fiji 2011 Article IV

Marshall Islands: Investment in DRM, Suva, Fiji

Consultation.” IMF, Washington, DC.
———. 2013. “Fiji 2013 Article IV Consultation.” IMF, Washington, DC.
NDMO (National Disaster Management Office). 1995. “Fiji Disaster Management Plan 1995.” Government of Fiji, Suva, Fiji.
http://www.ndmo.gov.fj/ndmo-legislature/ndmo-plan.
———. 1998. National Disaster Management Act 1998. Government of Fiji, Suva, Fiji. http://www.ndmo.gov.fj/ndmo-legislature/ndm-act.
———.2012. “TC Evan Initial Damage Assessments.” Government of Fiji, Suva, Fiji.
PCRAFI (Pacific Catastrophe Risk Assessment and Financing

SectionInitiative). 2011. “Country Risk Profile: Fiji.” September. www.

SPC (Secretariat of the Pacific Community) 2011 Vanuatu: Investment in DRM, Suva, Fiji

SPC (Secretariat of the Pacific Community) 2012 Papua New
Guinea: Investment in DRM, Suva, Fiji

SPC 2012 “Investment in DRM—Cook Islands.” Secretariat of the
Pacific Community, Suva, Fiji.

UNISDR (United Nations International Strategy for Disaster
Reduction). 2005. Hyogo Framework for Action 2005–2015:
Building the Resilience of Nations and Communities to Disasters. UNISDR, Hyogo, Japan.

pacris.sopac.org.
World Bank 2010 Financial Protection of the State against Natural

01

Scheyvens, R., and M. Russell. 2010. “Sharing the Riches ofTourism: Summary Report—Fiji.” March. NZAID. https://www.
aid.govt.nz/webfmsend/314.

Disasters; A Primer, Washington D.C., U.S.A.

FIJI

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47

Annex

Insurance Market Review, February 2014

Executive Summary

insurance penetration. The country’s non-life

The Fiji non-life (general) insurance market

capita, which is high for PICs. The commercial

is the second-largest in the Pacific Island

sector is the major contributor to this apparently

Countries (PICs), with a total premium ofhigh penetration, based on premium volume.

F$174.5 million (US$94 million). Seven local

Households remain largely uninsured.

///

///

premium is approximately F$206 (US$111) per///

insurers are currently operating with a premiumincome of F$145.5 million (US$78 million). The

Insurance for catastrophe insurance perils///

balance of F$29 million (US$15.6 million) is equalof earthquake and cyclone is available in

to 17 percent of the market and is placed withthe market and can be included in property

offshore insurers by the four local brokers.

insurance products. Cyclone insurance isFiji has legislation in place—the Insurance///

Act (1998) and regulations—to regulate theinsurance industry. The Reserve Bank of Fijiavailable only as an extension to property
policies once an engineer’s certification ofcompliance with the building code has been
received. Sea surge caused by cyclones is normally///(RBF) is the regulator. The RBF undertakes///

reviews to ensure that solvency margins are met,that there is adequate reinsurance protectionin place for insured catastrophe risks, and thatproperty and other accumulations are monitored.
Offshore insurance placements must be approvedby RBF before premium is remitted overseas.
Fiji is exposed to the catastrophe perils of///

cyclones and earthquakes. Fiji is in the Southern///

Hemisphere tropical cyclone zone. Earthquakes
are known to have occurred in Fiji. The last major
earthquake in a built-up area (Suva) was in 1953
and was large enough to trigger a tsunami.

excluded. Earthquake is underwritten by insurers
on differing bases. Tsunami is included as anearthquake peril by some insurers but excluded
by others. Property insurance rates for the cyclone
peril are around the Pacific average (0.30 percent);
rates for the earthquake peril (0.08 percent) arelower than most other Pacific countries.
The government of Fiji does not have///property insurance programs in place for key
public or infrastructure assets. This means///that major transportation assets such as roads
and bridges are not insured, which could result indelays in reconstruction following a catastrophic

The total general insurance market, in theevent. Some ministries and departments may

context of the size of the Fijian economy

insure physical property assets on an individual

and population, suggests relatively highbasis.

///

Section01

PCRAFI48

Government-owned commercial companies

FIJI

The general insurance market has a total

///

///

and statutory authorities arrange their own

premium of F$174.5 million (US$94 million),insurance programs, including property

which in the context of the size of the Fijian

insurance for key assets. Public authorities’

economy and population suggests relatively

property insurance is arranged by each individual

high insurance penetration(RBF 2012).

public authority. Most of these programs insure

However, examination of industry data indicates

earthquake, but the cyclone insurance extension isthat the commercial sector is the major contributor

not always taken.

to this apparently high penetration. Viewed on a

///

///

premium volume basis, households remain largely
uninsured. The seven local insurers currently have

Insurance Market Overview

a combined premium income of F$145.5 million(US$78 million). The balance of F$29 million

There are eight registered non-life (general)(US$15.6 million) is placed with offshore insurers///

insurers in Fiji, with seven currently operatingby the four local insurance brokers.

///

and one in run-off. These seven insurers andtheir company status are detailed in table 1. Of

The New India Assurance Company Limited isthe seven insurers, QBE, New India, and Tower

registered in India and has a branch in Fiji. Its

were reported to be the most active in the Firefinancial strength rating, issued by A. M. Best(property) insurance class, which includes theon January 16, 2013, is A- (excellent). Concern

catastrophe perils of earthquake and cyclone whenwas expressed by a source outside the insurance

underwritten. General insurers suffered significant

industry that New India (Fiji) was slow in paying

losses in the Fire class in 2009 and 2012 due tomajor claims, possibly due to its branch status andcyclone and flood events.

Table A .1— Non-life (General) Insurers Operating in Fiji 2012
COUNTRY OF
INCORPORATIONCOUNTRY OF
OWNERSHIPSTATUSFINANCIAL SECURITY

Fiji

Papua New Guinea

Subsidiary

Local solvency

Fiji

Fiji

Local co.

Local solvency

Fiji

Australia

Subsidiary

Local solvency

India

India

BranchSun Insurance Co. Ltd.

Fiji

Fiji

Local co.

Local solvency

QBE Insurance (Fiji) Ltd.

Fiji

Australia

Subsidiary

Local solvency

Fiji

New ZealandSubsidiary

Local solvency

COMPANY
BSP Health Care (Fiji)
Ltd.
Dominion Insurance
Co. Ltd.
Fiji Care Insurance Co.
Ltd.
New India Assurance
Co. Ltd.

SectionTower Insurance (Fiji)
Ltd.

01

Source: RBF 2012; World Bank.

A. M. Best “A-” (excellent) & local
solvency

PCRAFIFIJI

the need to refer any major loss events to the head
office in India.
QBE Insurance (Fiji) Limited is a wholly owned
subsidiary of QBE Insurance Group Limited, anAustralian company listed on the Australian stock
exchange. As QBE (Fiji) is a subsidiary, it has no
additional financial security in place beyond thatthe solvency requirements of the Insurance Act.
Tower Insurance (Fiji) Limited does not have its
own financial security rating. The parent, Tower
Insurance Limited, has a security rating of A-

Photo

///

Credit///Kyle Post/
Flickr b(excellent) from A. M. Best dated July 26, 2013,in accordance with the New Zealand Insurance
Prudential Supervision Act (2010).

provided under the solvency requirements of the

All other local insurers are locally registered or

Insurance Act. QBE (Fiji) does not have its own

subsidiaries with no financial security ratings,

financial security rating. The ultimate parent, QBE

though all are in compliance with local insurance

Insurance Group Limited, has a security rating of A-

solvency regulation.

from Standard & Poor’s dated May 22, 2013, and49

an A+ rating for core operating entities.

Offshore market

Tower Insurance (Fiji) Limited is a wholly owned

The main offshore insurers used for placement

subsidiary of Tower Insurance Limited, a New

of Fiji risks are Lloyds and the associated London

Zealand registered company listed on the New

market. Placement is arranged by local brokers

Zealand and Australian stock exchanges. As Tower

Aon, Marsh, and Insurance Holdings (a member(Fiji) is a subsidiary, it has no additional financialof the Willis global network), all of which havesecurity in place, other than that provided underinternational connections. The RBF must approve

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50

FIJI

Table A .2— Pacific Non-life Insurance Premium per Capita 2012 (US$)
MARKET

GDP MILLIONSPOPULATION

GDP PER CAPITA

MARKET
PREMIUM

PREMIUM PER
CAPITA

Cook Islands$305

19,300$15,823$6,600,000

$342

Fiji

$3,908874,700$4,467$97,500,000$111

Marshall Islands$182

52,560$3,470$3,000,000

$57

Samoa

$683

188,900$3,619$17,000,000$90

Solomon Islands$1,008549,600$1,130$13,000,000

$24

Tonga

$471

104,900$4,495$4,400,000$42

Vanuatu$781

247,300$3,182$16,500,000$67

Source: World 2014

all offshore placements and keeps comprehensive
records of them. For the Fire (property) insuranceclass, the number and value of offshore placementsof Fiji between 2010 and 2012 were as follows:in 2010, 64 offshore placements valued at F$14.8
million (US$8 million); in 2011, 72 valued at F$11
million (US$6 million); and in 2012, 71 valued at FJ$14.6 million (US$8 million) (RBF 2012).

AgentsThere are 129 licensed general insurance agents,
including banks (RBF 2012). Most of theseagents are individual salespeople and act for
specific insurers.

Bancassurance
Three trading banks have agency licenses under

Market penetration per capita

the Insurance Act: ANZ Banking Group Limited,

The non-life insurance industry contributes

Bank South Pacific, and Westpac Banking///

around 2.34 percent to the local GDP, andgeneral insurance premium penetration wasapproximately US$111 per capita in 2012///

(RBF 2012; World Bank 2012). A comparison to

Brokers
There are four licensed insurance brokers: Aon

These figures suggest relatively high insurance(Fiji) Limited, Marsh (Fiji) Limited, Unity Insurance

penetration in the Pacific context, although

Brokers (Fiji) Limited, and Insurance Holdings Fijifurther information on number of household

Limited. Aon, Marsh, and Insurance Holdings arepolicies indicates that the commercial sector

all majority-owned by or have links with major(notably tourism) is driving these figures, and thatinternational insurance brokering firms. The RBF

household insurance penetration remains very low.

(2012) records that F$137 million (US$74 million)

There is a wide variety of distribution channels
available to market general insurance products inFiji. These are discussed below.

01

arrangements with Tower (Fiji).

other Pacific Island countries is shown in table 2.

Distribution channels
SectionCorporation. All three have specific agency

of insurance premium is managed by brokers,
which equates to 78 percent of the market.
Insurance brokers therefore dominate the industry
distribution channels on a premium basis.

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51

The main catastrophe hazard in Fiji is tropical

Direct///cyclone. Insurers are aware of the exposure and

Photo

///

Credit//////A number of the general insurers in Fiji offer
insurance products on a direct basis for domestic
household and motor vehicle insurance products.
There are no online insurance services available
in Fiji.

insure only those properties that meet the cyclone
standard set out in the building code. In order toKyle Post/
Flickr b

better underwrite the cyclone peril, local insurers
require that buildings be inspected and certified
by local structural engineers as complying with

Catastrophe Risk Exposure andCapacity

the cyclone code. This certification is then valid
for seven years. Cyclone insurance is available
only as an extension to property policies once theCatastrophe risk insurance represents aengineer’s certification has been received. The

particular challenge to insurers’ exposure

average premium rate for cyclone extension is 0.30

management, since unlike other types ofpercent of the total insured value, with deductibles

insurance, it presents the possibility ofranging between 10 percent to 20 percent of thelarge correlated losses. Insurers need to use

loss and a maximum based on the asset value. Sea

a combination of reinsurance, reserves, andsurge caused by cyclones is normally an excluded

diversification within their portfolios to ensure

peril, even when the cyclone extension is given,that they can withstand large disaster shock losses

but limited sub-limit coverage for sea surge is

without threatening their solvency.

available for some major commercial accounts.

///

///

Section01

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52

Earthquake as a peril is underwritten byprofile asset counts give counts of 240,958 forthe insurers on differing bases. Some offer it

residential and 25,178 for public and commercial.

as an automatic peril with full sum insured, andComparing the policy numbers and profile asset

others offer it with a peril-specific limit (sub-limit)

count is not comparing like for like, but still

applied to restrict the insurer’s exposure. The

provides some general guidance into insurance

average premium rate for the earthquake peril

market penetration.

///

///

was 0.08 percent of total insured value, although
this rate varies if a sub-limit is used. Deductiblefor earthquake was generally 10 percent of sum
insured, with a minimum of F$2,000. Tsunami is
included as an earthquake peril by some insurers
but excluded by others.

FIJI

On the basis of this comparison, the approximate
residential property insurance penetration isaround 6 percent and the public/commercial
penetration 17 percent. This finding suggests thatthe majority of houses in Fiji are not insured forcatastrophe events. Anecdotal evidence would

Properties are insured on either a replacement

suggest that the cost of premiums is the mainor indemnity value basis. Policies are subject tofactor in residents’ decision not to insure theirunderinsurance where the value declared as sum

homes. Insurance penetration is better in theinsured is less than 80 percent of the correct value.

commercial sector, but is still low, with the majority

To avoid underinsurance, insured entities shouldof businesses uninsured based on this analysis.

///

///

obtain replacement valuations and have these
updated every three to five years.

Market capacity

Access to catastrophe insurance

The local market has no major limitations on

By comparing the consolidated data in the RBF

property insurers, QBE, Tower, and New India,

Insurance Annual Report (RBV 2012) to the dataoffer high acceptance limits, and other insurers

in the Fiji risk profile (PCRAFI 2011), it is possible

offer lower property capacity for smaller accounts.

to determine insurance market penetration. The

There is additional capacity available by way of

insurance report indicates that 14,792 household

offshore placements if needed. Industry sources

Creditpolicies were issued along with 4,192 Fireadvised that most of these are property offshore

Kyle Post/(commercial property) policies. The country risk

placements for large commercial and outer island

Flickr b

property and catastrophe capacity. Three major

Photo

///

///

PCRAFI

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53

Box 1— Reinsurance Programs
New India Assurance Company Limited in Fiji operates as a branch.

predominant catastrophe exposures are cyclones and earthquakes, withAccording to the company 2012 annual report, each of the company’s

the main accumulation on the main island of Viti Levu. The Tower Groupoverseas branches makes its own reinsurance arrangements. The report also

advised that reinsurance costs have increased in the 2011/12 financial

indicates that there is additional excess of loss (reinsurance) protection for

period (Tower Insurance Ltd 2012). Tower Group also confirmed that it has

the company as a whole (New India Assurance Limited 2012).

risk management procedures in place to identify natural hazard exposures
and where necessary purchases reinsurance to protect against the potential

QBE (Fiji) is reinsured for catastrophe events under the QBE Groupcatastrophe financial exposures.

reinsurance program. QBE Group has a detailed risk management
process (QBE Insurance Group Limited 2012) that includes monitoring of

Public information is not available on the reinsurance arrangements ofcatastrophe claims concentration and reinsurance protection to mitigate

the other general insurers in the Fiji market—that is, BSP Health Care (Fiji)the exposures.

Limited, Dominion Insurance Company Limited, Fiji Care Insurance Limited,
and Sun Insurance (Fiji) Limited. The 2012 Key Disclosure Statements for

Tower (Fiji) is reinsured for catastrophe events under the Tower Insurance

these companies all included reinsurance premiums, and RBF reviews their

Limited Group reinsurance program. Tower (Fiji) has determined that its

reinsurance programs.

tourism risks that are underwritten by the London

they have taken on) for each class of businessand Lloyd’s market or by large international insurers

by division, within Fiji and outside Fiji. The

in the New Zealand market. These placements

main property risk accumulations are locatedare arranged by locally registered international

within the Western and Central Divisions on theinsurance brokers and approved by RBF.

main island of Viti Levu. According to the RBV

Local insurance brokers surveyed advised thatproperty catastrophe insurance capacity is readily
available in the country, although insurers are attimes selective in accepting risk. They reported
that for major individual property risks they had
limited choice, as the major property insurers were

Insurance Annual Report (RBV 2012), reinsurance
reinstatement premiums of F$17.8 million (US$9.6
million) were reported by the industry following
the 2012 catastrophe events, meaning thatreinsurance programs were claimed upon forthese events.

the only companies with large capacity for those

In 2011, natural catastrophe insured losses inaccounts. Many of the outer island tourism risks are

the global reinsurance market were the second-

placed offshore because local insurers are reluctant

largest ever, at over US$110 billion (Swiss Re

to accept these risks, given the potential losses2012). What made this year significant for insurers

from cyclone, sea surge, and tsunami.

(and reinsurers) in the Pacific was the number ofReinsurance
RBF requires general insurers to submit areinsurance management strategy as part oftheir license renewal. RBF reviews the submitted
strategies as required by Section 39 of the
Insurance Act. Local insurers must submit grossaggregate amounts (a summary of how much risk

events that occurred in the Asia Pacific region:
earthquakes in New Zealand and Japan, floods inAustralia and Thailand, and a cyclone in Australia.
According to the Global Insurance Market Report(IAIS 2012), these Asia Pacific events accounted
for 61 percent of the insured losses from natural

Sectioncatastrophes in 2011, compared to a 30-year
average of 18 percent. As a consequence, there

01

PCRAFI54

FIJI

Box 2— Past Catastrophe Events
Cyclone///Catastrophe event insurance impact

///

///

///

In December 2012, Cyclone Evan caused significant damage in Fiji’s

The three major property insurers—QBE (Fiji), New India, and Tower (Fiji)—

Western Division. A total of 977 insurance claims valued at F$56.7 million

all reported net accounting losses in their Key Disclosure Statements for(US$30 million) were lodged after the event. In 2009, Cyclone Mick caused

the 2012 period (RBF 2012). These losses resulted from claims following

damage totaling F$15.2 million (US$8 million); a total of 240 insurance

Cyclone Evan and the two Western Division (Nadi) flood events in 2012claims were lodged after this event (RBF 2012).

and brought the final Fire net claims ratio to 195.7 percent. According toindustry sources, offshore insurers also suffered significant property losses

Earthquake and tsunami///

as a result of claims from Cyclone Evan, particularly in outer island tourist///

There have been no major earthquake insurance events reported in Fiji inrecent years. The last major damaging earthquake in Fiji was a magnituderesorts. A significant number of claims were lodged in 2009 as a result of
Cyclone Mick and the Nadi flood event.

6.7 earthquake on September 14, 1953, off the south coast of Viti Levu

Local insurers have expressed concern at the increasing frequency ofnear Suva (Houtz 1962). Local loss adjusters also advised that over the last

cyclones and floods in recent years. They are also aware of the potential for

20 years there have been only minor earthquake claims reported.

a local earthquake or tsunami event.

Other catastrophe events

On the basis of these major property claims in recent years, it is likely that

///

///

Fire class insurance premiums will rise over the next one to two years.

Fiji has suffered from three major flood events, one in 2009 and two in
2012. In the 2009 flood, 418 property insurance claims were lodged in theWestern Division for a total value of F$28.5 million (US$15.3 million). In
2012, the two flood events were also in the Western Division; 838 claims

Property insurers may also take underwriting action or withdraw coveragecompletely from exposed areas such as the Western Division floodplains
and Nadi Township.

were lodged following these floods for a total value of F$33 million (US$18
million) (RBF 2012).

were adjustments in reinsurance capacity andautomatically available and is included only as anhigher risk premiums. In 2012 the natural disaster

extension to property policies once an engineer’s

losses dropped to US$77 million (Swiss Re 2013),

cyclone certification has been received.

but this was still the third-highest year for natural
catastrophe insured losses since 1970. In the
Pacific, Tropical Cyclone Evan caused insured losses
of F$57 million in Fiji (RBF 2012) and estimatedinsured losses of SAT 3 million in Samoa in
December 2012.

Industrial Special Risks (ISR) policies are///used for property insurance on all majorcommercial, government, public authority,and government commercial companies. Each///major property insurer has its own ISR version, andmost brokers use agreed-upon ISR wordings fortheir clients. The wordings are generally based on

Products

the Australian Mark IV, London market, or Papua
There are no specific catastrophe insurance///

New Guinea market ISR wordings.

products available in the Fiji market. The///

Section01

following property and engineering insurance

A major limitation of the ISR wording for

products include the catastrophe perils ofgovernments is that infrastructure assets such

earthquake and tsunami. Cyclone insurance is not

as roads, bridges, and wharves are specificallyPCRAFIFIJI

excluded. Local insurers and insurance brokers
advised that it was common practice, on
major commercial accounts, to include smaller
infrastructure items in an ISR schedule and waive
the exclusion. Major infrastructure items, however,would need to be insured under a Completed Civil
Works policy.

55

Insurance Law and Regulation
The current insurance legislation in Fiji is the
Insurance Act (1998) and regulations. According to
RBF, a review of the act is currently in progress. In
addition to the act and regulations, RBF provides anumber of insurance supervision policy statements
on various aspects of insurance regulation.

Commercial Package or Business Protection///

policies are used for small and medium
enterprises and are offered as either a Multi Risks

Local non-life insurers are required to maintaina minimum solvency ratio of no less than F$1///(accidental damage including earthquake andcyclone by extension) or as a Specified Risks (fireand basic perils). These generally follow the perils
insured under the ISR, although coverage tends tobe more restrictive.

million, or 20 percent of net premium, or 15
percent of net claims outstanding (RBF 2012). In
addition, RBF reviews reinsurance management
strategies annually, undertakes on-siteexaminations of licensed insurers and brokers,
and obtains accumulation details from insurers

Contract Works insurance is available foron classes of insurance written in each division

property under construction and may be(region) of the country. There is no requirement

extended to insure construction of infrastructure

for a catastrophe reserve to be held, and current

assets.

solvency requirements do not take into account

///

///

Completed Civil Works insurance for///

infrastructure assets is not a commonlycatastrophe risk exposures or any quantification ofprobable large losses from disaster events.

available product in the Fiji market. Given that

RBF (2012) reports that the general insurance

smaller infrastructure assets can be insured underindustry has a combined solvency surplus of

ISR, the specialist Completed Civil Works product is

FJ$71.9 million (US$39 million), compared to theless needed than it otherwise would be.

minimum required solvency margin of F$20.6///

Photo Credit

///

///

Kyle Post/Flickr b

PCRAFI56

Box 3— Fiji Electricity Authority
FEA has a comprehensive enterprise risk management process in place toa new valuation is due in 2014). FEA management is aware of sub-limits

identify risks and take action to mitigate those risks. According to FEA,

under its ISR insurance for cyclone and sea surge. Overall cyclone limit is

this process allowed it to secure a favorable property insurance renewal

F$20 million (US$11 million) per event and F$40 million (US$22 million) on

in September 2012, in spite of a volatile property insurance market (FEAan annual aggregate basis, with specific limits for wind farm and exclusion2012). FEA advised that the Electricity Act has a clause requiring it to insure

for transmission and distribution lines. The earthquake peril is insured on

its assets. It maintains two asset registers, one for accounting purposes anda full sum insured basis. FEA self-funds against potential losses below its

one for insurance replacement purposes. It undertakes a review of asset

agreed-upon deductible levels and for any excluded property items.

replacement values on a regular basis (the last was undertaken in 2008, andmillion (US$11 million). RBF did note that due toAustralian and New Zealand standards as a basis,the catastrophic claims events of 2012, the generalincluding the New Zealand earthquake code

insurance solvency surplus fell that year by F$8.1(NZS4203) and Australian wind loads (AS1170.2)

million (US$4 million).

for cyclone code. In the engineer’s view, mostThe comprehensive annual analysis of the insurance
industry that RBF undertakes demonstrates ahigh level of supervision and a comprehensive
understanding of the insurance market.

commercial and government buildings constructed
after 2004 are probably in accordance with thecode. There is some uncertainty about who acts
as the final certifier of constructed buildings; theMinistry of Health, Ministry of Works, and local

From 2012 insurers were required to provide publicauthorities all have some involvement in the

Key Disclosure Statements. These statements areconstruction approval process.

available on insurer websites and within the RBF
Insurance Annual Report. Their aim is to allow
transparent financial comparisons to be madebetween insurers.

Insurers expressed concern that the code was notalways enforced, and they questioned why the
Ministry of Health—which does not appear tohave the necessary engineering technical expertiseFiji is not listed as a member of the Internationalin this area—is authorized to sign off on building

Association of Insurance Supervisors (IAIS).1

construction. The insurance industry also had

Membership in IAIS would allow Fiji to accessconcerns that local authorities were allowinginternational best practice information on

construction to take place on known floodplains

insurance regulation and supervision.

and in areas that were exposed to sea surge
and tsunami.

Building Control and Standards

Section01

Insurers have taken proactive steps to ensure

The legal basis for all construction in Fiji is thecyclone building standard compliance by requiring

National Building Code (2004). A local engineer

engineering certificates for insured properties,

in Suva, who undertook cyclone inspections forrather than relying on the government’s

insurers, advised that the code became law inenforcement of the building code.

August 2004. The code is understood to use

FIJI

PCRAFI

FIJI

57

Box 4— Fiji Ports Corporation Limited
FPCL advised that it has no formal risk management plan or risk register in

FPCL made a decision not to insure for cyclone because the additional

place. It did review some of its key risks with its insurance broker, Marshpremium costs would have been F$500,000 (US$269,000) per year,

Fiji, and attended a disaster management workshop presented by Marshwhereas its actual losses in December 2012 from Cyclone Evan wereFiji in the past. FPCL has an asset register in place; the last revaluation

only F$100,000 (US$54,000). It is aware of the 1953 earthquake andwas completed in 2012. These valuations give the reinstatement values of

has obtained engineering reports on the earthquake resistance of major

all wharves and buildings under its ownership. FPCL’s property insurance

wharves. In 2005 strengthening was carried out to the Suva wharf andprogram was placed by Marsh Fiji with AIG NZ. FPCL was aware that the(when the extension was completed) to the Lautoka wharf, in both cases

property program insured the catastrophe peril of earthquake only andwith consideration for the seismic risk.

that cyclone was excluded. The policy had a first loss limit of F$150 million(US$81 million) and one event, and the deductible was 2.5 percent of site

FPCL management did consider that it would be useful if the Ministryvalue, with a minimum of F$500,000 (US$269,000).

of Finance issued guidelines on insurance requirements for governmentowned companies.

Insurance of Public Assets

Government-owned commercial companies///

and statutory authorities arrange their own

Fiji has no formal government risk

insurance programs, including property

management or risk financing strategy ininsurance for key assets. The insurance broker

place to provide guidance on which risks are toused for the majority of these programs is Marshbe retained and which transferred or financed(Fiji), with various local insurers and offshore(including by traditional insurance).

placements also used. Those entities with property

///

///

There is no program in place to insure///

government key property assets against the///insurance programs are advised by their brokers tohave assets revalued at least every three years.

catastrophe perils of cyclone, earthquake, andA government statutory authority, Fiji Electricity

tsunami. Only one government department, theAuthority (FEA), and a commercial company, Fiji

Fiji Revenue Customs Authority, is reported to havePorts Corporation Limited (FPCL), were selected byproperty insurance for a government building.

the Ministry of Finance to operate key government///

The Ministry of Finance currently has a project///

underway to prepare an asset register of all
government physical assets; the goal is tocomplete the project by 2014. The main reason///

to compile the asset register is to provide an

infrastructure assets. Managers of the two entities
were interviewed to gain an understanding of
their risk management processes and of therisk financing arrangements they have in place,including property insurance.

accounting value for the included assets, although

It is not possible from a sample of only two

the register could also record the replacement value

entities to reach conclusions about the property

of property assets for insurance purposes. Once theinsurance programs of all other statutory

asset register is completed, it would be possible toauthorities and state-owned enterprises. It is

identify key property assets that the Government

possible that the catastrophe peril of cyclone

wish to insure. Fiji also has no central register

is generally not insured, both because of therecording existing insurance of public assets.

engineering certificate required and because of

Section01

PCRAFI58

the high premium cost of the cyclone insurance

FIJI

Recommendation 3: The government should///

extension. Thus there is a potential contingent

ensure both that the current project to set

liability for the government should a major cyclone

up a central key asset register is integrated

occur, particularly if the main island of Viti Levu

with any DFRI strategy, and that the asset(Central and Western Divisions) were to be directly

register is updated regularly. There is currently

impacted. A full survey of the property insurance

no central asset register of public property owned

programs for statutory authorities and state-by statutory authorities or commercial companies.

owned companies would need to be undertaken

Asset registers are held by the individual statutory

to determine if this assumption of a contingent

authorities and commercial companies. A

liability is correct.

consolidated register would allow the government///

to accurately determine the aggregate asset

Options for Consideration
Recommendation 1: An integrated DRFI///

exposure to catastrophe events and formulate
appropriate risk financing responses.
Recommendation 4: The government should///

strategy should be developed by theset up a central insurance register as part ofgovernment. The strategy should identify

the DFRI strategy and update the register as

key public assets and provide agreed-uponinsurance contracts fall due. There is currently

retention limits for individual departments, public

no central register of insurance held by theauthorities, and state-owned enterprises. It

government in respect of property insurance inshould also consider a number of risk financing

place for individual government departments,

and transfer options, such as captive insurance,

statutory authorities, and commercial companies.

///

regional risk pooling, and both parametric andindemnity insurance.
Recommendation 2: Any DRFI strategy

///

///

Recommendation 5: The Reserve Bank of Fiji///should consider applying for membership in
the International Association of Insurance

that is developed should integrate current

Supervisors.Membership would allow the RBF toindemnity property insurance held by various

access international best practice information on

government-owned commercial companies,

insurance company regulation and supervision.

///

statutory authorities, and some ministries
and departments. Existing indemnity insurance///

should be reviewed to ensure that the government,
statutory authorities, and commercial companies
are getting the best available coverage, terms,

End Notes

and conditions for the premiums paid. Particularconsideration should be given to the insurance of
public assets from the perils of earthquake/tsunami
and cyclone/sea surge.

Section01

1 IAIS members are listed at http://www.iaisweb.org/About-the-<sup></sup>

IAIS/IAIS-members-31 (accessed January 20, 2014).

PCRAFI

FIJI

59

References
FEA (Fiji Electricity Authority). 2012. Annual Report 2012. http://
www.fea.com.fj/wp-content/uploads/2014/02/FEA-ANNUAL-REPORT-2012.pdf.
Houtz, R. E. 1962. “The 1953 Suva Earthquake and Tsunami.”
Bulletin of the Seismological Society of America 52 (January):
1–12.
IAIS (International Association of Insurance Supervisors). 2012.
Global Insurance Market Report. 2012 edition. http://iaisweb.
org/index.cfm?event=getPage&nodeId=25308.
New India Assurance Co. Limited. 2012. Annual Report.
PCRAFI (Pacific Catastrophe Risk Assessment and Financing
Initiative). 2011. “Country Risk Profile: Fiji.” September. www.
pacris.sopac.org.
QBE Insurance Group Limited. 2012. Annual Report 2012. http://
www.group.qbe.com/.
RBF (Reserve Bank of Fiji). 2012. Insurance Annual Report 2012.
Suva, Fiji. http://www.rbf.gov.fj/Publications/Publications/Insurance-Annual-Reports.aspx.
Swiss Re. 2012. “Natural Catastrophes and Man-Made Disasters
in 2011.” Sigma 2/2012. http://www.swissre.com/sigma/.
———. 2013. “Natural Catastrophes and Man-Made Disasters in
2012.” Sigma 2/2013. http://www.swissre.com/sigma/.
Tower Limited. 2012. Annual Reports 2012. http://www.tower.
co.nz/Investor-Centre/Reports/Documents/TOWER_Annual_Report_2012.pdf.

Section01

PCRAFI

60

Glossary
Someone who acts for the insurance company in arranging insurance contracts. There are two mainAgenttypes of agents: tied agents, who act for one insurer only, and general agents, who act for multiple
insurance companies.

BrokerCapacity

Captive insurer

Someone who acts as an agent for the insured in arranging an insurance or reinsurance programwith a provider of capacity.

The ability of an insurance company to provide insurance protection to clients, which is limited byits own financial strength and the reinsurance protection it has in place.

An insurance company wholly owned by a company or entity that insures the risks of the parent
entity and subsidiaries.
Insurance that reimburses individuals or entities for loss or damage to a financial position as close

Indemnity insurance

as possible to the position they were in prior to the event, in the context of the financial terms ofthe coverage (such as deductible/excess and limit).

Intermediaries

Net retention

Parametric insurance

Probable maximum loss
(PML)

The general term given to insurance agents and brokers.

The amount that an insurance company retains on a reinsurance contract and in particular anexcess of loss of contract.

A type of insurance that is triggered by the occurrence of a specific measured hazard event, suchas a certain magnitude of earthquake or category of cyclone.

The maximum value of a claim from a large or catastrophe event. May also be called MPL.

The insurance of physical assets such as buildings, plant and equipment, stock, and machinery.
Property insurance

The products used for this insurance are variously named as fire and perils, commercial or businesspackage, industrial special risks, or material damage insurance.

A risk transfer method used by insurance companies to transfer part of a single large risk or an
Reinsurance

accumulation of similar risks and so increase their capacity. Reinsurance helps to smooth theextreme results and effects of specific perils (such as catastrophe events) and therefore to reducethe volatility of an insurance portfolio.

Section01

Solvency margin

The extent by which an insurer’s assets exceed its liabilities. Minimum statutory solvency
requirements are normally included in insurance acts or regulations.

FIJI

COOK ISLANDS
February 2015
Disaster Risk Financing and Insurance

CHAPTER 02

Country Note

PCRAFI

62

THE COOK ISLANDS

Executive Summary
The Cook Islands is composed of 15 islands,
spread across nearly 2 million km2 ofterritorial waters. The geographic spread of the
Cook Islands poses logistical problems for any
necessary post-disaster relief and response efforts.
The 2011 census estimated the resident populationof the Cook Islands at approximately 14,974
people, with a further 2,820 temporary residents.
Approximately three-quarters of the population
lived in Rarotonga. The geographic spread of
the population makes initial disaster response to
the outer islands expensive and further burdens
already-constrained public finances.
///

///

The events of 2005 demonstrated that the
Cook Islands is extremely vulnerable to thethreat of tropical cyclones (TCs): in the twomonths of February and March 2005, TCs Meena,
Nancy, Olaf, Percy, and Rae swept the country.
Four of these cyclones reached the maximum
category 5 rating and caused severe damage toinfrastructure and agriculture (Cyclone Recovery
Committee 2006).
///

///

The Cook Islands is expected to incur, on
average, about NZ$6 million (US$4.9 million)
per year in losses due to tropical cyclones.
In the next 50 years, the Cook Islands has a 50
percent chance of experiencing a per-event loss
exceeding NZ$97 million (US$79.5 million), anda 10 percent chance of experiencing a per-event
loss exceeding NZ$327 million (US$268 million)
from tropical cyclones. Tropical cyclones are thepredominant peril impacting the Cook Islands;
Pacific Catastrophe Risk Assessment and Financing
Initiative (PCRAFI) catastrophe models indicate
negligible losses from earthquake and tsunami.
///

///

Section02

The Cook Islands has a proactive approach todisaster risk financing and insurance (DRFI),
which is supported by the upper echelons ofgovernment. In January 2011, the prime ministerin his role as chair of the National Disaster Risk
Management Council requested that the Ministryof Finance and Economic Management lookat ways to become self-reliant in initial disaster
response and generate new income streams
for investment in a fund specifically for disastermanagement response and recovery.
///

///

The Cook Islands has available a maximum
amount of NZ$5.6 million (US$4.6 million)—in the form of contingency funds andcatastrophe risk insurance—to facilitate
disaster response. This amount is equivalent to
4 percent of gross total appropriations and 1.7
percent of gross domestic product in 2011. The
probability in any year that disaster losses could
exceed these contingency funds is estimated at
4.9 percent. The government has dedicated, yetlimited, funds that can be accessed following an
event.
//////

A number of options for further improving
the Cook Islands’ financial protection against
disasters are presented for consideration:
///

///

(a) the development of an integrated DRFI
strategy;(b) investigation of using contingent credit toaccess additional liquidity post-disaster;(c)development of an operations manualfor post-disaster budget mobilization andexecution; and(d) the identification of assets to be included in
an insurance program for critical public assets.

PCRAFITHE COOK ISLANDS

63

Introduction
The Cook Islands is composed of 15 islands,

Development Programme (UNDP) Pacific Centre,

spread across nearly 2 million km2 of

the United Nations International Strategy for

territorial waters. The geographic spread of theDisaster Risk Reduction (UNISDR), and other

Cook Islands poses logistical problems for any

partners, has developed several institutional

necessary post-disaster relief and response efforts.

frameworks on disaster risk management and

The 2011 census estimated the resident population

climate change adaptation at the national,of the Cook Islands at approximately 14,974

subregional, and international level, including

///

///

people, with a further 2,820 temporary residents.
Approximately three-quarters of the population
lived in Rarotonga. The resident population

the following:•has been in a slow but generally steady decline
since 1965 as a result of outward migration. The
government views outward migration as a major

Hyogo Framework for Action (HFA) 2005–
2015•

Pacific Disaster Risk Reduction and Disasterthreat to sustainable development. A steadyManagement Framework for Action (Regional

increase in the number of migrant workers,

Framework for Action, or RFA) 2005–2015

primarily in the tourism industry, has acted as acounter to out-migration.

•

National Action Plan (NAP) for Disaster Risk
Management, 2009–2015

Events of early 2005 demonstrated that the///

Cook Islands is extremely vulnerable to the•

Risk Management and Climate Change

threat of tropical cyclones (TCs): in the two

Adaptation, 2011–2015///

months of February and March 2005, TCs Meena,
Nancy, Olaf, Percy, and Rae swept the country.

Joint National Action Plan (JNAP) for Disaster

The JNAP cites the creation of sustainable///

Four of these cyclones reached the maximum
category 5 rating and caused severe damage toinfrastructure and agriculture (Cyclone Recovery

national financing mechanisms for disasterrisk management and climate change
adaptation as a priority for action (Government///

Committee 2006).

of Cook Islands 2011). This goal has been

The government of Cook Islands, in conjunction

carried forward from the NAP, and a great deal

with the Secretariat of the Pacific Communityof progress has been made in the Cook Islands

Applied Geoscience Division (SPC-SOPAC), thetoward establishing sustainable sources of finance

Secretariat of the Pacific Regional Environment

for these areas, including establishment of theProgramme (SPREP), the United Nations

Emergency Response Trust Fund (ERTF) in 2011.

Section02

PCRAFI

64

Disaster risk financing and insurance (DRFI) is///a key activity of the HFA Priorities for Action
4 and 5. 1 The HFA is a result-based plan of action///

adopted by 168 countries to reduce disaster risk
and vulnerability to natural hazards and to increase
the resilience of nations and communities todisasters over the period 2005–2015. In the Pacific,
the HFA formed the basis for the development of
the Pacific Disaster Risk Reduction and Disaster
Management Framework for Action (Regional
Framework for Action, or RFA).
The Regional Framework for Action cites///

DRFI activities as a key national and regional
activity. Theme 4—“Planning for effective///

preparedness, response and recovery”—has

THE COOK ISLANDS

to increase their financial resilience against
natural disasters by improving their capacity
to meet post-disaster funding needs withoutcompromising their fiscal balance. This programis one application of the Pacific Catastrophe Risk
Assessment and Financing Initiative (PCRAFI).
The Pacific DRFI program is built upon a threetiered approach to disaster risk financing. Theselayers align to the basic principles of sound publicfinancial management, such as the efficient
allocation of resources, access to sufficient
resources, and macroeconomic stabilization. The
three tiers acknowledge the different financial
requirements associated with different levels of
risk:
///

(a) Self-retention, such as a contingency budget
and national reserves, to finance small but

an associated key national activity, “Establish arecurrent disasters;

national disaster fund for response and recovery.”
Theme 6 of the RFA—“Reduction of underlying(b) A contingent credit mechanism for lessrisk factors”—cites the development of “financial

frequent but more severe events; andrisk-sharing mechanisms, particularly insurance,
re-insurance and other financial modalities(c)cover major natural disasters. See figure 1.

against disasters” as both a key national andregional activity (SOPAC 2005). These regional
implementation activities align with the three-tiered
disaster risk financing strategy promoted by theWorld Bank.
The Pacific Disaster Risk Financing andInsurance (DRFI) Program enables countries///

Disaster risk transfer (such as insurance) toThis report aims to build an understanding of
the existing DRFI needs and tools in use in the
Cook Islands. Specifically, it aims to encourage
peer exchange of regional knowledge throughdialogue on past experiences, lessons learned,
optimal use of these financial tools, and theireffect on the execution of post-disaster funds.
///

///

Figure 1 — Three-Tiered Disaster Risk Financing Strategy

Source: World Bank 2010.

Risk Transfer

Low Frequency/
High Severity

International AssistanceSovereign Risk Transfer(e.g. Cat Bond/Cat Swap, (re)insurance)

02

High Frequency/
Low Severity

SectionRisk Retention

Contingent Credit Lines

Insurance of Public Assets

Post Disaster Credit

Government Reserves, Contingency Budget / Funds

Emergency Funding

Reconstruction

PCRAFITHE COOK ISLANDS

65

Economic Impact ofNatural Disasters
Since 1955 the Cook Islands has experienced a///

Because of its high exposure to severe///

total of 28 natural disasters that have cost in

tropical cyclones, the Cook Islands is among

total approximately NZ$65.4 million (US$53.6

the 30 countries that experience the highest

million) (SPC-SOPAC 2011). Cyclones account///for 86 percent of past disasters (24 of 28), withepidemics and earthquakes accounting for 11

average annual disaster-related losses interms of gross domestic product (GDP).

///

Average annual disaster-related losses in the Cook
Islands are estimated at 2 percent of GDP (World

percent and 4 percent, respectively (SPC-SOPAC
2011). Of the NZ$65.4 million (US$53.6 million)
in disaster loss recorded in the Cook Islands, 100
percent is attributable to tropical cyclones. It should
be noted that the cost of disasters presented above

Bank 2011).
The recovery and reconstruction program///

following TC Pat (2010) was equivalent to 10
percent of national revenue in 2012 terms,
or 3.5 percent of GDP. In 2012, tax revenue was///reflects only 10 cyclone events.

Figure 2 — Building Locations
8° S

166° W

0164° W

162° W

150 300

160° W

158° W

600

AitutakiArutanga

10° S

Kilometers

Mangaia

12° S
14° S
16° S

4

Atiu
012 4

0 1 2 3
Buildings

Residential
Commercial
Industrial

18° S
20° S
22° S

012

Kilometers

Aitutaki
Rarotonga

AvaruaPublicOther

Rarotonga
Section

Atiu

02

Mangaia

Cook Islands

0 2 4

8

Source: PCRAFI 2011.

PCRAFI66

THE COOK ISLANDS

Figure 3 — Direct Losses by Return Period

DIRECT LOSSES (MILLION USD)

400
300
200

TC + EQTC
EQ

100

Source: PCRAFI 2011
Note: TC = tropical cyclone; EQ = earthquake.

0
0

100

200

300

400

500

600

700

800

900 1000

MEAN RETURN PERIOD (YEARS)

approximately NZ$100 million (US$81.9 million).

GDP per capita around NZ$15,477 (US$12,686) inThis narrow revenue base poses problems for2012 (ADB 2013).

stable public financial management in the Cook

The build-up of assets along the coastline

Islands, just as it does for many other Pacific Island///of the capital, Rarotonga, has increased

Countries (PICs).

the country’s vulnerability and exposure to

The economy is driven by tourism, pearl

damage from tropical cyclones and storm///

farming, fishing, and agriculture, all of which
are susceptible to adverse weather conditions.

surge (see figure 2). Coastal construction has been///

driven by the tourism industry, which seeks to offer///

Emigration poses problems for skilled labor-force

tourists direct access to the waterfront. The risk ofavailability to support the tourism industry, indamage from tropical cyclones and storm surge

particular, and it has led to an increase in thehas increased with this development, since many

number of migrant workers in the tourism sector.

natural barriers that protect the coastline have

Notwithstanding these issues, the Cook Islands isbeen removed to create uninterrupted views of theamong the best-performing Pacific economies, withocean.

Figure 4 — Average Annual Loss by Area
8° S166° W

0164° W

162° W

150 300

160° W

158° W

600

AitutakiArutanga

10° S

Kilometers

4

Atiu
Mangaia

12° S
14° S
16° S
22° S

02

20° S

18° S

Section012

Kilometers

012 4

0 1 2 3
Building Replacement Cost Density(million USD / km^2)
0 - 0.5
0.5 - 0.75
0.75 - 1.0

1-5
5 - 10
10 - 15

Aitutaki
Rarotonga

Avarua15 - 20
20 - 30

Rarotonga

Atiu

Mangaia

Cook Islands

0 2 4

8

Source: PCRAFI 2011

PCRAFITHE COOK ISLANDSThe Cook Islands is expected to incur, on///

average, about NZ$6 million (US$4.9 million)of losses per year due to tropical cyclones.

///

In the next 50 years, the Cook Islands has a 50
percent chance of experiencing a loss exceeding
NZ$97 million (US$79.5 million) and a 10 percent
chance of experiencing a loss exceeding NZ$327
million (US$268 million) (see figure 3).
Figure 4 shows the modeled average annual loss
by area, with red indicating high levels of averageannual losses—in the range of NZ$0.6 million to
NZ$0.8 million (US$0.49 million–US$0.65 million).
The full risk profile can be found in annex 4.

67

PCRAFI

68

THE COOK ISLANDS

Public Financial
Management of
Natural Disasters
In 2007, Emergency Management Cook Islands

but could not access the funds needed to facilitate(EMCI) was moved from the supervision ofaction.

///the police to the Office of the Prime Minister(OPM). This move gave EMCI greater politicalvisibility and resources: its annual budget

Effective post-disaster financial response relies on
two fundamental capabilities:///

allocation more than doubled, from NZ$46,000(US$37,700) in 2006 to NZ$102,000 (US$83,600)
in 2007. The budget allocation for the 2013
financial year was NZ$105,542 (US$87,500) for
operational and capital costs.
The Cook Islands has a proactive approach///

to DRFI, which is supported by the upperechelons of government. In January 2011, the///prime minister in his role as chair of the National
Disaster Risk Management Council requested that
the Ministry of Finance and Economic Management(MFEM) look at ways to become self-reliant ininitial disaster response and generate new income
streams for investment in a fund specifically fordisaster response and recovery.
Section02

The demand for self-reliance followed a///delayed response to TC Pat in 2010, whichcaused widespread devastation on the islandof Aitutaki. National agencies wanted to respond///(a) The ability to rapidly mobilize funds postdisaster; and(b) The ability to execute funds in a timely,transparent, and accountable fashion.
This section discusses the Cook Islands’ existingprocedures for post-disaster budget mobilizationand execution and where possible provides
examples of their use.

PCRAFITHE COOK ISLANDS

Post-Disaster
Budget Mobilization

69(the ERTF) and has purchased catastrophe risk
insurance with a maximum payout of NZ$3.4
million (US$2.79 million) under the Pacific
Catastrophe Risk Insurance Pilot. While these

The MFEM is heavily involved in disaster///

response, and the financial secretary sits on
the Response Executive, a committee thatis required to report directly to the cabinet.

steps do not negate the need for international
assistance, they provide dedicated funds for
initial response and ensure that the government///

The role of the Response Executive is to provide
advice and support to ensure effective emergency
response and initial relief coordination. It is

maintains control during this crucial period.
Mobilizing ex-post financial measures (such///as budget reallocation) and the contingency

primarily concerned with systematic acquisition

fund can take between one and two weeks.

and distribution of resources in accordance with

A Statement of Disaster will generate accessrequirements imposed by the national emergency

to the ERTF, but use of the contingency fundor declared disaster.

and reallocation of funds (even within the same

Following response to TC Percy in 2005 and///

TCs Pat and Oli in 2010, the MFEM has taken
an ex-ante approach to DRFI. To help finance///

immediate relief, it has established NZ$500,000(US$409,000) in dedicated domestic reserves///

ministry) may take one to two weeks to mobilize,
given that both require cabinet approval. The
cabinet sits every week, so it is unlikely but not
impossible that the reallocation of funds could
take as long as two weeks to mobilize. Table

Table 1— Sources of Funds Available
SHORT TERM
(1-3 MONTHS)MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)

Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Flash Appeal
Ex-ante Financing
Emergency FundContingency Budget
Contingent Credit
Sovereign (parametric) Catastrophe
Risk Insurance

SectionTraditional Disaster Insurance
Source: Government of the Cook Islands; World Bank.

02

PCRAFI70

THE COOK ISLANDS

Box 1— The Pacific Catastrophe Risk Insurance Pilot
The Pacific Catastrophe Risk Insurance Pilot aims to provide

government in the aftermath of a severe natural disaster that disrupts theimmediate budget support following a major tropical cyclone orprovision of government services. Countries can choose between threeearthquake/tsunami. The insurance is designed to cover emergency

layers of coverage—low, medium, and high—depending on the frequency

losses, which are estimated using both a modeled representation of theof events. The lower layer will cover events with a return period of 1 in 10

event based on hazard parameters and a calculation of total modeled

years, that is, more frequent but less severe events. The medium layer will

physical damage. Unlike a conventional insurance scheme, where a payout

cover events with a 1-in-15-year return period, while the higher layer will

would be assessed against actual incurred costs, this scheme pays out oncover less frequent but more severe events, or those with a return period

the results of a model. The advantage of this approach is that it results inof 1 in 20 years. However, countries may request that a more customized

a much faster payout. The payout would act as a form of budget support

option be developed for them.

///

///

and would go some way to cover the costs that would be incurred by the

1 provides an indication of when funds can betakes to mobilize these funds and the amount ofmobilized and where possible the amount offunds available.

funding available.

Ex-Ante Practices and Arrangements

The Cook Islands has a variety of ex-ante///and ex-post financial tools, and the timing

The uncertainty surrounding international

for mobilizing and executing these funds

assistance following a disaster has placed pressure

varies significantly. Building on the World Bankon countries to establish domestic sources offramework for disaster risk financing and insurance

finance for post-disaster relief, such as the(see annex 1), table 1 shows the ex-ante andestablishment of national reserves or the transfer

ex-post financial tools available, specifies thoseof risk to the international insurance market.

utilized by the Cook Islands, and gives indicative

The ex-ante practices and arrangements thattimings. The tools utilized by the Cook Islands arehave been made by the Cook Islands include ahighlighted in blue. Those sections highlighted incontingency budget, the ERTF, and sovereign

gray are for generic instruments that to date havecatastrophe risk insurance.

///

not been used in the Cook Islands.
The sections below discuss in detail the ex-anteand ex-post finance tools available to the Cook
Islands, including information on the time it

Section

02

Contingency budget
Section 70b(i) of the Cook Islands Constitution///

sets a cap on the contingency budget
equivalent to 1.5 percent of the total sums

PCRAFITHE COOK ISLANDS

71

appropriated (Government of Cook Islands

the following: deployment of initial damage2004). These sums were the equivalent ofassessment team(s); reestablishment of essential

NZ$1.7 million (US$1.4 million) for the 2012/13

services; deployment of appropriate ministry staff

fiscal year. It should be acknowledged, however,from Rarotonga to assist or relieve staff on thethat the contingency budget is not exclusively

outer islands; deployment of skilled volunteers,for disaster response, and it is unlikely that thetools, parts, and machinery to assist with clearance

full amount would be available in the event ofand immediate repairs; transport, accommodation,a disaster.

food, and water for volunteers and relief workers;///

and all costs associated with either air or sea

Emergency Response Trust Fundfreight (ERTF Policy 2011).

Following the prime minister’s request

The ERTF was fully operational and hadthat the country become self-reliant in thereceived an appropriation from the annual

provision of initial disaster response, EMCI

budget by December 2011, less than 12

collaborated with the MFEM and the Ministrymonths after it was initially discussed.

///

///

///

of Infrastructure and Planning (MOIP) to

Following its establishment and receipt of theestablish the Emergency Response Trust

initial appropriation, the ERTF received additional

Fund. Led by EMCI, these agencies within one

funds from the government and the Pacific Islands

year were able to draft a policy for the ERTF that

Forum Secretariat to establish a minimum reserve

was approved by the cabinet. This policy details

of NZ$500,000 (approximately US$409,000).

the budget execution process, the reporting

It is expected that the fund will be increased torequirements to ensure that expenditures arereach NZ$1 million (US$819,000). The country’s

transparent and accountable, and the role of theexperience with the ERTF demonstrates thetrustees’ management committee.

importance of ex-ante cooperation between///

government agencies, and suggests how quickly

The purpose of the ERTF is to enable a swift///

procedures can be developed when several

and coordinated response by the Disaster
Response Executive once a State of Emergency
or State of Disaster is activated. The fundagencies work together to remove barriers toeffective post-disaster budget execution.

///is limited to emergency response, including

Sovereign catastrophe risk insurance

Table 2— Selected Insurance Coverage, 2014–2015 Pilot Season
TROPICAL CYCLONE
Policy period

November 1, 2013–October 31, 2014

Peril selected

Tropical cyclone

Layer of coverage selected

1 in 10 years

Coverage limit as a percentage of contingency
budgetReporting agencies
Source: World Bank and PCRAFI 2013.

200 percent
Joint Typhoon Warning Center

Section02

PCRAFI72

THE COOK ISLANDS

Table 3— Total Operating Expenditure, Fiscal Year 2013/14

Payments on behalf of the
Crown
Operating2013 NZ$ MILLION

US$ MILLIONPERCENTAGE OF TOTAL
EXPENDITURE

78.4

64.2

66%

28.5

23.4

24%

a

Other

11.9

9.8

10%

Total budget

118.8

97.4

100%

Source: MFEM 2013; World Bank
Note: a. This comprises airport authority, debt-servicing interest, and depreciation.

The Cook Islands has financed its premium

coverage—that is, they chose coverage for morein an innovative way: by collaborating withfrequent but less severe events.

///

state-owned enterprises (SOEs). The SOEs find///

it difficult to access insurance for infrastructurein the insurance marketplace. To overcome thisproblem, the Cook Islands has arranged to fundhalf of its premium through SOE contributions
and half through a contribution from the national
budget; the SOEs will receive 50 percent of any
payout. The MFEM and SOEs agreed to finance thepremium in this way as a form of self-insurance;
it is recommended that they consider increasing
their insurance coverage in the future. This is amodel that could be considered by other countries
participating in the pilot program.
The Cook Islands’ participation in the Pacific

Catastrophe Risk Insurance Pilot provides
access to an injection of liquidity within
the first month of a qualifying disaster. This///

coverage came into effect on November 1, 2014,
and was renewed on November 1, 2015. The
Cook Islands opted for coverage against tropical02

estimated emergency loss2 that exceeds the<sup></sup>

attachment point, it will be eligible for apayout equivalent to over double the annual
contingency budget. Events that generate an///

emergency loss beneath the attachment point
must be managed by optimizing the use of otherfinancial tools.

Ex-Post Practices and Arrangements
A disaster often exceeds a country’s capacity///

SectionIn the event that the Cook Islands///

experiences a tropical cyclone with an

cyclones (see table 2) and chose the lower layer ofto cope with such an event, and there will
generally be a need for ex-post practices andarrangements. An optimal strategy for DRFI relies
on a combination of ex-ante and ex-post financial
instruments. Ex-post arrangements benefit frombeing able to establish the extent of the disasterand prioritize the response needs. As a result thesearrangements take longer to implement than exante arrangements, but they can often mobilize

PCRAFITHE COOK ISLANDS

73

Photo Credit

///

///

Australian
Department of
Foreign Affairs
and Trade/
Flickr b

larger amounts of finance. This section discusses

a summary of the total operating expenditure

the ex-post practices and arrangements that havefor the financial year 2013/14. It is estimatedbeen made by the Cook Islands.

that approximately NZ$28.5 million (US$23.4
million), or 24 percent, can be reallocated from the

Budget reallocation

operating expenditures in between departments

Under the Ministry of Finance and Economic

within the same ministry with the approval of the///Management Act 1995/1996, ministries

minister and the financial secretary.

may transfer operational funds between

External credit

departments with the agreement of the minister///

responsible and the financial secretary. Any ministry

In 2012/13 gross debt servicing was///

spending over its appropriation as a result of

approximately NZ$4.8 million (US$3.9 million)

these transfers will be investigated by the Public

and included loans from New Zealand and the

Expenditure Review Committee, which may direct

Asian Development Bank, both major developmentthat funds to be repaid from any subsequent

partners to the Cook Islands. Debt outstanding as

appropriation.

of June 30, 2012, was NZ$93.6 million (US$76.2

In 2012/13, the Cook Islands adopted the///Government Finance Statistics (GFS) formatof the International Monetary Fund (IMF) topresent Crown expenditures. Table 3 shows
///

///

million), an 18 percent reduction from 2010.
Annual debt service is equivalent to 4.4 percent ofrecurrent expenditure (MFEM 2013).

Section02

PCRAFI74

THE COOK ISLANDSThe Cook Islands is in the process oforganizations, businesses, and individuals

establishing a fund for debt repayment, thecontribute in the form of cash grants and aid in

Loan Repayment Fund (LRF). The LRF wouldkind. The provision of aid in kind, while vital, canmanage the repayment of government debt andaffect the costs borne by governments for theof guaranteed debt of SOEs. The government is

distribution these goods.

///

///

to deposit funds in the LRF annually to provide
for the repayment of all government borrowing
and government guaranteed borrowing. Annual
contributions to the LRF are to be based on thedebt service requirements for the year.

Donor assistance for reconstruction often///

takes significant amounts of time andrequires negotiation between the country
and its donors to establish key priorities.

///

Significant amounts of finance can be assigned,

The Cyclone Emergency Assistance Project

however. For example, New Zealand Aid provided

with the Asian Development Bank provided

NZ$6.4 million (US$5.3 million) to support thea NZ$4.8 million (US$3.9 million) loan to help

Aitutaki Cyclone Recovery and Reconstruction

with the recovery efforts following the series

Plan (ACRRP). Reconstruction financing may beof cyclones that affected the Cook Islands

conditional and may be aligned to donor rather

in 2005. This loan took four months to approve,than national priorities.

///

///

significantly delaying the necessary relief andTotal Response Funds Available

recovery work and demonstrating the need to haveaccess to a pre-agreed upon line of contingent

The Cook Islands has a maximum amount///credit to minimize disruption to the provision ofrelief and recovery.

of NZ$5.6 million (US$4.6 million) available
to facilitate disaster response. This amount is///Given the structured management of existing

equivalent to 4 percent of gross total appropriation

debt, the use of contingent credit could be

and 1.7 percent of GDP in 2011. Figure 8 shows

explored as an alternative to securing cash

the three-tiered DRFI strategy alongside thereserves for disaster response. MFEM expressed

sources of funds and the maximum amounts ofan interest in optimizing the use of contingent

funding available to the Cook Islands following

credit as an alternative to increasing the level ofan event. However, it should be acknowledged

cash held in the ERTF.

that the contingency budget is not exclusively for

///

///

disaster response, and it is unlikely that NZ$1.7

Donor funds for relief
and reconstruction
While donor funds will always be required///

following disaster, there is often an elementof uncertainty surrounding how much
will be provided, what will be provided, and///when funds will arrive in country. Consequently,
overdependence on international relief as a
Section02

source of post-disaster financing can delay theprovision of initial relief and inhibit ex-antecontingency planning. Development partners,
international organizations, local nongovernmental

million (US$1.4 million) would be exclusively
available for response. Consequently, there is likely
to be a gap between the amount available fromthe contingency and ERTF before a payout may betriggered by breaching the selected attachment
point of the catastrophe risk insurance pilot. It
is estimated that there is a 4.9 percent chancein any year that disaster losses will exceed thesecontingency funds.

PCRAFITHE COOK ISLANDS

Post-Disaster
Budget Execution75

aid-coordinating agencies to ensure timely andaccurate processing and reporting of expenditure.
The total cost of the ACRRP was NZ$597,074

Following TC Pat in 2010, the Cook Islands///

government reallocated NZ$2.7million(US$2.2 million) from its outer islands budget(US$489,000) under the planned budget(ACRRP 2013).
Following a Statement of Disaster or a///to reestablish essential services and forStatement of Emergency by the prime

infrastructure support; the aim was to enableminister under part 3 or 4, respectively, of thebusinesses to resume immediate operations so

Disaster Risk Management Act (Act No. 33) ofthat the locals could assist with recovery efforts.

2007, the funds contained within the ERTF can

An additional NZ$6.4 million (US$5.2 million)

be disbursed for any purchases deemed necessary

was provided by New Zealand Aid to support

by the fund’s trustee management committee.

the ACRRP.

There are four trustees on the committee: the

///

///

The completion report for the ACRRP suggests///that overall financial management could be
improved through personnel secondmentsfrom MFEM. The report indicated that overall,///financial management processes could have been
better coordinated between the implementing andnational controller, director of EMCI, secretary of
MOIP, and the financial secretary. Upon agreement
within the committee, all funds can be spent
if required in order to facilitate response. The
fund is to be administered in accordance with
Cook Islands Government Financial Policies andFigure 5 — Amount of Ex-Ante Funds Available for Immediate Response

Disaster risks

Disaster risk ﬁnancing
instruments

Amount of funds
available

High-risk layer(E.G. Major earthquake,major tropical cyclone)

Disaster risk insurance

Catastrophe risk
insurance coverage
NZ$3.4m (US$2.8m)

Medium-risk layer(E.G. Floods, small earthquakes)

Contingent credit

Low-risk layer(E.G. Localized ﬂood, landslides)

Contingency budget,
national reserves, annual
budget allocation

Source: World Bank.

Contingency budget:
NZ$1.7m (US$1.4m)
ERTF:
NZ$0.5m (US$0.4m)

Section02

PCRAFI

76

Procedures, specifically the MFEM Act (Act No. 21

staff training and to develop a dedicated post-of 1995/96), and the draft Trust Fund Procedures.

disaster budget execution manual to ensure swift
post-disaster mobilization and execution when

Although ERTF procedures and processes arenext required.

///well documented, there appears to be limited
awareness of them within MFEM. Given the///small number of staff in the department this is not
surprising; it is likely that those initially involved
have moved to positions elsewhere in government.
In small island states it is easy for institutional
knowledge be lost upon the departure of a few key
individuals.
The Cook Islands has developed policies and///procedures well founded on past experiences.
SectionThe government has dedicated, yet limited, funds
that can be accessed following an event, but not
all staff are aware of the procedures involved in

02

accessing them. It would be helpful to carry out

THE COOK ISLANDS///

Photo Credit

///

///

US Navy /Flickr b

PCRAFITHE COOK ISLANDS

77

Domestic Catastrophe
Risk Insurance Market
The insurance market in the Cook Islands is///

There is a high uptake of insurance by the///small, with the portfolio for general insurance

private sector, particularly in the tourism

premium estimated to be NZ$8.2 million

industry, where it is estimated that 80 percent///(US$6.7 million), including aviation. There is oneof operators purchase property insurance.

local insurance provider who holds NZ$4.4 million

Almost all these policies include tropical cyclone(US$3.6 million) of the market, while the remainderis placed offshore. Insurance agents and brokers
placing risk offshore are required to report back to
the Financial Supervisory Commission (FSC) withdetails of those offshore placements.

///

coverage, and some of the policies include
coverage against sea surge. In addition, many
tourism industry operators, irrespective of size,
hold business interruption insurance.
The Cook Islands is exposed to the///catastrophic peril of cyclones. It is located in///Insurance law and regulation within the///the Southern Hemisphere tropical cyclone zone,

Cook Islands is governed by the Insurance

and though the cyclone season officially runs

Act (2008), the Insurance Code (2010), andfrom November to May, tropical storms may

Insurance Regulations (2009). Insurance

occur outside this period. There have been few

supervision is the responsibility of the FSC.

earthquakes or tsunami events in the Cook Islands.

///

Photo Credit

///

///

Australian Department of Foreign Affairs and Trade/Flickr b

PCRAFI

78

Insurance for catastrophe insurance perils///of earthquake and cyclone are available inthe market and can be included in property
insurance products. Cyclone insurance is not///covered under standard property coverage
wordings, and is available by extension only.
Property insurance rates for the cyclone peril are
0.45 percent in the Cook Islands, which is higher
than the rate in most other Pacific countries. Rates
for the earthquake peril are 0.12 percent, aroundthe Pacific average.
The Cook Islands government does have///an indemnity property insurance programin place for the majority of its assets.
The program is arranged by Cook Islands
Investment Corporation (CIIC). It does not///insure buildings under NZ$50,000 in value, andmany infrastructure assets are not insured. Cyclone
insurance is not included in this program.
SOEs have independent indemnity property///

insurance programs in place for the majorityof their assets. Cyclone insurance is not///included in the majority of these programs. SOEs
contributed 50 percent of the premium for theparametric pilot insurance program in 2013.
Please refer to annex 3 for the full market
insurance review that was conducted in the
Cook Islands.

Section02

THE COOK ISLANDSPCRAFITHE COOK ISLANDS

79

Options for
Consideration
The Cook Islands has implemented several DRFI

recovery. The government has expressed interest

instruments to increase its financial protectionin establishing access to credit in advance of anagainst disasters. Some actions that would

event so that the funds can be received as soon as

strengthen this work further are outlined below forrequired without any negotiation.

consideration.

Recommendation 3: Develop an operations///

Recommendation 1: Develop an overarching

manual detailing the processes required

disaster risk financing strategy aligned to

to facilitate swift post-disaster budget///

existing processes. The Cook Islands has taken amobilization and execution. This document

proactive ex-ante approach to DRFI. However, thewould build on the procedures established for

activities in place have been developed in isolation,

the ERTF and refer to emergency procurement

and while some processes are documented, thisprocedures in place. A manual that detailed

information can be difficult to find. An overarchingexisting practices in a single document would help

DRFI strategy could be developed, and possibly

staff understand correct procedures by formalizing

endorsed by the cabinet, in order to create a single

existing processes—such as the allocation of adocument that would articulate the financing

member of staff from MFEM to the EMCI—that

options available and associated policies behind

are now conducted on a goodwill basis . Suchthese tools. It would be complemented by anprocesses are at risk of lapse when they rely on aaction plan for implementation.

few key individuals in government, as is the case in///

Recommendation 2: Investigate the use of///

the Cook Islands.

///

contingent credit to complement existing

Recommendation 4: Develop an insurance///

finance options. The Cook Islands has a strong

program for key public assets. This program

history of using credit to its best advantage

would identify possible assets to be included,

and has developed the LRF to ensure prudent

investigate existing insurance coverage provided

management of debt in the future. Having accessin country, and develop a table detailing coverage

to a line of contingent credit that has been agreed

options by provider to help determine which assets

upon in advance could prove a useful way toto include in the program and to select appropriate

access cash following a disaster and could help

coverage. This program could investigate the use

minimize disruption to the provision of relief andof an insurer vehicle if appropriate.

///

///

Section02

PCRAFI80

End Notes
1 Priority for Action 4—“Reduce the Underlying Risk Factors”—<sup></sup>

has an associated key activity of financial risk-sharing mechanisms, such as insurance, while Priority for Action 5—“Strengthen
disaster preparedness for effective response at all levels”—includes the establishment of emergency funds such as contingency
budget, national reserves, and annual budgetary allocations. See
UNISDR (2005).

2 Emergency loss is estimated as a percentage of direct losses,<sup></sup>

which include the cost of repairing or replacing damaged assets.

Section02

THE COOK ISLANDS

THE COOK ISLANDSPCRAFI

81

References
ACRRP (Aitutaki Cyclone Recovery and Reconstruction Plan).

SOPAC (Pacific Islands Applied Geoscience Commission). 2005.

2013. “Aitutaki Cyclone Recovery and Reconstruction Plan

“Pacific Disaster Risk Reduction and Disaster Management

Draft Completion Report.” Ministry of Finance and Economic

Framework for Action (Regional Framework for Action or RFA)Management, Rarotonga, Cook Islands.

2005–2015.” SOPAC, Suva, Fiji.

ADB (Asian Development Bank). 2013. “Asian Development Bank
and Cook Islands Fact Sheet.” ADB, Manila, Philippines.
Cyclone Recovery Committee. 2006. “Cyclone Recovery Reconstruction Plan 2006–2009.” Ministry of Finance and Economic
Management, Aid Management Division, Rarotonga, Cook
Islands.
Cyclone Recovery Committee, ———. 2010. “Cyclone Pat
Recovery and Reconstruction Plan 2010–2011.” Office of thePrime Minister, National Policy and Planning, Rarotonga, Cook
Islands.
GFDRR (Global Facility for Disaster Reduction and Recovery)
2012 The Sendai Report: Managing Disaster Risks for Resilient
Future, Washington D.C., U.S.A.
Government of Cook Islands 2009, National Action Plan for Disaster Risk Management (2009- 2015), Cook Islands and PacificIslands Applied Geoscience Commission (SOPAC), Suva.
Government of Cook Islands. 2004. Constitution of the Cook
Islands with Amendments as of 2004. Government of Cook
Islands, Rarotonga, Cook Islands.
———. 2009. “National Action Plan for Disaster Risk Management (2009–2015).” Cook Islands and Pacific Islands Applied
Geoscience Commission (SOPAC), Suva, Fiji.
———. 2011.” Joint National Action Plan for Disaster Risk

SPC-SOPAC (Secretariat of the Pacific Community, Applied
Geoscience and Technology Division). 2011. “Investment in
DRM—Cook Islands.” Secretariat of the Pacific Community,
Suva, Fiji.
SPC (Secretariat of the Pacific Community) 2011 Cook Islands:
Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment
in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Republic of
Marshall Islands: Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Vanuatu: Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2012 Papua New
Guinea: Investment in DRM, Suva, Fiji
SPC 2012 “Investment in DRM—Cook Islands.” Secretariat of the
Pacific Community, Suva, Fiji.
UNISDR (United Nations International Strategy for Disaster
Reduction). 2005. Hyogo Framework for Action 2005–2015:
Building the Resilience of Nations and Communities to Disasters. UNISDR, Hyogo, Japan.
World Bank 2010 Financial Protection of the State against Natural
Disasters; A Primer, Washington D.C., U.S.A.
World Bank. 2011. Pacific Catastrophe Risk Financing Initiative:

Management (2011–2015).” Cook Islands and Pacific Islands

Catastrophe Risk Assessment and Options for Regional Risk

Applied Geoscience Commission (SOPAC), Suva, Fiji.

Financing. Phase 1 Report. Washington, DC: World Bank.

Government of Cook Islands. 2013. “Cook Islands Government
Appropriation Amendment 2012/2013.” Ministry of Financeand Economic Management, Rarotonga, Cook Islands.
Government of Cook Islands. 2013. “Cook Islands Government

SectionBudget Estimates 2012/2013.” Ministry of Finance and Economic Management, Rarotonga, Cook Islands.
PCRAFI (Pacific Catastrophe Risk and Financing Initiative). 2011.
“Country Risk Profile: Cook Islands.” September. [http://pacris.
sopac.org](http://pacris.sopac.org).

02

PCRAFI82

THE COOK ISLANDS

Annex

Insurance Market Review, February 2014

Executive Summary

May, tropical storms may occur outside this period.

The insurance market in the Cook Islands is

events in the Cook Islands.

There have been few earthquakes or tsunami///

small, with the portfolio for general insurance
premium estimated to be NZ$8.2 million

Insurance for catastrophe insurance perils

///

///

(US$6.7 million), including aviation. There is oneof earthquake and cyclone are available inlocal insurance provider who holds NZ$4.4 million

the market and can be included in property(US$3.6 million) of the market, while the remainder

insurance products. Cyclone insurance is notis placed offshore. Insurance agents and insurance

covered under standard property coverage

brokers placing risk offshore are required to report

wordings, and is available by extension only. In

back to the Financial Supervisory Commission (FSC)

the Cook Islands, property insurance rates for thewith details of those offshore placements.

cyclone peril are higher (0.45 percent) than in most///other Pacific countries, and are around the PacificInsurance law and regulation within the

average for the earthquake peril (0.12 percent).

///

Cook Islands is governed by the Insurance
Act (2008), the Insurance Code (2010), and

The Cook Islands government does have///

Insurance Regulations (2009). Insurance

an indemnity property insurance programsupervision is the responsibility of the FSC.

in place for the majority of its assets.

///

There is a high uptake of insurance by the///

The program is arranged by Cook Islands
Investment Corporation (CIIC). It does not///

private sector, particularly in the tourism
industry, where it is estimated that 80 percent
of operators purchase property insurance.

///

Almost all these policies include tropical cyclone
coverage and some of the policies include sea

Sectionmany infrastructure assets are not insured. Cyclone
insurance is not included in this program.
State-owned enterprises (SOEs) have///

surge coverage. In addition, many tourism industry

independent indemnity property insurance

operators, irrespective of size, hold businessprograms in place for the majority of theirinterruption insurance.

assets. Cyclone insurance is not included in the///

The Cook Islands is exposed to the///catastrophic peril of cyclones. It is located in the///02

insure buildings under NZ$50,000 in value, andSouthern Hemisphere tropical cyclone zone, andthough the season officially runs from November tomajority of these programs. SOEs contributed 50
percent of the premium for the parametric pilot
insurance program in 2013.

PCRAFITHE COOK ISLANDS

Introduction

83

There is one licensed insurance broker, Willis

///

///

New Zealand Limited (Willis).

Insurance Market

Insurance may be placed offshore by an///

In the Cook Islands, total non-life (general)

approved insurance agent or insurance broker

insurance premium, all classes including

licensed under the Insurance Act. Those agents

aviation, is estimated at NZD$8.2 million

and brokers must report back to the Financial

///

///

(US$$6.7 million). Estimates based on anecdotal

Supervisory Commission (FSC) with details ofevidence from insurance industry sources suggest

those offshore placements. The main offshorethat of this amount, NZD$4.4 million (US$3.6

insurer used in the market is the London market

million), or 54 percent of the market, is placed with(including Lloyd’s), which is the major international

local insurer Tower Insurance Cook Islands Limited

insurance market. Another offshore insurer used

(Tower), and the remaining NZD$3.8 million

to provide some additional capacity is the New(US$3.1 million) is placed with offshore insurers.

India Insurance Company Ltd via branches in New///

The non-life insurance industry within the

Zealand or London.

///

Cook Islands is limited to Tower as the only

The non-life premium spending in the Cook///

locally licensed company. Tower has a small

Islands, at NZ$417.2 (US$$342), is higher

local office with three employees who handle

than comparable spending in other Pacificdirect domestic insurance, agency business, andIsland Countries (PICs); see table 1. The higher

insurance for small and medium enterprises (SMEs).

premium per capita could be driven by a number

The Auckland office of Tower manages insuranceof factors, including higher market penetration

for corporate businesses.

by non-life insurers, higher asset concentration as///

There are four licensed insurance agents in///the market: Australian and New Zealand Banking///

Group Limited (Cook Islands), Bank of Cook Islands
Limited, Shaun Gallagher Insurance, and Richard ET
Fisher Insurance Services.

///a consequence of higher gross domestic product(GDP) per capita, issues with the pricing of policies
arising from a lack of competition in the market,
higher exposure to natural perils, or a mix of thesefactors. A single local insurer has the potential torestrict local competiveness for insurance products,
particularly for SMEs and personal insurance

Table A .1— Pacific Non-life Insurance Premium per Capita 2012 (US$)
MARKET

GDP MILLIONSPOPULATION

GDP PERCAPITA

MARKET
PREMIUM

PREMIUM PER
CAPITA$342

Cook Islands$305

19,300$15,823$6,600,000

Fiji$3,908874,700$4,467$97,500,000

$111

Samoa

$683

188,900$3,619$17,000,000

$90

Tonga

$471

104,900$4,495$4,400,000$42

Vanuatu$781

247,300$3,182$16,500,000$67

Source: World Bank; Cook Islands MFEM.

Section02

PCRAFI84

THE COOK ISLANDS

Table A .2— Pacific Commercial Property Insurance Rate and Deductible Comparison

MARKETAVERAGE
EARTHQUAKERATEGENERAL
EARTHQUAKEDEDUCTIBLESAVERAGE CYCLONE
RATE

GENERAL CYCLONE
DEDUCTIBLE

Cook Islands

0.12%

2% of sum insured

0.45%

20% of sum insured

Fiji

0.08%

10% of sum insured

0.30%

20% of loss

Samoa

0.12%

Tonga

0.15%

5% of sum insured

0.25%

5% of sum insured

Vanuatu

0.30%

5% of loss

0.17%

20% of loss

2% of sum insured or
5% of loss

0.20%

2% of sum insured or
5% of loss

Source: World Bank 2013.
Note: Tables shows average market rate percentage of value based on insurance industry sources.

buyers who do not have the ability to access the2011) suggests, however, that the country’s

offshore insurance market. However, this reportearthquake risk is extremely low. The local basis

does not seek to undertake a full quantitative

rate for cyclone extension was quoted at 0.45

analysis of the appropriateness and competitivenesspercent, considerably higher than the regionalof insurance pricing within the Cook Islands,

range of 0.17 percent to 0.30 percent. Insurance

and so cannot comment on the degree to whichintermediaries in the Cook Islands market advised

anticompetitive behavior is influencing pricing.

that while 0.12 percent and 0.45 percent were

There are a number of variables in property
insurance rating, such as location of premises,
construction, occupation, fire protection, frequencyof expected losses, and the amount and type of
deductible on policies. It is not possible to use
average rating data as an exact basis for rating a
specific company, individual risk, or country. It is
possible, however, to offer a general comparisonof the property insurance rates in respective
markets (see table 2). The analysis below should beinterpreted with due consideration of the fact thatthe local standard rates for earthquake andcyclone perils, it was possible to negotiate forlarger corporate accounts or to place the businesswith offshore markets. This type of negotiation
would be more difficult for SMEs or domestic
homeowners, making insurance products lessaccessible to them due to price. However,the limitations of comparing rates (explained
above) should be considered when interpreting
this information.

Catastrophe Risk Insurance

corrections for differences in exposure to naturalperils, building stock, occupation, and financial

The main catastrophe hazard in the Cook Islands

terms have not been made.

is tropical cyclone. Tower advised it was awareof the potential exposure and insured only those

Local property insurance rates in the Cook

properties that had an engineer’s certification ofIslands are higher than in other PICs. The local

compliance with the cyclone (wind load) standard.

earthquake insurance basis rate used in the Cook

The Cook Islands’ primary accumulation exposure

Islands is 0.12 percent, which is consistent withis on the main island of Rarotonga.

///

///

Sectionthe earthquake basis rate used in other Pacific02countries; the Cook Islands risk profile (PCRAFI

THE COOK ISLANDSPCRAFI

According to the World Bank (1999), “Catastrophic
events are unique among insurance risks: while
traditional insurable risks occur with predictablefrequency and relatively low losses, catastrophes
occur infrequently but with high losses.” For thisreason, it is difficult for insurers to prepare forcatastrophe losses and obtain an appropriate
premium for these infrequent events. To reducethe volatility that results from catastrophe events,
they undertake a mix of methods, including
portfolio management, underwriting selection(e.g., declining risks in high exposure areas), andpurchase of reinsurance.
While the market is constrained by its small size,
some additional capacity is available offshore—
though in the past, the Cook Islands’ cyclone
exposure has limited the willingness of New
Zealand–based insurers to provide such capacity,

as evidenced by the withdrawal of New ZealandInsurance Ltd. in 1985 (Crocombe 1992).

85

Photo Credit

///

///

US Navy /Flickr b

All insurers with catastrophe exposures need
to obtain reinsurance to increase their capacity.
Reinsurance is even more important when theinsurer or the insurance market pool is small, suchas in the Pacific. As regulators become increasingly
vigilant about requiring insurers to have sufficient
capital and a good solvency margin to protect
their interests from catastrophic events, they are
requiring adequate reinsurance programs, placedwith robust reinsurers.
The non-life premium per capita comparison (table1) demonstrates that the insuring public in the
Cook Islands pays more in premiums per headthan in other PICs. From the catastrophe peril rates
comparison (table 2), it is clear that cyclone rates

Sectionare higher in the Cook Islands than in other PICs;
as a consequence, property premiums, particularly

02

PCRAFI86

for cyclone, will also be higher. The need to obtain

Australia and Thailand, and a cyclone in Australia.

an engineer’s cyclone certification for buildings

According to the Global Insurance Market Report

before obtaining cyclone insurance presents a(IAIS 2012), these Asia Pacific events accounted

challenge to the insuring public. These two factors

for 61 percent of the insured losses from natural

are likely to restrict the access to cyclone insurance

catastrophes in 2011, compared to a 30-year

in the Cook Islands, particularly for residential

average of 18 percent. As a consequence, there

property owners and small businesses.

were adjustments in reinsurance capacity andCatastrophe Reinsurance
Tower advised that its operation in the Cook Islands
is included in the group reinsurance programarranged by Tower Insurance Limited.

losses dropped to US$77 million (Swiss Re 2013),
but this was still the third-highest year for natural
catastrophe insured losses since 1970. In the
Pacific, Tropical Cyclone Evan caused insured losses
of F$57 million in Fiji (Reserve Bank of Fiji 2012)and estimated insured losses of SAT 3 million in

global reinsurance market were the second-largest

Samoa in December 2012.

What made this year significant for insurers (andreinsurers) in the Pacific was the number of events
that occurred in the Asia Pacific region, including

02

higher risk premiums. In 2012 the natural disasterIn 2011, natural catastrophe insured losses in theever, at over US$110 billion (Swiss Re 2012).
Section

THE COOK ISLANDS

earthquakes in New Zealand and Japan, floods in

In its 2011 annual report, Tower Insurance
Limited specifically advised that its event excess(net retention) had increased to NZ$6.7 million(US$5.5 million) and that it had protection forPCRAFITHE COOK ISLANDS

87

Regulatory Framework

two catastrophe events within the program forthe 2011–2012 period (Tower Limited/Tower

Insurance Law and Regulation

Capital Limited 2011). The reinsurance program
is not detailed in the 2012 report, but it would
be expected to follow the previous arrangements.
Tower did express concern in its annual reports at

Insurance law and regulation within the///

Cook Islands is governed by the Insurance
Act (2008), the Insurance Code (2010), andthe increase in catastrophe reinsurance premiums

Insurance Regulations (2009). Insurance

in recent years.

///

supervision is the responsibility of the FSC (CookIndeed, insurers throughout the Pacific haveIslands Financial Supervisory Commission, 2014).

expressed concern at the recent increase in

The Insurance Code (2010) details thereinsurance premiums, and more particularly///

requirements for registered insurance

premiums for catastrophe reinsurance. They havecompanies, including capital, solvency, andlimited ability to pass on the full costs of thesereinsurance programs. Minimum capital for aincreases to insured clients due to the small size///and economic constraints in those markets.

local general insurer (category A) is NZD$200,000

Market Property and Catastrophe
Insurance Products

of unearned premium reserve or 10 percent of(US$163,000) and minimum solvency is 5 percent
outstanding claim reserve. There is no requirement
for the general insurer to hold a catastrophe

Tower uses Material Damage/Businessreserve. A written reinsurance strategy must be///

Interruption (MDBI) wordings for major

submitted to the FSC each year in November. The

commercial, government, and state-owned

FSC advised that it did not undertake a detailed

enterprise (SOE) insurance. The MDBI

analysis of the submitted reinsurance strategy from///wording is based on insurance industry standard

Tower because it lacked the necessary expertise

Industrial Special Risks (ISR) wordings used inand understanding of the reinsurance contracts.

many Commonwealth countries. These wordings

The Cook Islands is not listed as a member

include cover of specified natural perils, such as///of the International Association of Insurance

earthquake, but do not cover cyclone risk.

Supervisors (IAIS). Membership in IAIS would///

Cyclone insurance is available in the Cooks///

Islands by extension only and is limited to those///buildings with an engineering cyclone certificatethat confirms the building meets the building codefor cyclone. The cyclone engineer’s certificates are

best practice information on insurance regulationand supervision.
The Cook Islands has recently enacted the///Captive Insurance Act (2013) and Captive

valid for seven years.

///

A Business Protection Policy is used for SMEs///

allow the Cook Islands to access international///

and is taken as either Multi Risks (accidental
damage including earthquake and cyclone byextension) or as Specified Risks (fire and extraneous

Insurance Regulations. As of September 2013,
there were no captive insurers registered under the
new legislation.
Under existing insurance regulations, Tower///

perils). These policies generally follow the perils

is required to submit to the FSC its annual

insured under the MDBI, although coverage may

reinsurance management strategy, which

be more restricted.

would include risk accumulations and catastrophe

Section///02

PCRAFI88

THE COOK ISLANDS

Table A .3— Property Insurance for Major Cook Island State-Owned Enterprises

PROPERTY
INSURANCE(MDBI/ISR)

EARTHQUAKEPERIL INCLUDEDCYCLONE PERILINCLUDED

REPLACEMENTVALUE (LASTVALUATION DATE,WHERE KNOWN)

Yes

Yes

No

Yes (1998)

Yes

Yes

One building only

Yes (2012)

Yes

Yes

No

Yes (2013)

Bank of Cook Islands

Yes

Yes

Yes

Yes (2013)

Not applicable

Ports Authority

Yes

Yes

No

Yes (2013)

Wharf—not insured

ENTITY

Investment
corporation
Airports Authority
Te Aponga Uria O
Tumu (Electricity

INFRASTRUCTUREASSETS
Bridges or roads—not
insuredRunway—not insured
Transmission lines—
not insured

provider)Source: SOE senior employees and insurance industry members.

exposures. The FSC advised that it did not

not always adhered to for residential properties,

undertake the detailed analysis of the local insurer’s

and that these properties could not obtain cyclone

reinsurance program and property accumulation

insurance without upgrades.

that would determine if these are adequate forthe probable maximum loss (PML) within the Cook

Insurers have taken proactive steps to ensure

Islands. The FSC also advised they did not checkcompliance with the cyclone building standard

the number of reinstatements available under theby requiring engineering certificates for insured

catastrophe reinsurance program.

properties, rather than relying on government

Building Controls and Standards
The legal basis for all construction in the Cook

enforcement of the building code.

Financial Security of Onshore Insurers///

Islands is the Building Controls and Standards
Act (1991) and the building code. According to///a local project manager and engineer in Rarotonga
who undertook cyclone inspections for insurers,

Section02

Tower Insurance Cook Islands Limited is a wholly
owned subsidiary of Tower Insurance Limited, a
New Zealand–registered company listed on themost commercial and government buildings

New Zealand and Australian stock exchanges. As

constructed after 1991 are in accordance with thea subsidiary whose parent company has a security

code and the wind loads for cyclones. This suggests

rating of A- (excellent),1 Tower Cook Islands isthat the building code is being followed for

not required to provide additional security incommercial structures. The project manager also

accordance with the New Zealand Insurance

advised that, based on inspections, many houses

Prudential Supervision Act (2010).

were not constructed to meet the wind loads inthe code. This suggests that the building code isPCRAFITHE COOK ISLANDS

Financial Security of Known
Offshore Insurers
The main offshore insurer used in the market is
Lloyd’s, which is regulated by the UK Financial
Conduct Authority and the Prudential Regulation
Authority under the Financial Services and Markets
Act (2000). As of August 2013, Lloyd’s had
confirmed security ratings of A (excellent) from A.
M. Best and A+ (strong) from Fitch Ratings andStandard & Poor’s.

89

their assets revalued on average every three years,
whereas the CIIC relies on an asset register thatuses property valuations from 1998. This practicegenerates a risk of underinsurance. Insurance
professionals recommend that individual buildings
should be revalued at best every three years andcertainly no longer than five years apart. CIIC
should consider engaging an independent valuer
to provide updated valuations as soon as possible.
CIIC has made a decision not to insure any
property under NZ$50,000 in value.

The New India Insurance Company Limited is used

The provision of cyclone insurance requires an///

as a coinsurer on some local property insurance
programs. It is registered in India and operates
branches in New Zealand, Fiji, and London. Its

engineer’s certificate to verify that properties
comply with the building code, and it is often
expensive. As a result the majority of government///

financial strength rating, issued by A. M. Best in
January 2013, is A- (excellent).

and SOE assets are not insured for the main
catastrophic peril in the Cook Islands.
The insurance broker used for SOE programs is

Insurance of Public Assets

Willis New Zealand; the program uses various

Insurance of government properties isproperty insurance arrangements for SOEs arearranged either by Cook Islands Investment

summarized in table 3.

///

insurers, including Tower. Findings on existing

Corporation (CIIC) or by the individual publicauthorities, with many policies excluding

Government infrastructure assets are not///

the tropical cyclone peril. CIIC manages theinsured in the Cook Islands, due either togovernment insurance program, although someproperty exclusions under existing market

public authorities—i.e., SOEs—make their own

insurance policy wordings or to high premium

independent arrangements. As a result SOEs havecost. Uninsured property includes wharves,

///

///

Photo Credit

///

///

Phillip Capper /Flickr b

PCRAFI90

THE COOK ISLANDS

bridges, roads, power transmission and distribution

in part be linked to the uncoordinated approachlines, and airport runways (see table 3).

toward an asset register.

With the passage of the Captive Insurance///

Act (2013), the Cook Islands government
can consider setting up of a captive insurer,

Past Catastrophe Events///

as a subsidiary of CIIC, to act as an alternative

The major reported damaging cyclones within therisk financing facility for property assets. A

Cook Islands have been Cyclone Sally (1987) andfeasibility study would be necessary to explore thisCyclone Pat (2011).

option, taking into account the volume of risk totransfer and the consequent economics, capital,
captive management, claims management, andreinsurance. This option has some advantages forthe government and SOEs, such as the possibilityof wider coverage, the inclusion of infrastructure
assets in a program, and premium savings from risk
pooling. The captive would need to reinsure thetotal accumulated catastrophe exposures once a
pre-agreed upon level was reached that exceeded

Damage from Cyclone Sally was estimated at
NZ$30 million (US$24.6 million) in 1987 prices (FijiMeteorological Service 1987) across all islands inthe group, but the cyclone was reported to be atits strongest when passing by Rarotonga (the mostpopulated island in the group and the governmentand commercial center). The main non-life insurer
at the time, Cook Islands Insurance Limited, isreported as incurring claims that exceeded NZ$4

its capacity.

million (US$3.3 million) in value on a premium

The Cook Islands government has been1992). This would suggest an insurance

included in the Pacific Catastrophe Risk

penetration of around 13 percent at that time.

base of NZ$400,000 (US$328,000) (Crocombe///

Insurance Pilot since 2013. The government///

should include this program in any disaster risk
financing and insurance strategy that is developed,
and should also provide input on ways to expand
the program.

million); there was damage to 436 homes, and 68
homes were totally destroyed. Tower advised that
there were minimal insured losses from Cyclone
Pat because most damaged properties on Aitutaki

asset register for public assets. While the CIIC

were not insured for cyclone. This suggests

has an asset register, it uses 1998 data. Somea current low property insurance penetration

government departments, public authorities, andon Aitutaki.

///

state-owned enterprises hold asset registers, butthese are not looked at collectively. The result is apiecemeal approach to insuring assets. Should acentralized asset register be developed, there may
be potential for premium reduction.
The government keeps no centralized register///of insurance arrangements for public assets///that have been made by individual government
departments, public authorities, or SOEs. This may

02

Aitutaki, was estimated at NZ$9.5 million (US$7.8

There is no up-to-date government central///

SectionDamage from Cyclone Pat, which impacted

There have been no reported earthquakes ortsunami events in the Cook Islands.

PCRAFITHE COOK ISLANDS

Options for Consideration
Recommendation 1: Develop an insurance

///

91

Endnotes
1 A. M. Best rating, July 26, 2013.

<sup></sup>

program for key public assets to be included
in a broader disaster risk financing andinsurance strategy. This approach would include///

establishment of a centralized asset register with
up-to-date valuations in conjunction with the Cook

References
Crocombe, R. G. 1992. Pacific Neighbours: New Zealand’s Rela-

Islands Investment Corporation, assessment oftions with Other Pacific Countries. Christchurch, New Zealand:

probable losses, and a review of existing indemnity

MacMillan Brown Centre for Pacific Studies and Institute for

insurance to ensure that the major perils of
cyclone and sea surge are included, and that the
government and SOEs are getting the best available
terms and conditions for the premiums paid.
Recommendation 2: Develop a program///of technical development for the Financial

Pacific Studies.
Fiji Meteorological Service. 1987. “Tropical Cyclone Report 87/5:
Tropical Cyclone Sally, 26 Dec 1986–5 Jan 1987.” Fiji Meteorological Service, Nadi, Fiji.
IAIS (International Association of Insurance Supervisors). 2012.
Global Insurance Market Report. 2012 edition. http://iaisweb.
org/index.cfm?event=getPage&nodeId=25308.

Supervisory Commission and consider
applying for membership in the International
Association of Insurance Supervisors. This///PCRAFI (Pacific Catastrophe Risk Assessment and Financing Initiative). 2011. “Country Risk Profile: Cook Islands.” September.
http://pacris.sopac.org.

program should focus on building the capacityof those responsible for risk-based supervision.
Membership in IAIS would allow the Cook Islands
to access international best practice information on
regulation and supervision of insurance companies.

Reserve Bank of Fiji. Insurance Annual Report 2012. http://www.
rbf.gov.fj/Publications/Publications/Insurance-Annual-Reports.
aspx.
Swiss Re. 2012. “Natural Catastrophes and Man-Made Disasters
in 2011.” Sigma 2/2012. http://www.swissre.com/sigma/.
———. 2013. “Natural Catastrophes and Man-Made Disasters in
2012.” Sigma 2/2013. http://www.swissre.com/sigma/.
World Bank. 1999. “Using Capital Markets to Develop Private
Catastrophe Insurance.” Viewpoint Note 197, World Bank,
Washington, DC.Glossary

Section02

PCRAFI92

THE COOK ISLANDS

Glossary
Someone who acts for the insurance company in arranging insurance contracts. There are two mainAgenttypes of agents: tied agents, who act for one insurer only, and general agents, who act for multiple
insurance companies.

BrokerCapacity

Captive insurer

Someone who acts as an agent for the insured in arranging an insurance or reinsurance programwith a provider of capacity.

The ability of an insurance company to provide insurance protection to clients, which is limited byits own financial strength and the reinsurance protection it has in place.

An insurance company wholly owned by a company or entity that insures the risks of the parent
entity and subsidiaries.
Insurance that reimburses individuals or entities for loss or damage to a financial position as close

Indemnity insurance

as possible to the position they were in prior to the event, in the context of the financial terms ofthe coverage (such as deductible/excess and limit).

Intermediaries

Net retention

Parametric insurance

Probable maximum loss
(PML)

The general term given to insurance agents and brokers.

The amount that an insurance company retains on a reinsurance contract and in particular anexcess of loss of contract.

A type of insurance that is triggered by the occurrence of a specific measured hazard event, suchas a certain magnitude of earthquake or category of cyclone.

The maximum value of a claim from a large or catastrophe event. May also be called MPL.

The insurance of physical assets such as buildings, plant and equipment, stock, and machinery.
Property insurance

The products used for this insurance are variously named as fire and perils, commercial or businesspackage, industrial special risks, or material damage insurance.

A risk transfer method used by insurance companies to transfer part of a single large risk or an
Reinsurance

accumulation of similar risks and so increase their capacity. Reinsurance helps to smooth theextreme results and effects of specific perils (such as catastrophe events) and therefore to reducethe volatility of an insurance portfolio.

Section02

Solvency margin

The extent by which an insurer’s assets exceed its liabilities. Minimum statutory solvency
requirements are normally included in insurance acts or regulations.

SOLOMON ISLANDS
February 2015
Disaster Risk Financing and Insurance

CHAPTER 03

Country Note

PCRAFI

94

SOLOMON ISLANDS

Executive Summary
This report aims to build understanding of the///

The Solomon Islands government has a///existing disaster risk financing and insurance

variety of tools for financing the cost of(DRFI) tools in use in the Solomon Islands

disasters, but the funds are limited andand to identify gaps where engagement

can be quickly exhausted. The disaster relief///

could further develop financial resilience. It

budget allocated to the National Disaster Council

also aims to encourage peer exchange of regional(NDC) is small—SI$2.2million (US$305,250) in

knowledge, specifically by encouraging dialogue on

2013—and is quickly exhausted, as happened

past experiences, lessons learned, optimal use ofduring the response to the Santa Cruz earthquake

these financial tools, and the effect these tools may

and tsunami. There is a 77 percent chance thathave on the execution of post-disaster funds.

disaster losses will exceed this budget amount///The Solomon Islands is located in an area///

in any given year. If these funds were exceeded,
the government would need to source remaining

known for frequent tropical cyclones andfunds from the contingency warrant and pursue

is also in the Pacific Ring of Fire, an active

budgetary reallocation. Consequently the Solomon

seismic area. Consequently, it is exposed to bothIslands tends to rely heavily on donor support tohydrometeorological and geophysical hazards. This

fund post-disaster expenditures.

///

exposure was clearly demonstrated at the end of
December 2012, when the country experienced
Tropical Cyclone Freda, followed in early February
2013 by a magnitude 8.0 earthquake and amobilize SI$1 million (US$138,000) to

subsequent tsunami affecting the Santa Cruz

purchase relief supplies. This is equivalentIslands.

to approximately half of the annual budget for

The Solomon Islands is expected to incur, overexhausted shortly for the additional supplies

the long term, average annual losses of SI$145

needed, for the first shipment following updates

million (US$20 million) due to earthquakes orfrom situation reports identifying the needtropical cyclones. In the next 50 years, the Solomon

for greater quantities of relief goods. The firstIslands has a 50 percent chance of experiencing ashipment of goods to the affected area had fully

single event loss exceeding SI$1.7 billion (US$240

exhausted the annual response budget. In light ofmillion), and a 10 percent chance of experiencing a

the small amount of dedicated funds allocated tosingle event loss exceeding SI$3.7 billion (US$520

the NDC and the speed with which they can be

million) (PCRAFI 2011).

used up, the Solomon Islands government should

///

03

///

response. The remaining SI$1.2 million was///

SectionThe NDC met on the day of the Santa Cruz///

earthquake and was able to immediately

SOLOMON ISLANDSPCRAFI

consider the reactivation of the National DisasterCouncil Fund, or the use of other DRFI instruments
such as contingent credit to ensure additionalsources of liquidity following an event.

A number of options to improve DRFI are///presented here for consideration:

manual to improve awareness of post-disaster

Anecdotal evidence suggests that the Ministryfrom the development of a post-disasterprocedures and processes;(b) Develop an integrated disaster risk financing
and insurance strategy; andbudget execution manual to improve staff
awareness of post-disaster procedures and///(a) Develop a post-disaster budget execution///of Finance and Treasury (MoFT) would benefit

95

(c)

Explore the use of other DRFI tools such asprocesses. During the Santa Cruz response, thecontingent credit to access additional liquidity

bid waiver process was not adhered to; MoFT staff

post-disaster.

///

were unaware of this process because it is rarely
used. As a result, there were significant delays in
the purchase of necessary relief items.

Photo Credit

///

///

Australian Department of Foreign Affairs and Trade/Flickr b

PCRAFI96

SOLOMON ISLANDS

Introduction
Located in the Pacific Ring of Fire, thewhich is responsible for developing funding

Solomon Islands is susceptible to botharrangements for cabinet approval. These

hydrometeorological and geophysicalplans can include reallocation of sector budgets,disasters. Hydrometeorological hazards include

as well as international partner and stakeholder

tropical cyclones, floods, and droughts, whereas

support (Solomon Islands Government 2010).

///

///

///

geophysical hazards include earthquakes andresulting tsunamis and landslides. The population

Both independently and in conjunction withof the Solomon Islands is estimated to be 515,870,

many partners—such as Secretariat of the Pacificwith an estimated growth rate of 2.3 percent.1 The

Community Applied Geoscience Division (SPC-

population is spread across 845 of the country’s

SOPAC), the Secretariat for the Pacific Regional

992 islands, which cover an area of 24,000km2

Environment Programme (SPREP), United Nations. With 80 percent of the total population

Development Program (UNDP) Pacific Centre,

living in rural areas, disaster response is often

and the United Nations International Strategy fortime-consuming and expensive; post-disaster

Disaster Reduction (UNISDR)—the Solomon Islands

transportation costs create a significant fiscal

has developed several institutional frameworks

burden and have led to delays in the distribution of

on disaster risk management and climate change

relief goods in the past.

adaptation at the national, subregional, andThe Solomon Island government has

international level, including the following:///

demonstrated commitment to disaster risk

• Hyogo Framework for Action (HFA) 2005–2015

management through its National Disaster Risk///

Management (N-DRM) Plan 2010, which was
adopted by the cabinet under the 1989 National

Management Framework for Action (Regional

Disaster Council Act. The N-DRM Plan provides the

Framework for Action or RFA) 2005–2015

government with a comprehensive institutionalframework to address hazards, reduce risks(including those associated with climate change),
and implement activities for disaster management,
recovery, and rehabilitation across sectors at theSection• Pacific Disaster Risk Reduction and Disasternational, provincial, and village levels.
The N-DRM Plan lays out procedures for the• National Adaptation Programme of Action(NAPA), 2008
• National Disaster Risk Management Plan, 2010
• Solomon Islands National Climate Change
Policy, 2012–2017

///

03

Recovery and Rehabilitation Committee,• National Development Strategy, 2011–2020

PCRAFISOLOMON ISLANDS

97

Disaster risk financing and insurance (DRFI) is

disaster risk financing strategy developed by thea key activity of the HFA Priorities for Action

World Bank.

///

4 and 5.2 The HFA is a result-based plan of action
<sup>

///

</sup>

adopted by 168 countries to reduce disaster risk
and vulnerability to natural hazards and to increase
the resilience of nations and communities todisasters over the period 2005–2015. In the Pacific,
the HFA formed the basis for the development of
the Regional Framework for Action.

The Pacific DRFI Program enables countries///

to increase their financial resilience against
natural disasters by improving their capacity///

to meet post-disaster funding needs withoutcompromising their fiscal balance. This programis one application of the Pacific Catastrophe Risk
Assessment and Financing Initiative (PCRAFI).

The RFA cites DRFI activities as a key national

The Pacific DRFI Program is built upon a three-///and regional activity. Theme 4—“Planning fortiered approach to disaster risk financing. These

effective preparedness, response and recovery”—

layers align to the basic principles of sound public

has an associated key national activity, “Establish afinancial management, such as the efficient

national disaster fund for response and recovery.”allocation of resources, access to sufficient

Theme 6 of the RFA—“Reduction of underlying

resources, and macroeconomic stabilization. The

risk factors”—cites the development of “financial

three tiers acknowledge the different financial

risk-sharing mechanisms, particularly insurance,

requirements associated with different levels

re-insurance and other financial modalities

of risk: (i) self-retention, such as a contingency

against disasters as both a key national andbudget and national reserves, to finance small

regional activity” (SOPAC 2005). These regional

but recurrent disasters; (ii) a contingent credit

implementation activities align with the three-tiered

mechanism for less frequent but more severe///

events; and (iii) disaster risk transfer (such as

Figure 1 — Three-Tiered Disaster Risk Financing Strategy

Risk Transfer

Low Frequency/
High Severity

International AssistanceSovereign Risk Transfer(e.g. Cat Bond/Cat Swap, (re)insurance)

Risk Retention

High Frequency/
Low Severity

Contingent Credit Lines

Post Disaster Credit

Government Reserves, Contingency Budget / Funds

SectionEmergency Funding

Source: World Bank 2010.

Insurance of Public Assets

Reconstruction

03

PCRAFI98

SOLOMON ISLANDS

insurance) to cover major natural disasters. See
figure 1.
This note aims to build understanding of the///

DRFI tools in use in the Solomon Islands andto identify gaps where engagement could
further develop financial resilience. It also///

aims to encourage peer exchange of regional
knowledge, specifically by encouraging dialogue onpast experiences, lessons learned, optimal use of
these financial tools, and the effect of these toolson the execution of post-disaster funds.

Photo Credit

///

///

Australian Department of Foreign Affairs and Trade/Flickr b

PCRAFISOLOMON ISLANDS

99

Economic Impact ofNatural Disasters
Since 1980, the Solomon Islands has(Solomon Islands Government 2013d). The Santa

experienced approximately 111 disasters that

Cruz earthquake affected 37 percent of theaffected over half a million people. Just overresident population, totally destroying 588 houses

half of these events were earthquakes, about aand partially damaging an additional 478.

///

///

quarter were tropical cyclones and storms, 11
percent were attributable to tsunamis, and 12

Logging, fishing, and more recently gold///

percent were man-made disasters, landslides, andmining drive the economy of the Solomon

droughts (PDN 2013).

Islands, and all of these industries can be
impacted by a natural disaster, which in turn

The Solomon Islands is located in an area

reduces the limited sources of government

known for frequent tropical cyclones, andrevenue. Like many small island states, the

///

///

is also situated in the Pacific Ring of Fire, anactive seismic area. Consequently, it is exposed to///both hydrometeorological and geophysical hazards.
This exposure was clearly demonstrated at the endof December 2012, when the country experienced
Tropical Cyclone Freda, followed in early February
2013 by a magnitude 8.0 earthquake and asubsequent tsunami affecting the Santa Cruz
Islands.

Solomon Islands has limited sources of domestic
revenue and thus limited budget flexibility. In
2013, domestic revenue grew by 8 percent (SI$202
million or US$28 million), which reflects growthin the national economy, ongoing improvement
in revenue administration, and compliance efforts(Solomon Islands Government 2013).
The Solomon Islands is expected to incur,///

The majority of the population works in the///

agriculture, fishing, and forestry sectors,
which are highly susceptible to natural
hazards, as the Santa Cruz earthquake
demonstrated. The tsunami following thatover the long term, average annual losses
of SI$145 million (US$20 million) due to///earthquakes or tropical cyclones. In the next
50 years, the Solomon Islands has a 50 percent
chance of experiencing a single event loss///

earthquake increased saline levels in the country’s
water sources. This had a severe impact on theexceeding SI$1.7 billion (US$240 million), and a
10 percent chance of experiencing a single event

living standards of and livelihoods of residents,

loss exceeding SI$3.7 billion (US$520 million) (seemost of whom practice subsistence agriculture

figure 2).

Section03

PCRAFI100

SOLOMON ISLANDS

Figure 2 — Direct Losses by Return Period
700
DIRECT LOSSES (MILLION USD)

600
500

TC + EQ
TC

400

EQ

300
200
100
0
0

100

200

300

400

500

600

700

800

900

Source: PCRAFI 20121000

Note: TC = tropical cyclone; EQ = earthquake

MEAN RETURN PERIOD (YEARS)

Figure 3 shows average annual loss by geographic

recorded over four days at the Honiara rain

area. Areas highlighted in red are likely to incur thegauge. These floods caused 22 fatalities across thehighest level of loss, between US$0.75 million andcountry, internally displaced some 10,000 people$2.1 million per year. The full country risk profile

initially, and affected approximately 52,000 people

for the Solomon Islands can be found in annex 4.

in total. The flooding caused damage to major
infrastructure, fully destroying some 675 houses

In April 2014, flash flooding in Honiara,along with the food gardens that many people///

Guadalcanal, Isabel, Malaita, and Makira-depend upon for their livelihood. This event took

Ulawa caused damage and loss estimated atplace at the time of writing, and information from

SI$787.3 million (US$108.9 million), equivalent

the event has been incorporated into this report

to 9.2 percent of gross domestic productwhere possible.

(GDP). A slow-moving tropical depression caused///

persistent heavy rains, with over 732mm of rainfall

Figure 3 — Average Annual Loss by Area0

Main Islands
50

100

200

Honiara0 1 2
Kilometers

Kilometers

03

5° S

Solomon Islands
Main Islands

0 175 350

Total Average Annual
Loss (thousand USD)

0 - 10
10 - 25
25 - 50
50 - 75
70 - 100
100 - 500
500 - 750
750 - 2,100

Honiara700

Kilometers

10° S

Section4

155° E

160° E

165° E

Source: PCRAFI 2011.

PCRAFISOLOMON ISLANDS

101

Public Financial
Management of
Natural Disasters
Although the Solomon Islands has developed

structure recognizes the need for MoFT to be

many policies to facilitate timely mobilization

part of the decision-making process for disasterand execution of post-disaster funds forresponse purchases. MoFT staff, however, remain

disaster response, these policies are little

uncertain of their role in post-disaster finance; inknown outside the NDC. This situation has led

the past they have not adhered to the correct bid

to delays in the purchase and distribution of relief

waiver process, which created unnecessary delays

goods and has had a significant impact on both thein purchasing needed goods.

///

///

budget for the NDC and the national contingency
warrant (contingency budget).

Effective post-disaster financial response relies
on two fundamental capabilities: (i) the ability to

All Solomon Islands government programs

rapidly mobilize funds post-disaster; and (ii) thereceive 100 percent of their budget allocation

ability to execute funds in a timely, transparent,(also known as a warrant) at the start of theand accountable fashion. This section discusses///

calendar year. This provides government agencies

the existing procedures for post-disaster budget

with the flexibility to manage their allocated funds

mobilization and execution and where possible

as they see fit throughout the year. Purchases canprovides examples of their use.

///

be made as long as they are within budget. But thearrangement can also create difficulty with postdisaster finance, particularly if a disaster should
occur toward the end of the year. Conversely, there
is a risk that an event at the start of the year could
exhaust the entire year’s worth of funds.
The National Disaster Risk Management Plan///

Sectionlists the permanent secretary of the Ministryof Finance and Treasury (MoFT) as a memberof the National Disaster Council (NDC). This///03

PCRAFI

102

Post-Disaster
Budget Mobilization

SOLOMON ISLANDS

significantly. Building on the World Bank disaster///risk financing and insurance framework (seeannex 1), table 1 shows the ex-ante and ex-post

The Solomon Islands government takes an///

ex-post approach to financing the cost ofdisasters. The disaster relief budget allocated to///

the NDC is small—SI$2.2 million (US$ 304,000)
in 2013 and SI$1.9 million (US$262,000) in 2014.
Both amounts were quickly exhausted following

financial tools available, indicates those utilized by
the Solomon Islands, and gives indicative timings.
The tools utilized by the Solomon Islands arehighlighted in blue. Those sections highlighted ingray are for generic instruments that to date havenot been used in the Solomon Islands.

one event during the first four months of the fiscal

The sections below discuss the financing tools

year. In other words, for two years in a row a single

available in the Solomon Islands in detail, providing

disaster has exhausted not only the relief budget

information on the time needed to mobilize theseof the NDC but also the operational budget. In

funds and the amount of funds available.

addition, anecdotal evidence suggests that the
majority of the national contingency budget wasdepleted following the event in Santa Cruz. It
appears that the Solomon Islands continues to rely
heavily on donor support to fund post-disaster
expenditures.

Ex-Ante Practices and Arrangements
The uncertainty surrounding international
assistance has placed pressure on countries toestablish domestic sources of finance for postdisaster relief, such as national reserves or transfer

The Solomon Islands has a variety of DRFI

of risk to the international insurance market. The

tools available to it, and the time needed

Solomon Islands has a variety of ex-ante practices

to mobilize and execute these funds varies

and arrangements, which are discussed below.

///

Table 1— Sources of Funds Available
SHORT TERM
(1-3 MONTHS)
Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Tax Incentives (Flash Appeal)
Ex-ante Financing

SectionNational Disaster Council FundContingency Budget

03

Contingent Credit
Sovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance
Source: Solomon Islands government; World Bank.

MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)PCRAFISOLOMON ISLANDS

National Disaster Council Fund
The National Disaster Council Fund was///established under Section 17 of the NDC Act(1989). However, this fund has not received an///

appropriation since 2008, when a special audit
conducted by the Office of the Auditor Generalfound that the National Disaster Council Fund was
misused and that funds were often diverted away

103

Cruz earthquake nor the flash floods of early2014 generated a payout under the terms of theinsurance. Nor was either event eligible under theterms of the insurance: the Santa Cruz earthquake
generated emergency losses that were below theattachment point of the policy, and the insurance
does not cover flood risk in itself.
The experience of the Solomon Islands///

from disaster response activities (Solomon Islands

highlights the importance of capacity building

Government 2008). In response to this finding,in DRFI. Countries need to decide exactly what

an account was established at the Central Bank

type of risk they wish to cover and what toolsof Solomon Islands (CBSI) to give the NDC greater

are best suited to covering it. Insurance cannot

control of any monies received from external

be used as a singular solution to hazard risk.

sources. (See “Flash appeal” below.)

The experience of the Solomon Islands has also///

given impetus to development of additional DRFI

Contingency warrant

products tailored to the specific needs of countries.

In 2011 the Solomon Islands government

Ex-Post Practices and Arrangements///

established a national contingency warrant to
set aside funds to meet unforeseen spending

Because disasters generally exceed a country’s

needs throughout the year (Solomon Islands

capacity to cope with them, there will always be a

Government 2013c). The warrant enables

need for ex-post practices and arrangements. An

the government to meet an urgent need for

optimal strategy for DRFI relies on a combination

expenditure on matters that were not foreseen atof ex-ante and ex-post financial instruments.

the time of the last appropriation bill; for example,

Ex-post arrangements benefit from being able

it can be used in response to a national emergency

to establish the extent of the disaster andor natural disasters, but can also be appropriatedprioritize the response needs. As a result thesefor less imperative financing demands.

arrangements take longer to implement than ex-///

Contingency warrants for disaster relief and///response can be released only following
a national declaration of emergency. The///

aggregate allocation for the 2013 contingency

ante arrangements, but they can often mobilize
larger amounts of finance. This section discusses
the ex-post practices and arrangements that havebeen made by the Solomon Islands.

Flash appeal

warrant was SI$38 million (US$5.2million), a 28
percent reduction from 2011. This decline raises
questions about the long-term sustainability of
the fund.

During the 2014 flash floods, an account was///established at the CBSI to receive funds froma flash appeal conducted by the NDC. The

The Solomon Islands participated in the first

appeal received SI$2.3 million (US$318,000),

two seasons of the Pacific Catastrophe Risk

which has been used to help emergency relief

Insurance Pilot but chose to discontinue thisand recovery needs. Donations came from private

insurance in the third season. This decision wascompanies, individuals, embassies of the Solomon

influenced by the fact that neither the Santa

Islands, and other governments, including Papua

///

///

///

Section03

PCRAFI104

SOLOMON ISLANDS

Box 1— The Pacific Catastrophe Risk Insurance Pilot
The Pacific Catastrophe Risk Insurance Pilot aims to provide

government in the aftermath of a severe natural disaster that disrupts theimmediate budget support following a major tropical cyclone orprovision of government services. Countries can choose between threeearthquake/tsunami. The insurance is designed to cover emergency

layers of coverage—low, medium, and high—depending on the frequency

losses, which are estimated using both a modeled representation of theof events. The lower layer will cover events with a return period of 1 in 10

event based on hazard parameters and a calculation of total modeled

years, that is, more frequent but less severe events. The medium layer will

physical damage. Unlike a conventional insurance scheme, where a payout

cover events with a 1-in-15-year return period, while the higher layer will

would be assessed against actual incurred costs, this scheme pays out oncover less frequent but more severe events, or those with a return period

the results of a model. The advantage of this approach is that it results inof 1 in 20 years. However, countries may request that a more customized

a much faster payout. The payout would act as a form of budget support

option be developed for them.

///

///

and would go some way to cover the costs that would be incurred by the

New Guinea and China. This account was opened

Donor assistance for reconstruction often///

to receive funds from external parties following

takes significant amounts of time andan event and has acted as a replacement to theinvolves negotiation between the country

National Disaster Council Fund—and given theand its donors to establish key priorities.

NDC greater control over and accountability for

However, significant amounts of financeany expenditures.

can be assigned. For example, the Solomon///

Islands government had received SI$7.9 million

Donor funds for relief
and reconstruction(US$1million) by February 19, 2013, less than
two weeks after the Santa Cruz earthquake andWhile donor funds will always be required,tsunami took place. Within one month of the///there is often an element of uncertainty
surrounding how much will be provided,

disaster, the amount of international assistancereceived had increased to SI$13 million (US$1.8///

what will be provided, and when the funds will
arrive in country. Consequently, overdependence
on international relief as a source of post-disastermillion). Approximately 5 percent of this wasreceived as aid in kind while the remainder wasprovided as cash grants.

financing can delay the provision of initial relief andFollowing the flash floods in 2014, theinhibit ex-ante contingency planning. Development

Solomon Islands was able to access SI$13

partners, international organizations, local

million (US$1.8 million) in grant funds from

nongovernmental organizations, businesses, andthe United Nations Central Emergency///

individuals contribute in the form of cash grants

Response Fund. These funds are to be used toand aid in kind. The provision of aid in kind, while

support health, nutrition, and water and sanitation

vital, can affect the costs borne by governments for

activities. However, access to these funds camethe distribution of these goods.

almost two months after the event, creating a lag///

in recovery activities.

PCRAFISOLOMON ISLANDS

Budget reallocation

105

cabinet has granted its approval (Solomon Islands

The NDC has three options for acquiring

Government 1978).

///

External debt

additional funds to facilitate response
activities:///

During the global economic crisis, the///(a) Transfer funds between accounts within an
agency, which requires approval of the head of

An 18-month Standby Credit Facility

agency and the minister of finance;

Arrangement approved in June 2010(b) Seek a contingency warrant, subject to cabinet
approval and in the event that the contingency
warrant allocated for that financial year isdepleted; or(c)Solomon Islands economy was hit hard.

succeeded in stabilizing the economy and///catalyzing donor support. The country’s fiscal
position has improved substantially since then as aresult of improved tax compliance and tax arrears
collection. The government cash balance increased

Request a supplementary budget allocationfrom almost zero in the first quarter of 2010 tofrom the contingency warrant.

about two months of recurrent spending by thesecond quarter of 2011 (IMF 2011).

According to the Public Financial Management///

Bill, the finance minister may seek

In 2012, the government introduced a debt///

supplementary appropriations when an

management framework incorporating a debt

urgent and unforeseen need has arisen and the

management strategy. This new framework

///

///

Photo Credit

///

///

Jenny Scott/Flickr b

PCRAFI

106

will guide any future debt decisions. The debt

amount in any given year. If these funds

management strategy aims to provide a robust

were exceeded, the government would need toand pragmatic approach to ensure that the volume

source remaining funds from the contingencyof new borrowing is limited to sustainable andwarrant and pursue budgetary reallocation. Thisaffordable levels (Solomon Islands Government

situation demonstrates the financial constraints the2013). MoFT has set the debt-to-GDP ratio at 25

government faces in financing disaster response.

percent, and has set the future maximum debt-

The government should investigate the possibility

servicing cost at 8 percent of forecast domesticallyof expanding the amount of dedicated funds

sourced revenue. At present, 10 percent of revenue

available and the use of contingent credit to fundis set aside for debt servicing (Solomon Islands

the level of retained risk.

Government 2013).
The Solomon Islands government has been///

improving its debt service ratio, whichsuggests that the option of contingent credit
could be considered to facilitate an immediate
injection of liquidity following a disaster.

///

However, any new credit facility must be affordable
and satisfy all the criteria outlined in the debt
management strategy. Furthermore, costs of use(including opportunity costs) must be balanced
against the benefits of the potential post-disasterliquidity injection.

Total Response Funds Available
The Solomon Islands has a maximum amount///of SI$41 million (US$5.7 million) available tofacilitate disaster response. Figure 4 shows the///three-tiered DRFI strategy alongside the sourcesof funds and the maximum amounts of funding
available to the Solomon Islands following an
event. However, it should be acknowledged thatthe contingency warrant is issued at the start of
the financial year and is not exclusively for disaster
response. The full amount of the contingency
warrant will probably not be available for response,
and there is likely to be a gap between the amountavailable and the disaster relief budget line.
Section03

SOLOMON ISLANDSThe Solomon Islands government has SI$2.2///

million (US$0.3 million) available in dedicatedresponse funds, and there is a 77 percent
chance that disaster losses will exceed this///

PCRAFISOLOMON ISLANDS

Post-Disaster
Budget Execution

107

The location of the earthquake in Santa///

Cruz was remote, and the Solomon Islands
government faced high transportation costs
to facilitate relief. This experience provides a

Following the Santa Cruz earthquake and///strong case for establishing some form of national///

tsunami, a Humanitarian Action Plan wasdeveloped that identified 41 activities with an///estimated total cost of SI$68.8 million (US$9.5
million), of which SI$47.5 million (US$6.6 million)
remained unmet two months after the event

reserves for disaster response and recovery. At
the moment the government depends on therecurrent budget of the NDC, which is insufficientfor high post-disaster transportation costs. In
fact the response to the Santa Cruz earthquake(Solomon Islands Government 2013d).

drained the annual budget for the National

The NDC met on the day of the Santa Cruz

Disaster Management Office and the majority ofearthquake and was able to immediately

the national contingency budget.

///

mobilize SI$1 million (US$138,000) to purchaserelief supplies. This is equivalent to approximately///

half of the annual budget for response. The
remaining SI$1.2 million was exhausted shortly
afterward following updates from situation
reports identifying the need for greater quantities
of relief goods. The first shipment of goods tothe affected area had fully exhausted the annual
response budget.

Anecdotal evidence suggests that the bid///

waiver process was not adhered to after the
Santa Cruz earthquake or the flash floods
in 2014; MoFT staff were unaware of thisprocess, which is rarely used. In a statement of///emergency, normal tendering procedures should
be waived upon submission of a bid waiver. But
following the earthquake and floods, the NDC
was required to submit a copy of the statement of

Figure 4 — Amount of Ex-Ante Funds Available for Immediate Response

Disaster risks

Disaster risk ﬁnancing
instruments

Amount of funds
available

High-risk layer(E.G. Major earthquake,major tropical cyclone)

Disaster risk insurance

N/A

Medium-risk layer(E.G. Floods, small earthquakes)

Contingent credit

N/A

Low-risk layer(E.G. Localized ﬂood, landslides)

Contingency budget,
national reserves, annual
budget allocation

Contingency Warrant:
SB$38m (US$5.4m)
Disaster Relief
SB$2.2m (US$0.3m)

Source: World Bank.

Section03

PCRAFI108

SOLOMON ISLANDS

emergency and a bid waiver form to accompany

was reported to oversee over 30 maintenanceeach quote for purchase. At times three quotes

contracts across the islands.

were sought despite the submission of a bid waiver.
This created significant delays in the purchase ofnecessary relief items. Some agencies, including
the Ministry of Health, asked nongovernmentalorganizations to pay for goods, as this was easierthan procuring essential equipment throughgovernment. These anecdotes suggest that a
post-disaster budget execution manual would
help MoFT raise staff’s awareness of post-disasterprocedures and processes.

Practical policies and procedures for post-///disaster finance are contained within the
National Disaster Risk Management Plan. But
there is limited awareness of these policies
and procedures across the Solomon Islands
government and in particular in the MoFT.

///

The small volume of dedicated funds allocated to
the NDC is easily exhausted, and the government
should consider reactivating the National DisasterCouncil Fund or using other DRFI instruments such

Some government departments indicatedas contingent credit to ensure additional sources ofthat they had sufficient funding to respond toliquidity following an event.

///the flash floods, but lacked the institutional
capacity to expend the funds. Key line ministries///

such as Health and Education cited the lack ofinstitutional capacity as a major constraint—not
only on the required response to the 2014 floods
but also on their day-to-day operations. These
ministries have significant sector budget support
from donors but do not have sufficient capacity to
implement the work required. One staff member
Photo Credit

///

///

Australian Department of Foreign Affairs and Trade/Flickr b

PCRAFISOLOMON ISLANDS

109

Insurance of
Public Assets
Total Solomon Islands non-life (general)

damaging earthquakes were a magnitude 8.1

insurance premium, all classes, was SI$95.6

earthquake in April 2007 in Western Province andmillion (US$13 million) in 2012. Local insurers

magnitude 8.0 earthquake in February 2013 nearunderwrite SI$48.7 million (US$6.6 million) of

the Santa Cruz Islands.

///

///

this amount, and the balance of SI$46.9 million(US$6.3 million), or 48 percent of the market, isplaced with offshore insurers.
The Solomon Islands non-life local insurance
market is small and currently has two locallyregistered insurers, QBE Insurance (International)
Limited, Tower Insurance Limited, and a new
entrant, Pacific Assurance Group (Solomon Islands)
Limited, which joined the market in 2014.

Non-life premium per capita is estimated///at SI$174 (US$24), which is lower than the///rate in other Pacific Island Countries (PICs) andindicates a low insurance penetration. The current
low insurance market premium suggests thatthe insurance market is, like the economy, still
recovering from the ethnic tension and unrest of
the past decade. The non-life insurance market
premium prior to 1999 was estimated by insurance

The Solomon Islands has legislation inindustry sources at over SI$181 million (US$25

place—the Insurance Act Cap. 82 (1985)

million) (1999 value).

///and regulations—to regulate the insurance
industry. The CBSI is the regulator. The CBSI///

Insurance for catastrophe insurance perils of///

requires insurers to report quarterly, ensures thatearthquake and cyclone is available in thesolvency margins are met, and receives copies

market and is automatically included in propertyof all reinsurance contracts. Offshore insurance

insurance products. Property insurance rates

placements must be approved by CBSI before

for cyclone in the Solomon Islands are below

coverage is placed overseas.

average rates for PICs, at 0.13 percent, due

The Solomon Islands is exposed to theto comparatively lower frequency of cyclones.

catastrophic perils of cyclone, volcanic

The earthquake insurance rates in the Solomon

eruption, and earthquake. The Solomon Islands

Islands—0.17 percent—are higher than average

is located at the northern edge of the Southernrates for other PICs because of recent major

Hemisphere tropical cyclone zone. The most recent

earthquake events.

///

///

///

Section03

PCRAFI110

SOLOMON ISLANDSThe Solomon Islands government does not

perils. Some statutory bodies do not have

have indemnity property insurance programs

property insurance.

///in place for its public assets, including major///transportation assets such as wharves, roads, andbridges. This could result in delays in reconstruction
following a catastrophic event.
Since 2012, the government has had a///property asset register in place, managed
by the MoFT. The MoFT advised that individual///

ministries have their own existing asset registers
and that these are not integrated or updated with
the MoFT asset register.
According to insurance industry sources, some///Solomon Islands statutory bodies and stateowned enterprises that manage public assets
have insurance programs in place that include
indemnity property insurance for catastrophe///

SOLOMON ISLANDSPCRAFI

111

Options for
Consideration
The Solomon Islands has developed a variety ofsafeguard expenditures, and development of an

DRFI processes and procedures, as detailed in thisoperations manual.

note. However, these could be strengthened toreduce the time it takes to expedite post-disaster
funds. Toward that end, a number of options for

Recommendation 3: Explore the use of///contingent credit to access additional liquidity
post-disaster, including identification of the///consideration are presented:
Recommendation 1: Develop a post-disasterproviders of this type of finance. The advantage ofcontingent credit is that it is used only following///

budget execution manual to improveawareness of post-disaster procedures andprocesses. A manual will help to reduce the time

an event and does not affect the current debtservicing ratio unless a disaster of an agreed-upon
magnitude occurs. This option could plausibly///

it takes to approve post-disaster expenditures by
ensuring normal tendering procedures are waived.
Any new process developed should align to the
National Disaster Council Act (1989). Agencies
and suppliers alike need to be familiar with post-

finance response efforts following intermediate
disaster events—that is, those that exceed thecapacity of options from within the budget,
but that are too expensive to fund through risk
transfer due to their frequency.

disaster processes to remove any unnecessary
delays in the system.
Recommendation 2: Develop an integrated///

disaster risk financing and insurance
strategy. This should establish potential sources///of immediate liquidity post-disaster, such as a
dedicated reserve fund for disaster response.
It is recommended that a feasibility study be
conducted to look at reactivating the National
Disaster Council Fund, considering in particular
identification of a sustainable source of funds,
any necessary amendments to legislation to

Section03

PCRAFI112

End Notes
1 Data are from Solomon Islands National Statistics Office, avail-<sup></sup>

able at http://www.spc.int/prism/solomons/.

2 Priority for Action 4—“Reduce the Underlying Risk Factors”—<sup></sup>

has an associated key activity of financial risk-sharing mechanisms, such as insurance, while Priority for Action 5—“Strengthen
disaster preparedness for effective response at all levels”—includes the establishment of emergency funds such as contingency
budget, national reserves, and annual budgetary allocations. See
UNISDR (2005).

Section03

SOLOMON ISLANDSSOLOMON ISLANDSPCRAFI

113

References
GFDRR (Global Facility for Disaster Reduction and Recovery)

ment, Climate Change, Disaster Management & Meteorology

2012 The Sendai Report: Managing Disaster Risks for Resilientand Disaster Management Partners, Government of Solomon

Future, Washington D.C., U.S.A.

Islands.

IMF (International Monetary Fund). 2011. “Solomon Islands 2011
Article IV Consultation.” IMF, Washington, D.C.
PCRAFI (Pacific Catastrophe Risk Assessment and Financing
Initiative). 2013. “Country Risk Profile: Solomon Islands.” June.
http://www.pacris.sopac.org.
PDN (Pacific Disaster Net). 2013. http://www.pacficdisaster.net.
Solomon Islands Government. 1978. Public Finance and Audit Act
1978. Solomon Islands Government.
———. 1989. The National Disaster Council Act 1989. Solomon
Islands Government.
———. 2008. Special Audit Report: Tsunami and Earthquake
Relief Fund within the National Disaster Council (NDC) under
the Ministry of Home Affairs. Honiara, Solomon Islands: Officeof the Auditor General, Solomon Islands Government.
———. 2010. “National Disaster Risk Management Plan 2010 for
Disaster Management Arrangements and Disaster and Climate
Change Risk Reduction.” National Disaster Council, Solomon
Islands Government.
———. 2012. “Approved Development Estimates.” Governmentof Solomon Islands. December 2011.
———. 2011a. “Approved Recurrent Estimates Budget Paper.”Vol. 2. Government of Solomon Islands. December 2011.
———. 2011b . “Budget Strategy and Outlook Budget Paper.”Vol. 1. Government of Solomon Islands. December 2011.
———. 2012. “National Climate Change Policy 2012–2017.”
Ministry of Environment, Climate Change, Disaster Management and Meteorology, Solomon Island Government.
———. 2013a. “Approved Development Estimates.” Governmentof Solomon Islands, December 2012.

SOPAC (Pacific Islands Applied Geoscience Commission). 2005.
Pacific Disaster Risk Reduction and Disaster Management
Framework for Action (Regional Framework for Action or RFA)
2005–2015. SOPAC, Suva, Fiji.
———. 2009. “Implementation of the Hyogo Framework for
Action and the Pacific Disaster Risk Reduction and Disaster
Management Framework for Action 2005–2015: Report for
the Period 2007-2009.” Regional Synthesis Report, SOPAC
Miscellaneous Report 674. SOPAC, Suva, Fiji.
SPC (Secretariat of the Pacific Community) 2011 Cook Islands:
Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment
in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Republic of
Marshall Islands: Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Vanuatu: Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2012 Papua New
Guinea: Investment in DRM, Suva, Fiji
SPREP (Secretariat of the Pacific Regional Environment Programme). 2013. “JNAP Development and Implementation in
the Pacific: Experiences, Lessons and Way Forward.” SPREP,
Apia, Samoa
UNISDR (United Nations International Strategy for Disaster
Reduction.) 2005. Hyogo Framework for Action 2005–2015:
Building the Resilience of Nations and Communities to Disasters. UNISDR, Hyogo, Japan.

———. 2013b. “Budget Strategy and Outlook Budget Paper.”———. 2013. “Country Study Solomon Islands.” In The PacificVol. 1. Government of Solomon Islands, December 2012.

Experience in Developing Policy and Legislation on Disaster———. 2013c. “Approved Recurrent Estimates Budget Paper.”Risk Reduction and Climate Change Adaptation, chap. 5.

Vol. 1. Government of Solomon Islands, December 2012.
———. 2013d. Humanitarian Action Plan for the Santa Cruz
Earthquake and Tsunami Response 2013. Ministry of Environ-

UNISDR.
World Bank 2010 Financial Protection of the State against Natural
Disasters; A Primer, Washington D.C., U.S.A.

Section03

PCRAFI114

SOLOMON ISLANDS

Annex 3

Insurance Market Review, April 2014

Executive Summary

damaging earthquakes were a magnitude 8.1

Total Solomon Islands non-life (general)magnitude 8.0 earthquake in February 2013 nearinsurance premium, all classes, was SI$95.6

the Santa Cruz Islands.

earthquake in April 2007 in Western Province and///million (US$13 million) in 2012. Local insurers///

underwrite SI$48.7million (US$6.6 million) of
this amount, and the balance of SI$46.9 million(US$6.3 million), or 48 percent of the market, isplaced with offshore insurers.

Non-life premium per capita is estimated///at US$24, which is lower than the rate in other///

Pacific Island Countries (PICs) and indicates a low
insurance penetration. The current low insurance
market premium suggests that the insurance

The Solomon Islands non-life local insurance

market is still recovering from the political unrest

market is small and currently has threeof the past decade. The non-life insurance

locally registered insurers, QBE Insurance

market premium prior to 1999 was estimated by(International) Limited, Tower Insurance

insurance industry sources at over US$25 million

Limited, and a new entrant, Pacific Assurance(1999 value).

///Group (Solomon Islands) Limited, which joined///

the market in 2014.

Insurance for catastrophe insurance perils of///earthquake and cyclone is available in the

The Solomon Islands has legislation inmarket and is automatically included in property

place—the Insurance Act Cap. 82 (1985)

insurance products. Property insurance rates forand regulations—to regulate the insurance

cyclone in the Solomon Islands are 0.13 percent,

///

///

industry. The Central Bank of Solomon Islands

below average rates for PICs, due to the lower(CBSI) is the regulator and requires insurers tofrequency of cyclones. The earthquake insurance

report quarterly to ensure that solvency margins

rates in the Solomon Islands, at 0.17 percent, areare met. All reinsurance contracts must be sent

higher than average rates for other PICs because

to CBSI, which also approves offshore insuranceof recent major earthquake events.

///

placements before coverage is placed overseas.

The Solomon Islands government does not///

The Solomon Islands is exposed to thehave indemnity property insurance programs

catastrophic perils of cyclone, volcanicin place for its public assets, including major

eruption, and earthquake. The Solomon Islands

transportation assets such as wharves, roads,

is located at the northern edge of the Southernand bridges. This could result in delays in

Hemisphere tropical cyclone zone. The most recent

reconstruction following a catastrophic event.

///

Section

///

03

///

PCRAFISOLOMON ISLANDS

115

Table 1— Pacific Non-life Insurance Premium per Capita 2012 (US$)

MARKET

GDP MILLIONSPOPULATION

GDP PERCAPITA

MARKET
PREMIUM

PREMIUM PER
CAPITA$342

Cook Islands$305

19,300$15,823$6,600,000

Fiji$3,908874,700$4,467$97,500,000$111

Marshall Islands$182

52,560$3,470$3,000,000

$57

Samoa

$683

188,900$3,619$17,000,000$90

Solomon Islands$1,008549,600$1,130$13,000,000

$24

Tonga

$471

104,900$4,495$4,400,000$42

Vanuatu$781

247,300$3,182$16,500,000$67

Source: World Bank

Since 2012, the government has had a

Limited (QBE), Tower Insurance Limited (Tower),///property asset register, managed by the
Ministry of Finance and Treasury (MoFT).

and a new entrant, Pacific Assurance Group///

The MoFT advised that individual ministries havetheir own existing asset registers and that these
are not integrated or updated with the MoFT
asset register.

(Solomon Islands) Limited, which joined the market
in 2014.
The Insurance Act Cap. 82 (1985) restricts the///placement of insurance offshore, and any
offshore placements must be approved byAccording to insurance industry sources, somethe Central Bank of Solomon Islands (CBSI).

Solomon Islands statutory bodies and state-

Insurance industry sources advised that mostowned enterprises that manage public assets

offshore placements are for specialist and global

have insurance programs in place that include

corporate insurance risks, such as Gold Ridge mine

indemnity property insurance for catastropheand Solomon Breweries. Aviation risks are also

///

///

perils. Some statutory bodies do not haveplaced offshore, as there is no capacity for thisproperty insurance.

class of business in the Solomon Islands.

Insurance Market Overview

Solomon Islands is US$24, lower than rates

Total non-life (general) insurance premium,1). Insurance industry sources advised that the

all classes, was SI$95.6 million (US$13 million)

non-life insurance market premium in 1999 was

in 2012. Local insurers underwrite SI$48.7

an estimated US$25 million. The current low

million (US$6.6 million) of the business andinsurance market premium suggests that thethe balance of SI$46.9 million (US$6.3 million)

insurance industry is still recovering from theis placed with offshore insurers.

ethnic tension and unrest of the past decade.

///The non-life premium per capita in the

///

///

///

The Solomon Islands non-life insurance///

in other Pacific Island Countries (PICs) (table///

Distribution channels

Sectionmarket is small and currently has three locallyregistered insurers, QBE Insurance (International)///

03

PCRAFI

116

SOLOMON ISLANDS

Table A .2— Pacific Commercial Property Insurance Rate and Deductible Comparison

MARKET

GENERAL
EARTHQUAKEDEDUCTIBLESAVERAGE
EARTHQUAKE RATEAVERAGE CYCLONE
RATE

GENERAL CYCLONE
DEDUCTIBLE
20% of sum insured

Cook Islands

0.12%

2% of sum insured

0.45%

Fiji

0.08%

10% of sum Insured

0.30%

Samoa

0.12%

2% of sum insured, or
5% of loss

0.20%

20% of loss
2% of sum insured, or
5% of loss

Tonga

0.15%

5% of sum insured

0.25%

5% of sum insured

Vanuatu

0.30%

5% of loss

0.17%

20% of loss

Source: World Bank 2013
Note: Average market rate percentage of value based on insurance industry sources.

According to CBSI, the Solomon Islands has two

number of claims for these events in the Solomon

licensed insurance agents, Australia & New ZealandIslands; while the events themselves are relatively

Banking Group Limited and Credit Corporation

frequent, the areas affected have limited assets(Solomon Islands) Limited.

and consequently very little insurance coverage.

There are four licensed insurance brokers: United

There are a number of limitations with a

Risk Services Limited, MAT Insurance Brokers

comparison of this type because of the variables

Limited, Pacific Insurance Broker Limited, andin property insurance rating, such as location ofMarsh PTY Limited. Only Marsh does not have apremises, construction, occupation, fire protection,

servicing office in the Solomon Islands; its businessfrequency of expected losses, and the amountis transacted from Australia or Papua New Guinea.

and type of deductible on the policies. It is not

Both of the current non-life insurers in Solomon
Islands offer insurance products on a direct
basis for domestic household and motor vehicle
insurance products. No insurance services areavailable by Internet in the Solomon Islands.
There is a range of distribution channels available
in the marketing of general insurance products in
Solomon Islands, all of which are focused in thecapital, Honiara.

possible to use average rating data as an exact
basis for a specific company or individual risk, but
it is possible to offer a general comparison of theproperty insurance rates in respective markets.
The local market does not appear to have any
major capacity limitations for property insurance.
Insurance intermediaries’ advised that both
insurance providers have capacity for mostproperty risks within the Solomon Islands. Thereis additional capacity available, by way of offshore

Property insurance rates for cyclone in the Solomonplacements, if necessary. The fact that 48 percent

Islands are below average for PICs, although theof the market premium is placed offshore suggests

earthquake rates are higher than average (see tablethat the capacity is used by insurance brokers to2). These high earthquake rates are due to theplace client business.

occurrence of major earthquake events in recent
years. The low cyclone rates are due to the low

SOLOMON ISLANDSPCRAFI

Catastrophe Risk Insurance
There are three major catastrophe hazards in the
Solomon Islands: earthquakes, volcanic eruptions,and tropical cyclones. The major property
accumulation exposure is in the capital (Honiara)
and the island of Guadalcanal.

117

requiring adequate reinsurance programs, placedwith robust reinsurers.

Catastrophe Reinsurance
In 2011, natural catastrophe insured losses in
the global reinsurance market were the secondlargest ever, at over US$110 billion (Swiss Re

Catastrophe risk insurance presents a particular2012). What made this year significant for insurers

challenge to insurers’ exposure management,(and reinsurers) in the Pacific was the number ofsince unlike other types of insurance, it presents

events that occurred in the Asia Pacific region:

the possibility of large correlated losses. Insurers

earthquakes in New Zealand and Japan, floods inneed to use a combination of reinsurance, reserves,

Australia and Thailand, and a cyclone in Australia.

and diversification within their underwriting to

According to the Global Insurance Market Reportensure that their portfolios can withstand large(IAIS 2012), these Asia Pacific events accounted

disaster shocks without threatening their solvency.

for 61 percent of the insured losses from natural

The Solomon Islands local domestic market has

catastrophes in 2011, compared to a 30-year

capacity available, with one international insurer

average of 18 percent. As a consequence, there

and two regional insurers, and additional capacity

were adjustments in reinsurance capacity andis available offshore if needed.

higher risk premiums. In 2012 the natural disasterAll insurers with catastrophe exposures need
to obtain reinsurance to increase their capacity.
This is even more important when the insureror the insurance market pool is small, such as in
the Pacific. As regulators become increasingly
vigilant about requiring insurers to have sufficient
capital and a good solvency margin to protect

losses dropped to US$77 million (Swiss Re 2013),
but this was still the third-highest year for natural
catastrophe insured losses since 1970. In the
Pacific, Tropical Cyclone Evan caused insured losses
of F$57 million in Fiji (RBF 2012) and estimatedinsured losses of SAT 3 million in Samoa in
December 2012.

their interests from catastrophic events, they are
Photo Credit

///

///

Australian Department of Foreign Affairs and Trade/Flickr b

PCRAFI

118

SOLOMON ISLANDS

QBE (Solomon Islands) is reinsured for catastrophebuilding code, since a national building code has

events under the QBE Group reinsurance program.

not been agreed upon or passed in the country.

QBE Group has a detailed risk management

Should clients wish, they can provide an engineer’s

process (QBE Insurance Group Limited 2012)

report to indicate that the building meets thethat includes monitoring of catastrophe claims

building standards applied elsewhere, and this canconcentration and reinsurance protection to

be factored into the policy.

mitigate the exposures.

Industrial Special Risks (ISR) policies are used for

Tower (Solomon Islands) is reinsured forproperty insurance on most major commercial,catastrophe events under the Tower Insurance

government, and government public bodies

Limited Group reinsurance program. Tower

accounts. There is no agreed upon ISR within

has determined that its main exposure in thethe market—that is, each property insurer has its

Solomon Islands is earthquake and that the main

own ISR. The wordings are generally based on theaccumulation is in the capital, Honiara. Tower

Australian Mark IV or Papua New Guinea market

Insurance Limited (2011, 2012) acknowledges that

ISR wordings.

property accumulations and exposure to naturalperils represent a significant risk to its business. In
order to mitigate this risk the company undertakes
accumulation risk modeling and ensures that
adequate reinsurance protection is in place. In
its 2011 annual report, Tower Insurance Limited(2011) advised that its event excess had increased
to NZ$6.7 million and that it had protection for
two catastrophe events within the program for the

The QBE ISR wording is based on the AustralianMark IV insurance industry standard wording.
Tower uses an ISR wording based on the Papua
New Guinea insurance market wording. Thesewordings insure material damage (subject
to specific exclusions) and include insurance
for natural perils, such as volcanic eruption,
earthquake, tsunami, and cyclone.

2011/12 period. The reinsurance program is not

Commercial Package or Business Protection

detailed in the company’s 2012 report, but it could

wordings are used for small and medium

be expected to follow the previous arrangements.

enterprises, and policies are taken as either Multi

Insurers throughout the Pacific have expressed
concern at the recent increase in reinsurance
premiums, particularly premiums for catastrophe
reinsurance. They have limited ability to pass on thefull costs of these increases to insured clients due

Risks (accidental damage including earthquake andcyclone by extension) or as Specified Risks (fire andextraneous perils). These policies generally follow
the perils insured under the ISR, although coverage
may be more restricted.

to the small size and economic constraints in thosemarkets.

Section03

Regulatory Framework

Market Property and Catastrophe
Insurance Products

Insurance Law and Regulation

Cyclone insurance in the Solomon Islands differs

Under the Insurance Act Cap. 82 (1985), allfrom that in most other PICs in that it is available
automatically, with no preconditions for acceptancesuch as an engineer’s report. It can be assumed,
however, that buildings do not meet any form of

insurance companies, agents, and brokers mustbe licensed. The CBSI is the regulator and requires
quarterly and annual returns from insurers.
According to the CBSI (2012), the draft of a new

SOLOMON ISLANDSPCRAFI

119

Photo Credit///

Insurance Bill was completed in 2008 with theCap. 154 (1980), any development plans must be

assistance of the International Monetary Fund,lodged with local authorities prior to construction,although the bill is still pending at this time.

but this legislation does not require compliance

CBSI requires insurers to annually submit a

In the absence of a legally enforceable building

details with their insurance license renewal

code, insurers underwrite on the basis thatapplication. CBSI holds quarterly prudential

premises do not meet code, unless proof by way of

consultative meetings with insurance companies

an engineer’s report is provided to the contrary.

undertakes biannual on-site reviews of local

Flickr b

Financial Security of Onshore Insurers

insurers, including cross-checks of accumulations

The Solomon Islands has three onshore insurers,

against adequacy of insurance coverage.

QBE (Solomon Islands), Tower (Solomon Islands),

Building Controls and Standards

Krasowski/

with any building code.

reinsurance management strategy and programand brokers to discuss market issues. It also///

Stefanand Pacific Assurance Group (Solomon Islands)
Limited,The Solomon Islands does not have a building act

QBE (Solomon Islands) is a branch of QBE

in place. Insurance industry sources advised that

Insurance (International) Limited, which is a whollya draft National Building Code was circulated inowned subsidiary of QBE Insurance Group Limited,

1990, using the New Zealand earthquake code

an Australian company listed on the Australian(NZS4203) and Australian wind loads (AS1170.2) as

stock exchange. QBE Insurance (International)

its basis. Under the Town and Country Planning Act

Limited has a security rating of A+ (strong) from

Section03

PCRAFI

120

SOLOMON ISLANDS

Standard & Poor’s, dated May 22, 2013, as a coreproperty insurance management and purchasing,operating entity of QBE.

which could result in lower premiums.

Tower (Solomon Islands) is a branch of Tower
Insurance Limited, a New Zealand–registered

Past Catastrophe Events

company listed on the New Zealand and Australianstock exchanges. As a branch, Tower (Solomon

The most destructive cyclone within the Solomon

Islands) holds the financial security rating of theIslands was Cyclone Namu in 1986 (Revell

parent company, Tower Insurance Limited, which1986). This event caused significant property

has a security rating of A- (excellent) from A. M.

damage in the capital city, Honiara, and in theBest dated July 26, 2013.

surrounding islands of Guadalcanal and Malaita.
Insurance industry sources reported that claims

The new entrant, Pacific Assurance Group(Solomon Islands) Limited, is a subsidiary ofwere estimated at SI$14 million (1986 values),

a company registered in Papua New Guinea,

the largest of which was from Solomon Islands

Pacific Assurance Group Limited. No details of

Plantations Limited at over SI$7 million. The

the company’s financial security are available atremaining SI$7 million in claims was from flood

this time.

and wind damage within Honiara township. The
loss adjuster who attended to these claims advisedthat there were a number of roof failures due toInsurance of Public Assets

incorrect or inadequate fixing of roofing iron.

According to the Ministry of Finance and

On April 2, 2007, a magnitude 8.1 earthquake

Treasury (MoFT), the Solomon Islands has

occurred in Western Province to the southwest///of the regional town Gizo. As a result of damage

no property insurance program in place forgovernment buildings or infrastructure assets.

///

Nor is there a current plan to insure public assets.
The government does have an asset register///in place for property and infrastructure assets,managed since 2012 by MoFT. The existing asset///

register could be used to identify key government
assets for any risk financing or insurance program.
Some state-owned enterprises that hold///major public assets have property insurance
programs that include earthquake and cyclone
perils. These enterprises include Solomon Airlines///

Limited, Solomon Islands Electricity Authority, andSolomon Islands Ports Authority.
SectionThe government keeps no centralized register///

detailing the insurance arrangements made by

03

individual state-owned enterprises. A register///of this type would allow a coordinated approach tofrom the earthquake and resulting tsunami, 35
insurance claims were lodged, and insured damage
was estimated at SI$9 million (US$1.1 million). The
claims and insured costs were lower than might
have been expected due to the low penetration of
insurance in remote islands.
Following Cyclone Namu, one insurer, Sun
Alliance, withdrew from the underwriting of
insurance business in the Solomon Islands market.

PCRAFISOLOMON ISLANDS

Options for Consideration

121

References

Recommendation 1: The government should///

CBSI (Central Bank of Solomon Islands). 2012. 2012 CBSI Annual

develop an insurance program for key public

Report. http://www.cbsi.com.sb/index.php?id=105.

assets and include this in a broader disasterrisk financing and insurance strategy. This

IAIS (International Association of Insurance Supervisors). Global

step would include use of the existing asset

Insurance Market Report. 2012 edition. http://iaisweb.org////

index.cfm?event=getPage&nodeId=25308.

register to identify key assets and assessment ofpremium costs for property indemnity insurance

QBE Insurance Group Limited. 2012. Annual Report 2012. http://
www.group.qbe.com/.

on key public assets, in particular for the major
catastrophe perils of earthquake/tsunami andRBF (Reserve Bank of Fiji). 2012. Insurance Annual Report 2012.

cyclone/sea surge.

Suva, Fiji. http://www.rbf.gov.fj/Publications/Publications/Insurance-Annual-Reports.aspx.

Recommendation 2: The government should///

update the asset register held by the MoFT toinclude the property assets currently listed inexisting asset registers with other ministries.
Where possible the asset register entries should
include the current replacement value of public
assets, in addition to the existing purchase value.

Revell, C. G. 1986. “Tropical Cyclone Namu.” Weather andClimate 6: 67–69.
Solomon Islands Government. 1980., Town and Country Planning///

Act Cap. 154, 1980———. 1985. Insurance Act Cap. 82,1985.
Standards Australia Limited, AS1170 Minimum design loads on
structure, Part 2 Wind forces 1989, (superseded standard,
replaced by AS/NZS 1170.2:2011)
Standards New Zealand, NZS4203 1984, Code of practice forgeneral structural design and design loadings for buildings,
Part 3 Earthquake provisions, (superseded standard, replaced
by NZS 1170.5:2011)
Swiss Re. 2012. “Natural Catastrophes and Man-Made Disasters
in 2011.” Sigma 2/2012. http://www.swissre.com/sigma/.
———. 2013. “Natural Catastrophes and Man-Made Disasters in
2012.” Sigma 2/2013. http://www.swissre.com/sigma/.
Tower Insurance Limited. 2012. _Annual Reports 2012_. http://
www.tower.co.nz/Investor-Centre/Reports/Documents/TOWER_Annual_Report_2012.pdf

Section03

PCRAFI122

SOLOMON ISLANDS

Glossary
Someone who acts for the insurance company in arranging insurance contracts. There are two mainAgenttypes of agents: tied agents, who act for one insurer only, and general agents, who act for multiple
insurance companies.

BrokerCapacity

Captive insurer

Someone who acts as an agent for the insured in arranging an insurance or reinsurance programwith a provider of capacity.

The ability of an insurance company to provide insurance protection to clients, which is limited byits own financial strength and the reinsurance protection it has in place.

An insurance company wholly owned by a company or entity that insures the risks of the parent
entity and subsidiaries.
Insurance that reimburses individuals or entities for loss or damage to a financial position as close

Indemnity insurance

as possible to the position they were in prior to the event, in the context of the financial terms ofthe coverage (such as deductible/excess and limit).

Intermediaries

Net retention

Parametric insurance

Probable maximum loss
(PML)

The general term given to insurance agents and brokers.

The amount that an insurance company retains on a reinsurance contract and in particular anexcess of loss of contract.

A type of insurance that is triggered by the occurrence of a specific measured hazard event, suchas a certain magnitude of earthquake or category of cyclone.

The maximum value of a claim from a large or catastrophe event. May also be called MPL.

The insurance of physical assets such as buildings, plant and equipment, stock, and machinery.
Property insurance

The products used for this insurance are variously named as fire and perils, commercial or businesspackage, industrial special risks, or material damage insurance.

A risk transfer method used by insurance companies to transfer part of a single large risk or an
Reinsurance

accumulation of similar risks and so increase their capacity. Reinsurance helps to smooth theextreme results and effects of specific perils (such as catastrophe events) and therefore to reducethe volatility of an insurance portfolio.

Solvency margin

Section03

The extent by which an insurer’s assets exceed its liabilities. Minimum statutory solvency
requirements are normally included in insurance acts or regulations.

SAMOA
February 2015
Disaster Risk Financing and Insurance

CHAPTER 04

Country Note

PCRAFI

124

Samoa

Executive Summary
In 2012 Tropical Cyclone (TC) Evan offered a

Samoa has several disaster risk financing///

distressing reminder of Samoa’s exposure to naturaland insurance (DRFI) tools in place and ishazards. TC Evan came only three years after theable to reallocate resources swiftly following

earthquake and tsunami of 2009, which affected

an event. However, there is some confusion

2.5 percent of the country’s population, causing

surrounding the correct post-disaster finance

143 fatalities and associated economic losses

policies among Ministry of Finance (MoF) staff. At

equivalent to 20 percent of gross domestic product(GDP).

///

present these policies are spread across a variety
of documents. This has resulted in delays inprocurement and inefficient allocation of humanThe economic growth of Samoa has been

resources. It is recommended that post-disaster

impacted in the past few years by two major

policies be compiled into a single document fordisasters: the tsunami in 2009 and TC Evan

post-disaster budget mobilization and execution to

in 2012. Growth was also impacted by the global

avoid problems in the future.

///

///

financial crisis. Overall GDP contracted by 5.1

A number of options to improve the existing///

percent following the tsunami in 2009, but it has

DRFI measures have been presented for

gradually increased in subsequent years. Following

consideration:///

TC Evan, real GDP declined by 0.4 percent. Growth
in GDP rebounded to 2.2 percent in 2013/14 as(a) develop an overarching disaster risk financing
strategy aligned to existing processes;

the reconstruction program commenced (WorldBank 2014).

(b) develop an operations manual detailing theprocesses required to facilitate swift post-

Samoa is expected to incur, on average overdisaster budget mobilization and execution;///

the long term, about SAT 23 million (US$10

andmillion) per year in losses due to earthquakes
and tropical cyclones. In the next 50 years,///

Samoa has a 50 percent chance of experiencing aloss exceeding SAT 255 million (US$110 million)
and a 10 percent chance of experiencing a loss
Sectionexceeding SAT 812 million (US$350 million)(PCRAFI, Country Risk Profile).

04

(c)

develop an insurance program for key public
assets.

PCRAFI

Samoa

125

Introduction
Samoa is composed of two large volcanic islands

subregional, and international level, including(Upolu and Savai’i) and several smaller islands,

the following:

and has a total land area of approximately 2,935
km2. The resident population of Samoa for 2013
was estimated at 190,652, with 80 percent of this• Hyogo Framework for Action (HFA) 2005–2015• Pacific Disaster Risk Reduction and Disasternumber living in rural areas. 1

Management Framework for Action (Regional
Framework for Action, or RFA) 2005–2015

Samoa is exposed to tropical cyclones, floods,
earthquakes, tsunamis, volcanic eruption, and• Samoa’s National Disaster Management Plandrought. Samoa was ranked 51st out of 179
countries in the Global Climate Risk Index 2012
report on who suffers most from extreme weather

2011–2014• Samoa National Action Plan (NAP) for Disaster
Risk Management, 2011–2016

events (Harmeling 2012).
In 2012 TC Evan offered a distressing reminderof Samoa’s exposure to natural hazards. TC Evancame only three years after the earthquake andtsunami of 2009, which affected 2.5 percent of
the country’s population, causing 143 fatalities
and associated economic losses equivalent to 20
percent of gross domestic product (GDP).

Samoa’s National Disaster Management Plan///

cites disaster-related financing as the role ofthe Ministry of Finance (MoF). Under reference///

17 in the plan, the MoF must coordinate thecollection, allocation, and provision of monetary
aid to people affected by a disaster (GoS 2011a).
Disaster risk financing and insurance (DRFI) is///

The government of Samoa, in conjunction with
the Secretariat of the Pacific Community Applied
Geoscience and Technology Division (SPC-SOPAC),
the Secretariat of the Pacific Regional Environment
Programme (SPREP), the United Nations
Development Programme (UNDP) Pacific Centre,
and the United Nations International Strategy
for Disaster Risk Reduction (UNISDR) as well asother partners, has developed several institutionala key activity of the HFA Priorities for Action
4 and 5.2 The HFA is a result-based plan of action///

adopted by 168 countries to reduce disaster risk
and vulnerability to natural hazards and to increase
the resilience of nations and communities todisasters over the period 2005–2015. In the Pacific,
the HFA formed the basis for the development of
the Regional Framework for Action.
The RFA cites DRFI activities as a key national

Section///frameworks on disaster risk management andand regional activity. Theme 4 of the RFA—

climate change adaptation at the national,“Planning for effective preparedness, response

///

04

PCRAFI

126

Samoa

and recovery”—has an associated key national(a) Self-retention, such as a contingency budget

activity, “Establish a national disaster fund forand national reserves, to finance small but

response and recovery.” Moreover, Theme 6 ofrecurrent disasters;

the RFA—“Reduction of underlying risk factors”—
cites the development of “financial risk-sharing(b) A contingent credit mechanism for lessfrequent but more severe events; andmechanisms, particularly insurance, re-insurance
and other financial modalities against disasters as(c)both a key national and regional activity” (SOPAC

Disaster risk transfer (such as insurance) tocover major natural disasters.

2005). These regional implementation activitiesalign with the three-tiered disaster risk financing

This note aims to build understanding of the///strategy promoted by the World Bank (andexisting DRFI tools in use in Samoa and todescribed below).

identify gaps where potential engagement

The Pacific DRFI Program enables countries

In addition, this note aims to encourage peer

to increase their financial resilience against

exchange of regional knowledge through dialogue

natural disasters by improving their capacity

on past experiences, lessons learned, and ways toto meet post-disaster funding needs without

optimize the use of these financial tools, as well ascompromising their fiscal balance. This program

how these tools may affect the execution of post-is one application of the Pacific Catastrophe Risk

disaster funds.

could further develop financial resilience.
///

///

///

Assessment and Financing Initiative (PCRAFI). The
Pacific DRFI Program is built upon a three-tiered
approach to disaster risk financing (figure 1).
The different tiers align to the basic principles ofsound public financial management, such as theefficient allocation of resources, access to sufficient
resources, and macroeconomic stabilization. The
three tiers acknowledge the different financial
requirements associated with different levels of risk:

Photo Credit

///

///

Stefan Lins/Flickr bd

PCRAFI

Samoa

127

Economic Impact ofNatural Disasters
In 2012, the Global Climate Risk Index ranked

equivalent to approximately four times GDP (GoS

Samoa 51st out of 179 countries for extreme2013). In comparison, the last major flood in 2001

weather event impacts (Harmeling 2012).

caused direct losses worth SAT 11 million (GoS

///

///

2013).

In the past 50 years Samoa has experienced 56
events with associated losses of SAT 1,270 million

The economic growth of Samoa has been///

(US$543 million).3

impacted in the past few years by two majordisasters: the tsunami in 2009 and TC Evan

The main hazards that affect Samoa are fromin 2012. Growth was also impacted by the global///

tropical cyclones, earthquakes, tsunamis, and///financial crisis. Overall GDP contracted by 5.1

occasional flooding. In 1990, Tropical Cyclones

percent following the tsunami in 2009 but has///(TCs) Ofa and Val caused estimated total loss ofgradually increased in subsequent years. Following

between SAT 690 and SAT 1,150 million (US$300

TC Evan, real GDP declined by 0.4 percent. Growth

million–US$500 million) (PCRAFI, 2012), which is

172˚ 30'0"W

172˚ 15'0"W

172˚ 0'0"WSamoa

171˚ 45'0"W010

171˚ 30'0"W

20

40

Kilometers

13˚ 30'0"S

Buildings
Residential

13˚ 30'0"S

172˚ 45'0"W

13˚ 15'0"S

Figure 1 — Land Use/Land CoverCommercial

13˚ 45'0"S

0

1

2

PublicOther

13˚ 45'0"SIndustrial

Apia
4

SectionKilometers

172˚ 45'0"W

172˚ 30'0"W

172˚ 15'0"W

14˚ 0'0"S
172˚ 0'0"W

171˚ 45'0"W

171˚ 30'0"W

14˚ 15'0"S

14˚ 0'0"S

Apia

04

PCRAFI

128

Samoa

Figure 2 — Direct Losses by Return Period

DIRECT LOSSES (MILLION USD)

600
500

TC + EQ

400

EQ

TC

300
200
100

Source: PCRAFI 2012
Note: TC = tropical cyclone; EQ = earthquake

0
0

100

200

300

400

500

600

700

800

900 1000

MEAN RETURN PERIOD (YEARS)in GDP rebounded to 2.2 percent in 2013/14 as

and tropical cyclones. In the next 50 years,

the reconstruction program commenced (World

Samoa has a 50 percent chance of experiencing a

Bank 2014).

loss exceeding SAT 255 million (US$110 million),///and a 10 percent chance of experiencing a loss

Tourism is a major economic driver and has

exceeding SAT 812 million (US$350 million) (see///increased the concentration of assets along

figure 3).

Samoa’s coastline, where the majority of the
population resides. Figure 2 shows that the

Figure 4 shows the average annual loss by area,majority of buildings, residential and commercial,with red indicating a high level of average annual

are located along the coastline.

losses—those worth SAT 5.5 million (US$2.4///

million) and over.

Samoa is expected to incur, on average over///the long term, about SAT 23 million (US$10
million) per year in losses due to earthquakes

172°30'0"W

172°15'0"W

172°0'0"W

171°45'0"W0171°30'0"W

Samoa
10

20

40

13°30'0"S

Kilometers13°45'0"S

13°45'0"S

Apia

13°30'0"S

172°45'0"W

13°15'0"S

Figure 3 — Average Annual Loss by Area

14°0'0"S

Building Replacement Cost Density(million USD / km^2)

172°45'0"W

0.0 - 0.1

0.5 - 0.75

5 - 100.1 - 0.25

0.75 - 1

10 - 20

0.25 - 0.5

1-5

172°30'0"W

172°15'0"W

172°0'0"W

171°45'0"W

171°30'0"W

14°15'0"S

04

14°0'0"S

SectionSource: PCRAFI 2012

PCRAFI

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129

Public Financial
Management of
Natural Disasters
Following the declaration of a state of///(a) the ability to rapidly mobilize funds postdisaster, andemergency, staff from the Ministry of Financeare relocated to the Disaster Management
Office (i) or the National Emergency Operation(b) the ability to execute funds in a timely,transparent, and accountable fashion.

Centre. This change is to help ensure that///procurement of emergency supplies occurs as

This section discusses the existing procedures forquickly as possible. For expenditures agreed upon

post-disaster budget mobilization and execution,by the National Disaster Council, emergency

and where possible provides examples of their use.

procurement policies allow for payments to bemade to contractors within one week, as opposedto the standard term of 30 days.
Samoa has experienced two major disasters///

within a three-year period, the tsunami in2009 and TC Evan in 2012. These events placed///

considerable pressure on core government staff,
in particular in the DMO and the MoF. As aresult of these events, however, the policies andprocesses for DRFI have been tested—and found tobe effective.
Effective post-disaster financial response relies on
two fundamental capabilities:

Post-Disaster
Budget Mobilization
Samoa has a variety of ex-ante and ex-post///

financial tools, and the timing for mobilizing
and executing these funds varies significantly.

///

Building on the World Bank framework for disasterrisk financing and insurance (see annex 1), table
1 shows the ex-ante and ex-post financial tools
available, indicates which have been utilized by
Samoa, and gives indicative timings. The tools
utilized by Samoa are highlighted in blue andshow the indicative timing involved in mobilizing

Sectionthe funds. Those sections highlighted in gray are04

PCRAFI

130

Emergency fundfor generic instruments that to date have not beenused in Samoa.

Samoa

Following a declaration of emergency, an///

The sections below discuss in detail both the

emergency fund can be established to receive

ex-ante and the ex-post financing tools available

any monies reallocated from the government

to Samoa, including the time it takes to mobilize

as well as donations from the international

these funds and the amount of funding available.

community, private enterprises, and members of

Ex-Ante Practices and Arrangements
The uncertainty surrounding international///

the public. This was the process following thetsunami in 2009 and TC Evan in 2012.
The establishment of an emergency fund///assistance has increased pressure on countries
to establish domestic sources of financing—suchas national reserves or the transfer of risk to theis requested by the Disaster Advisory
Committee and is authorized by the financial
secretary. Section 61 of the Public Finance///international insurance market—for post-disaster
relief. The ex-ante practices and arrangements thathave been made by Samoa include an emergency
fund, a contingency budget, and sovereign

Management Act requires the source of finance,
signatories, and expenditure areas to be assigned
in advance in order to prevent misuse of the funds.

catastrophe risk insurance.

Table 1— Sources of Funds Available
SHORT TERM
(1-3 MONTHS)
Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increae
Flash Appeal
Ex-ante Financing
Emergency FundContingency Budget
Contingent Credit

SectionSovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance

04

Source: Government of Samoa

MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)PCRAFI

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131

Box 1— The Pacific Catastrophe Risk Insurance Pilot
The Pacific Catastrophe Risk Insurance Pilot aims to provide

government in the aftermath of a severe natural disaster that disrupts theimmediate budget support following a major tropical cyclone orprovision of government services. Countries can choose between threeearthquake/tsunami. The insurance is designed to cover emergency

layers of coverage—low, medium, and high—depending on the frequency

losses, which are estimated using both a modeled representation of theof events. The lower layer will cover events with a return period of 1 in 10

event based on hazard parameters and a calculation of total modeled

years, that is, more frequent but less severe events. The medium layer will

physical damage. Unlike a conventional insurance scheme, where a payout

cover events with a 1-in-15-year return period, while the higher layer will

would be assessed against actual incurred costs, this scheme pays out oncover less frequent but more severe events, or those with a return period

the results of a model. The advantage of this approach is that it results inof 1 in 20 years. However, countries may request that a more customized

a much faster payout. The payout would act as a form of budget support

option be developed for them.

///

///

and would go some way to cover the costs that would be incurred by the

The emergency fund established in the

3 percent of the total appropriation bill,///aftermath of TC Evan received SAT 5.1 million

is available subject to Article 96 of the(US$2.2 million) in budgetary reallocation

constitution. The release of funds for unforeseen

///

///

from the unforeseen expenditure line following

expenditure requires approval from the legislativea request from the National Disaster Committee.
This fund was approved by the legislative authority,

assembly4 following advice presented by theestablished, and disbursing funds within 24 hours

Minister of Finance. In 2013 the maximumof the request from the committee.

contingency budget would have been equivalent
to SAT 16 million (US$7 million). According toContingency budget

estimates, there is a 7.2 percent chance that

A contingency budget, known as thedisaster losses will exceed this amount in any“unforeseen expenditure” equivalent togiven year.

///

Table 2— Selected Insurance Coverage, 2014–2015 Pilot Season
TROPICAL CYCLONE
Policy period
Peril selected
Layer of coverage selected
Coverage limit as a percentage ofcontingency budget
Reporting agencies

EARTHQUAKE

November 1, 2013–October 31, 2014
Tropical cyclone

Earthquake

1 in 20 years

1 in 20 years

137 percent

89 percent

Joint Typhoon Warning Center

United States Geological Survey

SectionSource: World Bank and PCRAFI 2014.

04

PCRAFI

132

Sovereign catastrophe risk insurance
The coverage selected by Samoa provides an

Samoa

Budget reallocation
Intradepartmental transfers can be made

///

///

aggregate coverage limit worth more thanfollowing authorization from the head of

double the unforeseen payments (contingency

the department and the financial secretary.

budget) for the fiscal year 2013/14 (see table 2).

These transfers are allowed provided that the

Samoa chose a level of coverage designed to pay

transfer does not increase the appropriation forout for tropical cyclone and earthquake/tsunamithat line item by 20 percent or more, and theevents of such severity that a triggering event

total appropriation for the department must

would be expected to occur once every 20 years

remain unaltered.

///on average, over the long term. The coverage isin effect from November 1, 2014, to October 31,
2015.

Ex-Post Practices and Arrangements///

Following the declaration of a state of///

emergency, the minister of finance may
approve expenditure to help address needs
arising from the emergency. Any such///

expenditures must be published in Savai’i and
By definition a disaster exceeds a country’s

presented to the legislative assembly at the earliest

capacity to cope with it, and there will therefore

opportunity, although such expenditures do notalways be a need for ex-post practices andrequire their approval. The expenses must also be

arrangements. An optimal strategy for DRFI relies

included in the annual financial statements.

on a combination of ex-ante and ex-post financial

External credit

instruments. Ex-post arrangements benefit frombeing able to establish the extent of the disasterand prioritize the response needs. For this reason
these arrangements take longer to implement thanex-ante arrangements, but they can often mobilize
larger amounts of finance. This section discusses
the ex-post practices and arrangements that havebeen made by Samoa.

Both the fiscal deficit and public debt have///increased following the 2009 tsunami and TC
Evan in 2012. In the fiscal year 2008/09, Samoa///

had a debt-servicing ratio equivalent to 45.4
percent of GDP. In fiscal year 2011/12—prior to
TC Evan—this ratio was trending upward to 57.6
percent of GDP and was expected to increase
Photo Credit

///

///

Kyle Post/Flickr b

PCRAFI

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133

further. The tsunami recovery program is being

and organizations (GoS 2011b.). This serves tofinanced by grants, however, so this increase may

demonstrate that while donor assistance forprove to be relatively small.

reconstruction may take some time to mobilize, it
allows significant amounts of finance to be raised.

Following these events, the government of///

Samoa revised its targeted debt threshold

Total Response Funds Available

to 50 percent of GDP, placing restraints on
Samoa has the ability to raise a maximum

any new borrowing. As a consequence the

///

///

International Monetary Fund and World Bankof SAT 47.1 million (US$20.5 million) for

revised the risk of debt distress from low todisaster response, equivalent to 9 percent ofmoderate, a change that increases the urgency of

total expenditures in 2013/14. This figure isfiscal consolidation (IMF 2012).

based on the unforeseen expenditure allowance///for the fiscal year 2013/14, the emergency fundDonor funds for relief
and reconstruction

established for TC Evan, and the aggregate
coverage limit from the Pacific Catastrophe
Risk Insurance Pilot (see figure 5). It should be

While donor funds will always be requiredemphasized that this amount is a maximum; given///in the event of an emergency, there is also

the nature of the emergency fund process, there isan element of uncertainty surrounding

an element of uncertainty surrounding how much

how much will be provided, what will be

could actually be made available. In other words,///

provided, and when funds will arrive in country.

the SAT 5.1 million that the Government was able

Consequently, overdependence on international

to reallocate following TC Evan provides us with anrelief as a source of post-disaster financing can

indication of what can be made available. Similarly,

delay the provision of initial relief and inhibit exante contingency planning. Development partners,
international organizations, local nongovernmentalorganizations, businesses, and individuals

the aggregate payout is the absolute maximumthat Samoa could receive following an earthquake/tsunami or a tropical cyclone. It is estimated that
there is a 2 percent chance that disaster losses willcontribute in the form of cash grants and aid inexceed this amount in any given year.

kind. The provision of aid in kind, while vital, canaffect the costs borne by governments for the
distribution these goods.
In the month following TC Evan, Samoa///

received cash donations from theinternational community worth over SAT 4.8
million (US$2 million); in addition, the local
and international community also donatedsignificant supplies to help with initial relief.

///Experience shows that donations continueeven after relief work ends and recovery andreconstruction programs begin. For example, thecompletion report for the tsunami fund states thatSAT 62.4 million (US$26.7 million) was received
from development partners and private individuals

Section04

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134

Samoa

Post-Disaster
Budget Execution

the Asian Development Bank and the World Bank

Following the experience of the 2009 tsunami,

Bank of Samoa (CBS) established a credit

the response to TC Evan was triggered quickly:

facility of SAT 5 million for tourism-related

finance was sourced and allocated within theloans. The Development Bank of Samoa oversaw

first week. The MoF was able to reallocate SAT

the day-to-day management of this facility. The

5.1 million (US$2.2 million) into an emergency

aim was to expand fale (a traditional style of housefund and open a relief account for donations fromin Samoa) businesses that could not be supported

members of the public and private sector entities.

via grants and other financial vehicles.

made loans for key infrastructure projects.
Following the tsunami in 2009, the Central

///

///

///

Additional finance for the recovery and///

The government of Samoa financed

///

///

reconstruction framework following TC Evan

approximately 14 percent of the 2009 tsunami

was sought via the reprogramming of funds,

reconstruction program. A deficit of SAT 9.7

savings in the recurrent budget, and funding

million (US$4.1 million) was identified and filledfrom development partners. While much ofby the government to ensure continuation of thethe funding from development partners wasreconstruction program. This finance came fromsought in grants, large amounts were also madethe reprogramming of funds and was also partiallyavailable in loans. To facilitate reconstruction ofsourced from World Bank and Asian Development

major infrastructure such as roads and electricity,

Bank budget support loans. Consequently, some

///

///

Figure 4 — Amount of Ex-Ante Funds Available for Immediate Response

Section04

Disaster risks

Disaster risk ﬁnancing
instruments

Amount of funds
available

High-risk layer(E.G. Major earthquake,major tropical cyclone)

Disaster risk insurance

Total catastrophe risk
insurance coverage
SAT26m (US$11.3m)

Medium-risk layer(E.G. Floods, small earthquakes)

Contingent credit

Low-risk layer(E.G. Localized ﬂood, landslides)

Contingency budget,
national reserves, annual
budget allocation

Source: World Bank.

Unforeseen:
SAT16m (US$7m)
Emergency fund:
SAT5.1m (US$2.2m)

PCRAFI

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135

work continued into the 2011/12 budget forsome sectors.
Samoa has a proactive approach to DRFI///

and is able to reallocate resources swiftly
following an event. However, post disaster///

financial procedures are spread across a variety
of documents. The result has been delays inprocurement and inefficient allocation of humanresources. To avoid these issues in future, it isrecommended that post-disaster policies becompiled into a single document for post-disasterbudget mobilization and execution.

Photo Credit

///

///

Simon Sees/Flickr b

SectionPCRAFI

136

Samoa

Domestic Catastrophe
Risk Insurance Market
All classes of non-life insurance premiumInternational insurance companies registered

///

///

in Samoa are estimated to be worth SAT 41

in Samoa are regulated by a separate body,

million (US$17 million). This figure includes

the Samoa International Finance Authority///

premiums for businesses placed with offshore(SIFA). SIFA is a member of the International

insurers by locally licensed agents and brokers.

Association of Insurance Supervisors (IAIS) and

The exact amount of premium for offshore-placed

the Group of International Insurance Center

insurance was not available from the CBS.

Supervisors (GIICS).

///

The market is composed of four local insurers.

///

The Public Finance Management Act (2001),

///

///

While such a market would normally be classified
as small, insurance industry sources advised that
this market is in fact very competitive. Non-life
premium per capita is estimated at US$90.00,
which is consistent with other developing PacificIsland Countries (PICs).

Section 54, requires the government toestablish an insurance fund and to pay
insurance premiums out of this fund. The///

premiums for the existing property insurance
program are paid out of this fund.
The main catastrophe hazard in Samoa is///tropical cyclone. Insurers will insure only those///

There is legislation in place that regulates theproperties that meet the cyclone standard set

local insurance industry (the 2007 Insurance

out in the building code. Cyclone insurance isAct), and the CBS acts as the insurance

available as an extension of property policies only

regulator. The CBS collects information toafter the engineer’s certification of compliance

ensure that solvency margins are met. It alsowith the cyclone code has been received. The

monitors accumulations for all classes and requests

average premium rate for cyclone extension is

information on reinsurance protection.

0.20 percent of the total insured value. Based

///

///

PCRAFI

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137

on estimates of insured-to-total losses in priorprograms insure against earthquake, but the

major cyclone events, it is estimated that only 20

cyclone insurance extension is not always taken.

percent of businesses and 10 percent of residential
premises have cyclone insurance. Earthquake as aperil is normally offered automatically on the fullsum insured. The average premium rate for the

Please refer to annex 3 for the full market
insurance review that was conducted in Samoa
in 2013.

earthquake peril is 0.10 percent of total insured
value, although there is some variation among
insurers. Tsunami is included as an earthquake
peril.
The government has a property insurance///

program in place for major public buildingson an indemnity value basis. At present there is///no insurance of key infrastructure assets, such as
bridges or roads.
Public trading bodies make their own///

insurance arrangements, including property///

insurance for key assets. These property insurance
Photo Credit

///

///

Australian Department of Foreign Affairs and Trade/Flickr b

PCRAFI

138

Samoa

Options for
Consideration
Samoa has implemented several DRFI tools to

Recommendation 2: Develop an operations///

improve its financial resilience to natural disasters.

manual detailing the processes required

However, the policies are spread throughout ato facilitate swift post-disaster budget

variety of documents, and during a disaster staff

mobilization and execution. This manualfind it difficult to access needed information;

would clearly document the post-disaster budget

they often must rely on key staff to ensure themobilization and execution procedures andcorrect policies are followed. The following

processes for MoF staff. In addition, it could

recommendations for minimizing any potential lossof institutional knowledge have been suggested
for consideration.

///

feature the disaster response plan for the MoF thatis now required under the Disaster Management
Act. During a disaster it is important that staff
know and understand the correct procedures

Recommendation 1: Develop an overarching

to follow, and having a manual that details thedisaster risk financing strategy aligned toprocesses in a single document would help toexisting processes. Samoa has a proactive ex-

embed existing processes such as the allocation ofante approach to DRFI. However, the activities

a member of staff from MoF to the DMO.

///

///

in place have been developed in isolation; while

Recommendation 3: Develop an insurance///some processes are documented, this information

program for key public assets. This would///

can be difficult to find. One way to address thisprogram for the government by MoF. In addition,

strategy for the Cabinet Development Committee

it would identify assets to be included and indicate

to endorse. This would create a single document

appropriate coverage selection for these assets.

to articulate the available financing options and

The potential for establishing an insurance vehicle

associated policies behind these tools. In addition,

could also be investigated if deemed appropriate.

an action plan for implementation activities is also
recommended.
Section04

include a full review of the current insurance

issue would be to develop an overarching DRFIPCRAFI

Samoa

139

End Notes
1 Samoa Burea of Statistics, “Key Statistics,” http://www.

<sup></sup>

sbs.gov.ws/index.php?option=com_content&view=article&id=35&Itemid=102.

2 Priority for Action 4—“Reduce the underlying risk factors”—has<sup></sup>an associated key activity of financial risk-sharing mechanisms
such as insurance, while Priority for Action 5—“Strengthen disaster preparedness for effective response at all levels”—includes theestablishment of emergency funds such as a contingency budget.

3 Pacific Disaster Net - http://www.pacificdisaster.net/pdn2008/<sup></sup>

4 This is the equivalent of the cabinet in some countries.

<sup></sup>

Section04

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140

References
GFDRR (Global Facility for Disaster Reduction and Recovery)
2012 The Sendai Report: Managing Disaster Risks for Resilient

SPC (Secretariat of the Pacific Community) 2011 Vanuatu: Investment in DRM, Suva, Fiji

Future, Washington D.C., U.S.A.
SPC (Secretariat of the Pacific Community) 2012 Papua New
GoS (Government of Samoa). 2011a. “Samoa’s National Disaster
Management Plan 2011–2014.” Government of Samoa, Apia,
Samoa. http://reliefweb.int/report/samoa/samoa-s-national-disaster-management-plan-2011-2014.
———. 2011b. “Post Tsunami (Samoa September 2009–June2011).” Government of Samoa, Apia, Samoa.
———. 2013. Samoa Post-Disaster Needs Assessment Cyclone
Evan 2012. Apia, Samoa: Government of Samoa, Apia, Samoa.
S. Harmeling. 2012. “Global Climate Risk Index 2012: Who Suffers Most from Extreme Weather Events? Weather-Related Loss
Events in 2010 and 1991 to 2010.” Briefing paper, German
Watch, Bonn.
IMF (International Monetary Fund). 2012. “Samoa 2012 Article IV
Consultation.” IMF, Washington, DC.
PCRAFI (Pacific Catastrophe Risk and Financing Initiative). 2012.
“Country Risk Profile: Samoa.” [http://pacris.sopac.org](http://pacris.sopac.org).
SOPAC (Pacific Islands Applied Geoscience Commission). 2005.
Pacific Disaster Risk Reduction and Disaster Management
Framework for Action (Regional Framework for Action or RFA)
2005–2015. SOPAC, Suva, Fiji.
SPC (Secretariat of the Pacific Community) 2011 Cook Islands:
Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment in
DRM, Suva, Fiji

Section

SPC (Secretariat of the Pacific Community) 2011 Republic of
Marshall Islands: Investment in DRM, Suva, Fiji

04

Guinea: Investment in DRM, Suva, Fiji
UNISDR (United Nations International Strategy for Disaster
Reduction). 2005. Hyogo Framework for Action 2005–2015:
Building the Resilience of Nations and Communities to Disasters. UNISDR, Hyogo, Japan.
World Bank 2010 Financial Protection of the State against Natural
Disasters; A Primer, Washington D.C., U.S.A.
World Bank. 2014. “International Development Association Program Document for a Proposed Development Policy Grant.”
World Bank, Washington, DC.

Samoa

PCRAFI

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141

Annex

Insurance Market Review, February 2014

Executive Summary

establish an insurance fund and to pay
insurance premiums out of this fund. The
premiums for the existing property insurance
program are paid out of this fund.
///Non-life insurance premiums, all classes, areestimated in Samoa to be SAT 41 million(US$17 million). This figure includes premiums
for business placed with offshore insurers, by
locally licensed agents and brokers. The exact
amount of premium for offshore placed insurance
was not available, but it is estimated to be 15
percent of the market premium.
///

///

The non-life market in Samoa is composedof four local insurers. While this would
normally be classified as a small market,
insurance industry sources judge it to be very
competitive. Non-life premium per capita isestimated at US$ 90.00, which is consistent
with other developing Pacific Island Countries.
///

There is legislation in place that regulates the
local insurance industry (the 2007 InsuranceAct), and the Central Bank of Samoa (CBS)acts as the insurance regulator. The CBS collects
information to ensure that solvency margins
are met. It also monitors accumulations for allclasses and requests information on reinsurance
protection.
///

///

International insurance companies registeredin Samoa are regulated by a separate body,the Samoa International Finance Authority(SIFA). SIFA is a member of the International
Association of Insurance Supervisors andthe Group of International InsuranceCenter Supervisors.
///

///

The main catastrophe hazard in Samoa istropical cyclone. Insurers will insure only
those properties that meet the cyclone
standard set out in the building code. Cyclone
insurance is available as an extension toproperty policies only after the engineer’s
certification of compliance with the cyclone
code has been received. The average premium
rate for cyclone extension is 0.20 percent of thetotal insured value. Based on estimates of insuredto-total losses in prior major cyclone events, it isestimated that only 20 percent of businesses and
10 percent of residential premises have cyclone
insurance. Earthquake as a peril is normally offeredautomatically on the full sum insured. The averagepremium rate for the earthquake peril is 0.10
percent of total insured value, although there issome variation among insurers. Tsunami is included
as an earthquake peril.
///

///

///

The government has a property insurance
program in place for major public buildingson an indemnity value basis. At present there isno insurance of key infrastructure assets, such as
bridges or roads.
///

///

Public trading bodies make their own
insurance arrangements, including property
insurance for key assets. These property
insurance programs insure earthquake, but the///Section///

The Public Finance Management Act (2001),
Section 54, requires the government to///cyclone insurance extension is not always taken.

04

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142

Samoa

Table A .1— General Insurers Operating in Samoa 2012

COMPANY

COUNTRY OF
INCORPORATIONSTATUSFINANCIAL SECURITY

Samoa

Local company

Local solvency

Samoa

Local company

Local solvency

Samoa

Local company

Local solvency

Samoa

Local company

Local solvency

National Pacific Insurance
LimitedFederal Pacific Insurance
Company Limited
Apia Insurance Company
Limited.
Progressive Insurance Co.
LimitedSource: Central Bank of Samoa; World Bank

Insurance Market Overview

Offshore market

Samoa has a small non-life (general) insurance

Insurance industry sources suggest the mainmarket with four local insurers operating.

offshore insurers used for placement of risks in

///

///

These four insurers are detailed in table 1.

Samoa are Lloyds and the London market arranged

Insurance industry sources indicated that National

by locally registered international brokers Aon andPacific Insurance (NPI) and Federal Pacific are theMarsh. There is no review of these placements bymost active in the property insurance class.

CBS and no collection of data on the amount ofpremium remitted to offshore insurers.

The non-life market has an estimated total///

premium income of SAT 41 million (US$17
million). This includes an estimate of premiums///

for risks placed with offshore insurers by licensed
agents and brokers operating in the market, which
insurance industry sources believe to be around 15
percent of the market premium.
Of the four companies, only NPI has a multinational
affiliation; it is 71 percent owned by Tower
Insurance Limited, a New Zealand–registeredcompany. This affiliation gives NPI access toregional reinsurance programs and expertise,

Section04

Distribution channels
All insurers in Samoa offer insurance products on
a direct basis, but none of these insurers offer
products online.
Samoa has three licensed international insurance
brokers, Aon, Marsh, and Willis. None of thesebrokers have local offices; they visit Samoa fromFiji and New Zealand only as necessary to manage
client accounts. There is one local insurance broker,
Platinum Insurance Consultants Limited.

which in turn allows the Samoa insurance market

Both ANZ Bank and Westpac Bank have insurance

to insure larger risks than would otherwise

agency licenses, allowing them to transact

be possible.

insurance business.

PCRAFI

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143

Table A .2— Pacific Non-life Insurance Premium per Capita 2012 (US$)
MARKET

GDP MILLIONSPOPULATION

GDP PERCAPITA

MARKET
PREMIUM

PREMIUM PER
CAPITA

Cook Islands$305

19,300$15,823$6,600,000

$342

Fiji

$3,908874,700$4,467$97,500,000$111

Marshall Islands$182

52,560$3,470$3,000,000

$57
$90

Samoa

$683

188,900$3,619$17,000,000

Solomon Islands$1,008549,600$1,130$13,000,000

$24

Tonga

$471

104,900$4,495$4,400,000$42

Vanuatu$781

247,300$3,182$16,500,000$67

Source: World Bank 2014

Market penetration per capita
The general insurance penetration for Samoa,
estimated on a premium per capita basis, was
US$90.00 for 2012. This estimate is based on
information obtained from the CBS and insurance

by local structural engineers as complying withthe cyclone code. Cyclone insurance is available
as an extension to property policies only after theengineer’s certification has been received; thiscertificate is then valid for seven years.

industry sources, and includes the 15 percent of

The average premium rate for cyclone extension

business estimated to be placed offshore. Table 2

is 0.20 percent of the total insured value, withcompares Pacific Island Countries and shows that

deductibles ranging between 5.00 percent andthe insurance premium per capita in Samoa is close

10.00 percent of loss, or 2 percent of the sum

to the average of the Pacific countries sampled.

insured. Sea surge caused by cyclones is normallyan excluded peril, even when the cyclone

Catastrophe Risk Exposure andCapacity

extension is given.

Catastrophe risk insurance represents a particular

automatic peril on the full sum insured. The

challenge to insurers’ exposure management,

average premium rate for the earthquake peril

because unlike other types of insurance, it presents

is 0.10 percent of total insured value, although

the possibility of large correlated losses. Insurers

there is some variation among insurers. Deductible

need to use a combination of reinsurance, reserves,for earthquake varies between insurers, ranging

and diversification within their portfolio to ensure

between 5.00 percent and 10.00 percent ofthat they can withstand large disaster shock losses

loss, or 2 percent of the sum insured, with awithout threatening their solvency.

minimum of SAT 2,000. Tsunami is included as an

The main catastrophe hazard in Samoa is tropical

Earthquake as a peril is normally offered as anearthquake peril.

cyclone. Insurers are aware of the exposure and

A comparison of cyclone and earthquake rates

insure only those properties that meet the cyclone

across the Pacific is detailed in table 3. Samoa

standard set out in the building code. In order tohas below average rates for both perils, which

better underwrite the cyclone peril, local insurers

insurance industry sources suggested was due torequire that buildings be inspected and certified

the high level of competition in the market.

Section04

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144

There are a number of limitations with thisSamoa

ISR policies are used for property insurance

///

///

comparison, such as variation in property

on most major commercial, government, andinsurance rating due to the location of premises,

government public trading bodies accounts. The

construction, occupation, fire protection, frequency

majority of ISR policies in Samoa are issued by NPI,of expected losses, and the amount and type ofusing a wording based on the Papua New Guinea

deductible on policies. It is not possible to use

insurance industry policy. A major limitation of theaverage rating data as an exact basis for a specific

ISR wording for governments is that infrastructurecompany or individual risk. It is possible, however,assets such as roads, bridges, and wharves areto carry out a general comparison of the property

excluded by the policy. Insurers in Samoa do notinsurance rates in respective markets.

include infrastructure items in the ISR schedule.

The main property risk accumulations arewithin the capital, Apia. Insurers report theseaccumulations to CBS as part of their quarterly andannual returns.

Insurers reported that infrastructure items would
need to be insured under a Completed Contract
Works policy.
Commercial Package or Business Protection///

policies are used for small to medium enterprises///

Major commercial properties are insured on a
replacement basis under Industrial Special Risks(ISR) policies. One local insurer advised that it wasoffering property insurance on an indemnity value
only, meaning that coverage would be based on
the current value of the item as determined by age
and condition, rather than on the replacement
cost to rebuild. This approach suggests that there

and are offered as either a Multi-Risks policy(accidental damage including earthquake andcyclone by extension) or as a Specified Risks policy(fire and basic perils). These generally follow theperils insured under the ISR wording, but thecoverage tends to be more restrictive.
Contract Works insurance is available for property

///

///

are some property capacity acceptance limitations

under construction and may be extended to insurein the market, which could be due to reinsurer

construction of infrastructure assets.

limitations.

Completed civil works insurance for///

infrastructure assets is not a commonly available

have adequate capacity for local large property

product in Samoa. Insurers indicated that

accumulations, due to its regional reinsurance

they could, with the support of international

capacity. If needed, further additional capacity isreinsurers, provide terms under such a product foravailable by way of offshore placements. Anecdotal

infrastructure assets.

market information suggests that most of theseoffshore placements are to the Lloyd’s and London
market and are arranged by the international
insurance broker Aon.

Section04///

Another of the local insurers, NPI, appears toReinsurance
In 2011, the natural catastrophe insured losses
suffered by the global reinsurance market were

Products

the second-largest ever, at over US$110 billion

There are no special catastrophe insurance products

for insurers (and reinsurers) in the Pacific wasavailable in Samoa, but the following property andthe number of events that occurred in the Asia

engineering insurance products include catastrophe

Pacific region. These included earthquakes inperils.

New Zealand and Japan, floods in Australia and(Swiss Re 2012). What made this year significant

PCRAFI

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145

Table A .3— Pacific Commercial Property Insurance Rate and Deductible Comparison
MARKETAVERAGE
EARTHQUAKE RATEGENERAL
EARTHQUAKEDEDUCTIBLE

AVERAGE CYCLONE
RATE

GENERAL CYCLONE
DEDUCTIBLE

Cook Islands

0.12%

2% of sum insured

0.45%

20% of sum insured

Fiji

0.08%

10% of sum insured

0.30%

Samoa

0.12%

Solomon Islands

0.17%

2% of sum insured or
5% of loss
1% or 5% of sum
insured

0.20%

20% of loss
2% of sum insured or
5% of loss

0.13%

5% of loss

Tonga

0.15%

5% of sum insured

0.25%

5% of sum insured

Vanuatu

0.30%

5% of loss

0.17%

20% of loss

Source: World Bank 2013
Note: Average market rate percentage of value based on insurance industry sources.

Thailand, and a cyclone in Australia. The Global

is not detailed in the 2012 report, it would be

Insurance Market Report (IAIS 2012) advised that

expected to follow the previous arrangements.

these Asia Pacific events accounted for 61 percentof the insured losses from natural catastrophes
in 2011, compared to a 30-year average of 18
percent. As a consequence, IAIS said, adjustments
were made in reinsurance capacity and risk
premiums were increased. In 2012, the natural
disaster losses dropped to US$77 million (Swiss Re2013), but this was still the third-highest year fornatural catastrophe insured losses since 1970. In
December 2012, Evan caused estimated insured
losses of SAT 28.3 million in Samoa and insured
losses of FJ$57 million in Fiji (Reserve Bank ofFiji 2012).
NPI (Samoa) indicated that its operation is includedin the group reinsurance program arranged byTower Insurance Limited for all Pacific subsidiaries,
including the NPI companies. In its 2011 annual
report, Tower Insurance Limited specifically advisedthat its event excess (net retention) had increased
to $NZ 6.7 million and that it had protection for
two catastrophe events within the program for the
2011–2012 period (Tower Limited/Tower Capital
Limited 2011). Although the reinsurance program

Insurers throughout the Pacific have expressed
concern at the significant increase in recent years
in reinsurance premiums, especially premiums
for catastrophe reinsurance. Insurers have limited
ability to pass the full costs of these increases onto
insured clients due to the small size and economic
constraints in those markets. In Samoa, insurers
complained about the lack of reinsurance capacity
for catastrophe accumulations.

Access to catastrophe insurance
Public access to catastrophe insurance is limitedin Samoa, particularly for the cyclone peril. The
price of cyclone cover (currently 0.20 percent of
insured value) and the requirement to obtain anengineer’s certificate confirming compliance withcyclone standards are factors that may be putting
off consumers. It is likely that only 20 percent ofbusinesses and 10 percent of residential premises
have cyclone insurance, based on the ratio of
insured losses to total losses found in two prior

Sectioncyclone events, Ofa and Val.

04

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146

Samoa

Box 1— Past Catastrophe Events
Cyclone//////In December 2012, Cyclone Evan caused significant damage in Samoa. The

Earthquake and tsunami

///

///

total damage to all sectors caused by Evan has been estimated at SAT 235.7
million (US$103.3 million) (GoS 2013). Total insurance claims associatedOn the September 30, 2009, a magnitude 8.1 earthquake occurred towith Evan have been estimated at SAT 28.3 million. CBS advised that they

the south of Samoa, in the neighboring country of Tonga. The tsunami

do not collect claims numbers and gross claims from local insurers for any

from this earthquake caused major property damage on the south coast

catastrophe events.

of Samoa and in American Samoa. The total damage in Samoa from theevent was estimated at SAT 211.96 million (GoS 2009). Insurance industry

According to local engineers, following Cyclone Evan it was determinedsources suggest that in Samoa approximately 150 claims were lodged, withthat some comparatively new government buildings, constructed with aid

gross insured losses estimated at SAT 10 million. These sources advised thatfunding, did not comply with the building code for cyclone and suffered

the majority of these claims were in the tourism and transportation sectors.

structural failures.
Catastrophe event insurance impact

///

///

Cyclone Ofa in 1990 is estimated to have caused damage and economic
loss of SAT$300 million (US$120 million) (South Pacific Disaster Reduction

Following Cyclones Ofa and Val in 1990 and 1991, NPI reportedly imposed

Programme 1997), with local insurer losses of over SAT$15 million (National

the strict condition of cyclone engineering compliance and increased

Business Review 1992).

cyclone rates from 0.16 percent to 0.50 percent (National Business
Review 1992). NPI advised that it had considerable difficulty in obtaining

Cyclone Val in 1991 was the most significant catastrophe event ever tocatastrophe reinsurance in the years following these significant losses.

impact Samoa. The total economic cost of the cyclone was estimated at

It was estimated that prior to these two cyclones, only 20 percent of

SAT$713 million (US$287) (South Pacific Disaster Reduction Programme

buildings in Samoa were constructed to basic cyclone standards. After1997), with damage to private businesses and residential properties

Cyclone Val, one American insurer, Travellers Insurance Company, withdrew

estimated at SAT$330 million (US$132 million) and damage to government

from the neighboring American Samoa insurance market.

buildings at SAT$16 million (US$6.4 million). Insurance company grosslosses from this cyclone were SAT$33 million (National Business Review

The tsunami in 2009 and Cyclone Evan have had a limited impact on1992), and offshore insurer losses were estimated at a further SAT$20

local insurers, but they are likely to further restrict reinsurance capacity

million. Insured losses from this event were just over 15 percent of the total

and increase costs for property catastrophe reinsurance, which in turnbuilding damage.

will lead to an increase in property insurance rates in Samoa over the next
few years.

Insurance Law and Regulation
Samoa’s current insurance legislation is the
Insurance Act (2007), with the Central Bank of

1 million, or 20 percent of net premium, or 15
percent of the outstanding claims provision in

local on-site reviews of licensed insurers, agents, orthe last 12 months. CBS requires local insurers tobrokers had been completed since 2007, when it

complete quarterly and annual returns. With noassumed the regulation of local insurers. Staff fromon-site reviews carried out by CBS, the adequacyorder to gain experience in undertaking reviews,

04

a minimum solvency ratio of no less than SAT

Samoa (CBS) as regulator. CBS accepted that noCBS had participated in an on-site review in Fiji in

SectionLocal general insurers are required to maintainbut considered they required additional expertiseof insurer capital, solvency, and reinsurance
programs has not been tested. Testing would

for the actual reviews in Samoa. CBS also advised

ensure that local insurers had adequate financial

that its focus in recent years has been on banks

resources to provide for their clients in event of arather than insurance.

major catastrophe in Samoa.

PCRAFI

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147

Box 2— Electric Power Corporation
Electric Power Corporation (EPC) is responsible for the provision of electrical

Following Cyclone Evan in December 2012, EPC suffered significant

supply within Samoa. Management of EPC reported that though EPC

damage to property assets. An insurance claim was lodged, but thehas no formal risk management plan in place, it has undertaken a self-

amount offered in settlement was significantly lower than the amountassessment of risks at each location. Earthquake, tsunami, and cyclone

claimed, due to deductions for excess and indemnity value adjustments.

are included in the property insurance program; however, the assets areThis claim was in dispute, and EPC engaged a public adjuster to review its

insured for indemnity value only. The EPC assets were last valued 10 years

claim and assist with the settlement negotiations.

ago, but EPC has started an asset revaluation process to determine both
fair market value and insurance replacement value, a process that it expects

A public tender process was used each year for the insurance program

to complete in 2014. Transmission and distribution lines were not insured

renewal due to the amount of premium involved—over SAT $800,000. The

under the program, and EPC is aware of this gap in coverage. In the future

total property sum insured now at risk is over SAT $100 million.

some transmission lines may be put underground to reduce their exposure
to cyclone damage.

Samoa is listed as a member of the International

general review process for building consents, theAssociation of Insurance Supervisors (IAIS), but

Building Alignment Ordnance (1932) and thethe Samoa International Finance Authority (SIFA)

Planning and Urban Management Act (2004). The

is listed as the member organization. SIFA isengineers noted that discussions were underway

responsible for regulating international insurers

to review and if necessary update the old draft

and captives under the International Insurance

building code.

Act (1988), not for regulating local insurancecompanies. SIFA is also a member of the Group ofInternational Insurance Center Supervisors (GIICS).

Insurers have taken proactive steps to ensure
cyclone building standard compliance by requiring
engineering certificates for insured properties,

There may be a duplication of resources withinrather than relying on government enforcement of

Samoa with regard to supervision of insurers,

the building code.

since international insurers and local insurers
are regulated by different agencies. It may be
worthwhile for CBS to cooperate with SIFA on

Insurance of Public Assets

insurance supervision matters, particularly because
SIFA is a member of both IAIS and GIICS and
therefore able to access the expertise of bothbodies.

Existing risk financing policy
The government of Samoa has allowed for
insurance of public assets under Section 54 of

Building Control and Standards

the Public Finance Management Act (2001). This

According to local engineers, there is a draft

may include payment of premiums to insurebuilding code, developed in 1992, that isagainst damage to public property caused by fire,used in designing structures; but no specificearthquake, or other perils.

///

building legislation is in place to enforce
the code. There are two acts that provide a

section establishes an insurance fund, which

While not a comprehensive risk financing

Section///policy, this section does provide flexibility to
the government either to self-retain some risks

04

PCRAFI148

Box 3— Concession Assets
agreement discount of between 2.5 percent and 5 percent for insurance
The government of Samoa owns the fuel facility assets that are operated

periods of three years.

under a concession agreement. Under that agreement, the property

The government may wish to consider asking the concession holder toinsurance of those assets is arranged by the government. Every threeprovide quotes for insuring those government property assets at the end

years the government tenders the property insurance on a three-year, butof the current insurance tender period. If the concession holder has otherannually renewable, contract basis. The last tender was in July 2012, and aproperty insurance in place around the Pacific for similar fuel facilities,

local insurer was successful in that tender. The policy is required to insure, at

it may be able to obtain more favorable property insurance rates. At aa minimum, the perils of fire, cyclone, earthquake, tsunami, and flood. The

minimum the government should require the assets to be insured under an

estimated market value of those assets is SAT $40 million, with a further

Industrial Special Risks (material damage) policy for replacement value.

SAT $15.75 million in new assets to be added over the tender period. It is
the standard practice within the insurance industry to offer a long-term-

within the insurance fund or to insure thoseview. In most cases the small value of claims forrisks with private insurers. This fund is used

these perils could be handled as retained losses

by the government to insure public assets, as

within government.

detailed below.

Insurance of government assets

The insured buildings are currently insured on
an indemnity value basis only. Indemnity value
is based on the cost to rebuild, less a deduction

There is a comprehensive property insurance

for age and wear and tear. In event of a major

program in place to insure key government

claim, there may be a significant shortfall between

property assets against material damage, including

the indemnity value and the actual cost to repair

damage caused by the catastrophe perils ofor reinstate the property, particularly for older

earthquake and cyclone. Multiple policies arebuildings. It would be more appropriate to insurearranged by the Ministry of Finance (MOF) forthe properties for replacement value and take aassets of ministries and departments. There is nohigher retained excess on all insured perils withinagreed upon wording, and assets are variously

the insurance program.

insured under wordings for ISR, Business Assets
Protection, and Fire, although the ISR wordingis the most common. It would be preferable
for the government to agree with insurers ona standard ISR wording for all government
property insurances.

SectionAccording to the MoF, public trading bodies maketheir own insurance arrangements, including
property insurance for key assets. The MoF
offered the Electric Power Corporation (EPC) as

The MoF was able to provide copies of schedules

an example of a public trading body that hadfor the property insurance program with details

insurance for key public assets (see box 2), andof coverage. The properties are insured forindicated that there were concession assets (seeindemnity value only and contain small sub-limits

box 3) for the fuel facility insured by MoF.

for burglary, money, self-ignition (fusion of wiring),
and plate glass. These small sub-limits for minor

04

Insurance of public trading body assets

perils are expensive from a premium point of

Samoa

PCRAFI

Samoa

Options for Consideration

149

References

Recommendation 1: The existing insurance///

fund provided for under the Public FinanceManagement Act should be incorporated intoa wider disaster risk financing and insurance(DRFI) strategy. The DFRI strategy should identify

GoS (Government of Samoa). 2009. Post-Disaster Needs Assessment following Earthquake and Tsunami of 29th September
2009. http://www.gfdrr.org/sites/gfdrr/files/documents/
PDNASamoa2009.pdf.

///

key public assets and provide agreed-upon
retention limits for individual departments andpublic trading bodies. It should review existing andnew risk financing and transfer options, such as
captive insurance, regional risk pooling, and bothparametric and indemnity insurance, to ensure thatthe best coverage at the lowest possible cost is
being obtained.

———. 2013. Post-Disaster Needs Assessment Cyclone Evan
2012. March. http://www.gfdrr.org/sites/gfdrr/files/SAMOAPDNACycloneEvan2012.pdf.
IAIS (International Association of Insurance Supervisors). 2012.
Global Insurance Market Report. 2012 edition. http://www.
iaisweb.org/index.cfm?event=getPage&nodeId=25308.
National Business Review. 1992. “Insurers Quit Western Samoa
as Cyclone Losses Mount.” May 1.
Reserve Bank of Fiji. 2012. Insurance Annual Report 2012. http://

Recommendation 2: Develop a central

www.rbf.gov.fj/Publications-%281%29/Insurance-Annual-Re-

insurance register as part of the DFRI strategy

ports.aspx.

///

///

and update the register as insurance contracts fall

South Pacific Disaster Reduction Programme. 1997. The Econom-due. Currently, no central register of insurance held

ic Impact of Natural Disasters in the South Pacific. http://ict.

by government in respect of property insurance

sopac.org/VirLib/DM0001.pdf.

is in place for government and public trading
bodies. The register should contain details on theclass of business, reason for placement, and grosspremium remitted.

Swiss Re. 2012. “Natural Catastrophes and Man-Made Disasters
in 2011.” Sigma 2/2012. http://www.swissre.com/sigma/.
———. 2013, “Natural Catastrophes and Man-Made Disasters in
2012.” Sigma 2/2013. http://www.swissre.com/sigma/.

Recommendation 3: The Central Bank of///Samoa should cooperate with the SIFA toaccess information from the IAIS. This would///

allow the CBS to access international best practiceTower Limited/Tower Capital Limited. 2011. Annual Reports.
http://www.tower.co.nz/investor-centre/reports/.
World Bank. 2012. “Samoa Country Data.” http://data.worldbank.org/country/samoa

information on insurance company regulation andsupervision, which could provide further guidanceand help to build its capacity as a regulator.

Section04

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150

Glossary
Someone who acts for the insurance company in arranging insurance contracts. There are two mainAgenttypes of agents: tied agents, who act for one insurer only, and general agents, who act for multiple
insurance companies.

BrokerCapacity

Captive insurer

Someone who acts as an agent for the insured in arranging an insurance or reinsurance programwith a provider of capacity.

The ability of an insurance company to provide insurance protection to clients, which is limited byits own financial strength and the reinsurance protection it has in place.

An insurance company wholly owned by a company or entity that insures the risks of the parent
entity and subsidiaries.
Insurance that reimburses individuals or entities for loss or damage to a financial position as close

Indemnity insurance

as possible to the position they were in prior to the event, in the context of the financial terms ofthe coverage (such as deductible/excess and limit).

Intermediaries

Net retention

Parametric insurance

Probable maximum loss
(PML)

The general term given to insurance agents and brokers.

The amount that an insurance company retains on a reinsurance contract and in particular anexcess of loss of contract.

A type of insurance that is triggered by the occurrence of a specific measured hazard event, suchas a certain magnitude of earthquake or category of cyclone.

The maximum value of a claim from a large or catastrophe event. May also be called MPL.

The insurance of physical assets such as buildings, plant and equipment, stock, and machinery.
Property insurance

The products used for this insurance are variously named as fire and perils, commercial or businesspackage, industrial special risks, or material damage insurance.

A risk transfer method used by insurance companies to transfer part of a single large risk or an
Reinsurance

accumulation of similar risks and so increase their capacity. Reinsurance helps to smooth theextreme results and effects of specific perils (such as catastrophe events) and therefore to reducethe volatility of an insurance portfolio.

Section04

Solvency margin

The extent by which an insurer’s assets exceed its liabilities. Minimum statutory solvency
requirements are normally included in insurance acts or regulations.

Samoa

VANUATU
February 2015
Disaster Risk Financing and Insurance

CHAPTER 05

Country Note

PCRAFI152

VA N UAT U

Executive Summary
Vanuatu is susceptible to a variety of bothand potentially an amendment to the Public Finance andhydrometeorological and geophysical disasters due

Economic Management Act. While this change might

to its location in the South Pacific tropical cyclone

take some time to implement, it could provide a much-basin and the Pacific Ring of Fire. Hydrometeorologicalneeded boost to the current limited response funds.

///

///

hazards include tropical cyclones, floods, and droughts,
whereas geophysical hazards include volcanoes,
earthquakes, and resulting tsunamis and landslides.

Vanuatu has a maximum of VT 1.6 billion (US$16.6///

million) available in ex-ante instruments forfinancing disaster-related losses. This is equivalent to///

Sixty-three percent of recorded disasters in Vanuatu///

have occurred in the provinces of Malampa and
Torba, where over a quarter of the population
resides (SPC-SOPAC 2011). The rural population is///largely dependent on subsistence agriculture, which isadversely affected by natural disasters. According to
the latest national census, the population of Vanuatu isestimated to be 234,023, with 80 percent of residents

more than five times the supplementary budget. Thereis a 21.5 percent chance that disaster losses will exceed
this amount in any given year. In comparison, there is a
91 percent chance that disaster losses will exceed thedisaster provision of VT 25 million (US$260,000) in any
given year.
Vanuatu uses a variety of disaster risk financing///

living in rural areas that are spread across 80 islands in six
provinces—Malampa, Penama, Sanma, Shefa, Tafea, andTorba (Vanuatu NSO 2009).

and insurance (DRFI) tools, but its available funds
are limited. The ex-ante instruments provide access///to limited amounts of cash, and the ex-post tools can

In 2010 the government of Vanuatu established atake several weeks to mobilize. Some procedures, suchbudgetary provision of US$265,000 for natural andas the waiving of normal tendering procedures, are notfinancial disasters. This continues to be appropriatedembedded within the financial legislature, an omission

annually, but does not accrue and becomes expendable

that could significantly delay future response efforts.

///

///

at the end of the financial year. The provision is heldby the Department of Finance and Treasury (DoFT) andis released upon the approval of the National DisasterCouncil and a subsequent request from the National
Disaster Management Office (NDMO) for immediate

A number of options to improve DRFI in the future///

are presented for consideration in this note:

///

(a)

insurance strategy;

disbursement.
In 2010 Tropical Cyclone Vania, a category 1 cyclone,develop an integrated disaster risk financing and(b)develop a post-disaster budget execution manual to///minimize the loss of institutional knowledge should

quickly depleted Vanuatu’s disaster provision,

personnel leave DoFT; andand supplementary finance of VT 95 million (US$1
Sectionmillion) was required. There has been some discussion///

within DoFT about converting the disaster provision into05

a fund that would accrue over time, but doing so would
require analysis to establish an optimal level of reserves(c)explore the use of contingent credit to access
additional liquidity post-disaster.

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153

Introduction
Vanuatu is susceptible to a variety of bothseveral institutional frameworks on disaster risk

hydrometeorological and geophysicalmanagement and climate change adaptation at

disasters due to its location in the Souththe national, subregional, and international level,

Pacific tropical cyclone basin and the Pacificincluding the following:///

Ring of Fire. Hydrometeorological hazards///

include tropical cyclones, floods, and droughts,

•

2015

whereas geophysical hazards include volcanoes,
earthquakes, and resulting tsunamis and landslides.

Hyogo Framework for Action (HFA) 2005–•

Pacific Disaster Risk Reduction and Disaster
Management Framework for Action (Regional

Disaster risk management (DRM) is integrated///

Framework for Action, or RFA) 2005–2015

in the national Priorities and Action Agenda(PAA), and in 2012 Vanuatu established the•

National Advisory Board (NAB) for Disaster
Risk Management and Climate Change.

Priorities and Action Agenda (PAA) 2006–
2015

///

Vanuatu was one of the first Pacific Island•

Countries (PICs) to mainstream DRM into national
planning. This step demonstrates its commitment
to improved DRM, which can also be seen in•

National Adaptation Programme of Action,
2004

ongoing work to enhance community preparedness
and resilience to natural disasters via the National

National Action Plan (NAP) for Disaster Risk
Management, 2006–2016

Disaster risk financing and insurance (DRFI) is///

Disaster Management Office (NDMO), and in thea key activity of the HFA Priorities for Action

establishment of the NAB, which created staff

4 and 5.1 The HFA is a result-based plan of action

positions responsible for continued improvement in

adopted by 168 countries to reduce disaster risk

this area.

and vulnerability to natural hazards and to increase

The government of Vanuatu, in conjunction with
the Secretariat of the Pacific Community Applied
Geoscience Division (SPC-SOPAC), Secretariatof the Pacific Regional Environment Programme(SPREP), United Nations Development Programme(UNDP) Pacific Centre, the United Nations///

the resilience of nations and communities todisasters over the period 2005–2015. In the Pacific,
the HFA formed the basis for the development of
the Regional Framework for Action.
The RFA cites disaster risk financing and///insurance activities as a key national andInternational Strategy for Disaster Risk Reduction

regional activity. Theme 4—“Planning for(UNISDR), and other partners, has adopted

effective preparedness, response and recovery”—

Section///05

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154

has an associated key national activity, “Establish anational disaster fund for response and recovery.”
Theme 6 of the RFA—“Reduction of underlying
risk factors”—cites the development of “financial
risk-sharing mechanisms, particularly insurance,
re-insurance and other financial modalities
against disasters as both a key national andregional activity” (SOPAC 2005). These regional
implementation activities align with the three-tiered
disaster risk financing strategy developed by theWorld Bank.
Goal 2 of the NAP seeks to “mainstream DRM
into all national planning, decision-making
and budgetary processes at the national andlocal levels,” which includes establishing asustainable fund for DRM. The NAP also aims
to encourage public-private partnerships as away of developing financing schemes for risk
management, particularly insurance, reinsurance,and other financial modalities against disasters; thisapproach is in keeping with its commitments to
key regional and global agreements (Governmentof Vanuatu 2006). The NAP was endorsed by
Vanuatu’s Council of Ministers in 2006 andhas received support from the highest levelof government.
///

///

The Pacific DRFI Program enables countries
to increase their financial resilience against
natural disasters by improving their capacity
to meet post-disaster funding needs without
///

///

VA N UAT U

compromising their fiscal balance. This programis one application of the Pacific Catastrophe Risk
Assessment and Financing Initiative (PCRAFI).
The Pacific DRFI Program is built upon a threetiered approach to disaster risk financing. Theselayers align to the basic principles of sound publicfinancial management, such as the efficient
allocation of resources, access to sufficient
resources, and macroeconomic stabilization. The
three tiers acknowledge the different financial
requirements associated with different levelsof risk: (i) self-retention, such as a contingency
budget and national reserves, to finance small
but recurrent disasters; (ii) a contingent credit
mechanism for less frequent but more severe
events; and (iii) disaster risk transfer (such as
insurance) to cover major natural disasters. See
figure 1.
This note aims to build understanding of theexisting DRFI tools in use in Vanuatu and to
identify gaps where engagement could further
develop financial resilience. In addition, it aims toencourage peer exchange of regional knowledge,
specifically by encouraging dialogue on pastexperiences, lessons learned, optimal use of thesefinancial tools, and their effect on the executionof post-disaster funds, including any areas ofregulation or legislation that need to be addressed
to better complement the flow of post-disaster
funds.
//////

Figure 1 — Three-Tiered Disaster Risk Financing Strategy

Risk Transfer

Low Frequency/
High Severity

International AssistanceSovereign Risk Transfer(e.g. Cat Bond/Cat Swap, (re)insurance)

05

Risk Retention

SectionHigh Frequency/
Low Severity

Contingent Credit Lines

Insurance of Public Assets

Post Disaster Credit

Government Reserves, Contingency Budget / Funds

Emergency Funding

Reconstruction

Source: World Bank 2010.

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155

Economic Impact ofNatural Disasters
During the period 1980 to 2012, Vanuatu

This rural population is largely dependent on

experienced approximately 53 disastersubsistence agriculture, which is adversely

events. Earthquakes account for 46 percent ofaffected by natural disasters. According to thethese events, and tropical cyclones account for alatest national census, the population of Vanuatu

///

///

is estimated to be 234,023, with 80 percent offurther 35 percent. Floods, volcanic activity, andresidents living in rural areas that are spread acrossstorm surges account for the rest. It is estimatedthat these events affected around 300,000 people
during the period examined (PDN 2013).

80 islands in six provinces—Malampa, Penama,
Sanma, Shefa, Tafea, and Torba (Vanuatu NSO
2009).

Approximately 63 percent of recorded

In February 1987, Vanuatu was struck by

///

///

disasters occurred in the provinces of

Tropical Cyclone (TC) Uma, a category 4

Malampa and Torba, where over a quarterof the population resides (SPC-SOPAC 2011).

cyclone that subjected Port Vila to high winds///

Figure 2 — Building Replacement Cost Density by Village

Section05
Source: PCRAFI 2011.

PCRAFI156

VA N UAT U

Figure 3 — Direct Losses by Return Period

DIRECT LOSSES (MILLION USD)

700
600
500
400
300

TC + EQ
TC

200

EQ

100

Source: PCRAFI 2011
Note: TC = tropical cyclone; EQ = earthquake.

0
0

100

200

300

400

500

600

700

800

900 1000

MEAN RETURN PERIOD (YEARS)

for a period of seven hours and that caused

and cruise ship terminals are located. Figure 2

damage of VT 14.4 billion (US$150 million)shows the estimated building replacement cost

(VMS 1994). It is estimated that 95 percent of thefor Vanuatu. Red indicates areas with the highest

building stock was damaged, although insuredbuilding replacement cost, those with estimatedlosses were valued at only VT 1.9 billion (US$20

values of US$10–60 million per km2. Port Vila, themillion).

main economic center, falls into this category.

///The economy of Vanuatu is largely driven

In January 2011, TC Vania caused damage of

///

///

by tourism, agriculture, and construction—

VT 71 million (US$742,000) in Vanuatu andindustries that are susceptible to tropicalaffected over 10,000 households (NDMO

cyclones and earthquakes, the major perils in2011). TC Vania caused considerable damage///

Vanuatu. The expansion of the tourism industry

to several staple and cash crops, destroyed

has seen an increase in assets along the coastline

livelihoods, and damaged houses, water systemof the main island of Efate, where the main air

infrastructure, roads, and schools. The main cash///

Figure 4 — Average Annual Losses for Tropical Cyclone and Earthquake(ground shaking and tsunami)
75 1500 75 150

14° S

Sanma

Malampa

Malampa

S hefa300

Kilometers

0

300

18° S

Shefa
Tafea

168° E

170° E0 15 3060

0 1.5 30 - 0.1
0.1 - 0.2
0.2 - 0.3
0.3 - 0.5
0.5 - 0.75
0.75 - 1
1-5
10.73

6

Kilometers

Kilometers

05

Tafea
0 15 30

S anma60

Total Average
Annual Los s(million US D)

Port
Vila

20° S

SectionVanuatu

15 30

Kilometers

Kilometers

16° S

0

Port Vila

Kilometers60

Source: PCRAFI 2011

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crops affected were sandalwood and kava, which

157

Vanuatu is expected to incur, on average///take years to recover. An immediate supply ofover the long term, annual losses of VT 4.6

food was required for the three months following

billion (US$48 million) due to earthquakes

the event to compensate for the loss of staple

and tropical cyclones. In the next 50 years,

crops. This situation demonstrates the islands’ highVanuatu has a 50 percent chance of experiencing

dependence on natural resources and the potential

a loss exceeding VT 31.6 billion (US$330 million)

post-disaster economic cost an event imposes. It

from a single event, and has a 10 percent chancealso argues for a substantial disaster fund to caterof experiencing a loss exceeding VT 51.8 billion

for such losses.

(US$540 million) (see figure 3).

Inter-island and intra-island travel andFigure 4 indicates the average annual loss incommunication were difficult and expensive

Vanuatu by area; those areas highlighted in red arefollowing TC Vania. Located as they are on

likely to experience the highest level of loss, VT 1

large volcanic islands with rugged terrain andbillion (US$10.73 million) per year. The full country

dense tropical forest, Vanuatu villages tend to berisk profile can be found in annex 4.

///

///

///

scattered over large distances. This poses difficulty
for facilitating initial damage assessments andquantifying how much funding is required for
initial response.

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Public Financial
Management of
Natural Disasters
Since 2010, the NDMO budget allocation

Effective post-disaster financial response relies on

has almost tripled, from around VT 11

two fundamental capabilities:///

million (US$115,000) in 2005 to VT 32 million(US$335,000) (Government of Vanuatu 2010).
///(a) The ability to rapidly mobilize funds postdisaster; andThis increase was the direct result of a successful
New Policy Proposal drafted in 2009 following
the attendance of NDMO officials at a New Policy
Proposal training given by the Ministry of Financeand Economic Management (MFEM). The increasedemonstrates the increased priority of disaster risk
within central government.

(b) The ability to execute funds in a timely,transparent, and accountable fashion. Thissection discusses the existing proceduresfor post-disaster budget mobilization andexecution and where possible provides
examples of their use.
Photo Credit

///

///

Kyle Post/Flickr b

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Post-Disaster
Budget Mobilization

159

Vanuatu uses a combination of ex-ante and///ex-post financial tools to facilitate initial
response, and these take significantly

The Department of Finance and Treasury///(DoFT) and the NDMO together play asignificant role in mobilizing funds in thewake of an event. When a disaster occurs, both///

agencies act to ensure that payments are executed
rapidly. This simple process requires the NDMO toprovide an initial disaster report and to prioritize
its essential needs and the associated costs. In
addition, it must submit a formal letter requesting

different lengths of time to mobilize andexecute. Building on the World Bank’s disaster risk///

financing and insurance framework (see annex 1),
table 1 shows the ex-ante and ex-post financial
tools available, indicates those used by Vanuatu,
and gives indicative timings. The tools utilized by
the Vanuatu are highlighted in blue. Those sections
highlighted in gray are for generic instruments thatto date have not been used in Vanuatu.

the release of the disaster relief fund. Upon receipt

The sections below discuss the financing toolsof these, the DoFT must verify all submitted

available to the Vanuatu government, including

documents, release the requested funds, commit

information on the time it takes to mobilize funds

a local purchase order to facilitate immediate

and the amount of funds available.

payment, and subsequently issue the check.

Table 1— Sources of Funds Available
SHORT TERM
(1-3 MONTHS)MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)

Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Flash Appeal
Ex-ante Financing
Emergency FundContingency Budget
Contingent Credit
Sovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance

SectionSource: Government of Vanuatu; World Bank.

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Box 1— The Pacific Catastrophe Risk Insurance Pilot
The Pacific Catastrophe Risk Insurance Pilot aims to provide

government in the aftermath of a severe natural disaster that disrupts theimmediate budget support following a major tropical cyclone orprovision of government services. Countries can choose between threeearthquake/tsunami. The insurance is designed to cover emergency

layers of coverage—low, medium, and high—depending on the frequency

losses, which are estimated using both a modeled representation of theof events. The lower layer will cover events with a return period of 1 in 10

event based on hazard parameters and a calculation of total modeled

years, that is, more frequent but less severe events. The medium layer will

physical damage. Unlike a conventional insurance scheme, where a payout

cover events with a 1-in-15-year return period, while the higher layer will

would be assessed against actual incurred costs, this scheme pays out oncover less frequent but more severe events, or those with a return period

the results of a model. The advantage of this approach is that it results inof 1 in 20 years. However, countries may request that a more customized

a much faster payout. The payout would act as a form of budget support

option be developed for them.

///

///

and would go some way to cover the costs that would be incurred by the

Ex-Ante Practices and Arrangements
The uncertainty surrounding international
assistance has put pressure on countries toestablish domestic sources of finance for postdisaster relief, such as the establishment of national
reserves or the transfer of risk to the international
insurance market. Vanuatu’s ex-ante practices
and arrangements include a disaster provision,
sovereign catastrophe risk insurance, and external
debt.

In 2010 TC Vania depleted the disaster///provision, and supplementary finance of VT
95 million (US$989,000 million) was required.

///

There is a 91 percent chance that disaster losses
will exceed the disaster provision in any given year.
TC Vania, a category 1 cyclone, exhausted thedisaster provision quickly, demonstrating that one
event may deplete the fund in full. There has beensome discussion within DoFT about converting thedisaster provision into a fund that would accrue
over time, but this step would require analysis

Disaster provision

to establish an optimal level of reserves andpotentially an amendment to the Public FinanceIn 2010 the government of Vanuatu

and Economic Management (PFEM) Act. Whileestablished a budgetary provision of VT 25

this might take some time to implement, it could

million (US$260,000) for natural and financial

provide a much-needed boost to the limited

disasters. This continues to be appropriatedresponse funds currently available.

///

///

annually, but does not accrue and becomes

Sovereign catastrophe risk insurance

expendable at the end of the financial year. The
provision is held by the DoFT and is released upon

The coverage selected by Vanuatu could///

the approval of the National Disaster Council and asubsequent request from the NDMO for immediate
Sectiondisbursement.

provide an aggregate injection of liquidity
equivalent to almost five times the estimatedsupplementary budget of 2013. Table 2 shows///that the selected coverage is designed to pay out

05

for cyclone and earthquake/tsunami events of such

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161

severity that a triggering event would be expected

would require examination of the costs of using ato occur once every 20 years on average, over thecontingent credit facility (including any potential

long term. The coverage is in effect from November

opportunity costs) and balance them against the

1, 2014, to October 31, 2015.

benefit of the additional contingent liquidity.

External Debt

Ex-Post Practices and Arrangements

While Vanuatu’s stock of total public debt

Because disasters generally exceed a country’s

has remained generally low, it neverthelesscapacity to cope with them, there will always be aincreased from 19.4 percent of GDP in 2010 toneed for ex-post practices and arrangements. An

21.6 percent of GDP in 2012 (IMF 2013). Within

optimal strategy for DRFI relies on a combination

the total public debt, external borrowing wasof ex-ante and ex-post financial instruments.

equivalent to only 14 percent of GDP in 2012.

Ex-post arrangements benefit from being able to

///

///

However, contingent liabilities are estimated to beestablish the extent of the disaster and prioritize

equivalent to 30 percent of GDP, and this share

the response needs. These arrangements takeis expected to increase in light of government

longer to implement than ex-ante arrangements,

plans to increase borrowing to finance key public

but they can often mobilize larger amounts

investment projects.

of finance. This section discusses the ex-postpractices and arrangements that have been madeOverall, therefore, Vanuatu’s public debt///

level is low, and it should remain manageable

by Vanuatu.

despite a significant increase in debt (byBudget reallocation

an estimated 4.5 percent of GDP) expectedTransfers (or virements) within ministries

by 2017 (IMF 2013). This is in line with the

///

///

government’s cautious approach to borrowing

require authorization from both the ministerand assumes strict public expenditure restraint andresponsible and the minister of finance andconstant revenues. Given this prudent approachare processed within a maximum of three

to debt, the government may wish to consider theworking days. These virements are managed

use of contingent credit to establish an injection

under strict conditions stipulated in the PFEM Act,of liquidity following a natural disaster. This step

Section 34(A) and (B): funds may be transferred///

Table 2— Selected Insurance Coverage, 2014–2015 Pilot Season
TROPICAL CYCLONE
Policy period
Peril selected
Layer of coverage selected
Coverage limit as a percentage ofcontingency budget
Reporting agencies

Source: World Bank and PCRAFI 2013.

EARTHQUAKE

November 1, 2014–October 31, 2015
Tropical cyclone

Earthquake

1 in 20 years

1 in 20 years>300 percent>300 percent

Joint Typhoon Warning Center

United States Geological
SurveySection05

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Table 3— 2013 Budget Appropriation
FISCAL YEAR 2013
(VT MILLION)FISCAL YEAR 2013
(US$ MILLION)% OF TOTAL BUDGET

Personnel emoluments

900.1

9.4

60

Other goods and services

516.5

5.4

34

Capital expenditure
Total budget

9.0

0.9

6

1,425.6

15.7

100

Source: Government of Vanuatu 2013.

only within the agency and must come from theof “emergency” are clearly stipulated under Article

operational budget for other goods and services.

69 of the Constitution,3 and declaration of a state

Payroll and transfers across ministries are notof emergency requires authorization from thepermitted through a virement (Government ofCouncil of Ministers4 and Parliament prior to the

Vanuatu 1998).

disbursement of funds. The need for parliamentary

Approximately 34 percent of Vanuatu’s total///

budget could potentially be transferred via
virements. The budget is classified into three///

approval can result in significant delays for postdisaster response.
Supplementary funding of approximately///

core categories— personnel emoluments, otherVT 95 million (US$1 million) was released

goods and services, and capital expenditure. Of

following TC Vania. This funding allowed school

the three categories, only funds under goods andfees for the children of Tafea Province to be waived

services are considered operational funds and canand made possible the provision of general relief

be reallocated in the wake of a disaster. In 2013supplies.5

these funds amounted to VT 516.5 million (US$5.4
million), or 55.6 percent of the total budget that
could potentially be reallocated for the fiscal year
(see table 3).

///

Donor funds for relief
and reconstruction
While donor funds will always be required///

after a disaster, there is often an element

Supplementaryof uncertainty surrounding how much will

Following a declared state of emergency or

be provided, what will be provided, and whena financial emergency, the PFEM Act, Section

the funds will arrive in country. Consequently,

34C (1)–(2), allows for a supplementary

overdependence on international relief as aallocation2 of up to 1.5 percent of thesource of post-disaster financing can delay the

total appropriation for that fiscal year

provision of initial relief and can inhibit ex-ante(Government of Vanuatu 1998). The definitions

contingency planning. Development partners,///

Section05<sup></sup>//////

PCRAFI

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163

international organizations, local nongovernmental

the government to meet a large portion of theorganizations, businesses, and individuals

total costs. This experience suggests how muchcontribute in the form of cash grants and aid in

uncertainty governments face where donorkind. The provision of aid in kind, while vital, canfunding is concerned.

affect the costs borne by governments for the

Total Response Funds Available

distribution these goods.
According to information compiled by the

Vanuatu has a maximum of VT 1.2

///

///

Financial Tracking Service of the United

billion (US$12.5 million) available in DRFI

Nations Office for the Coordination of

instruments. This is equivalent to seven times the

Humanitarian Affairs, the government of

supplementary budget. Figure 5 shows the three-

Vanuatu received VT 18.7 million (US$195,000)

tiered DRFI strategy alongside the sources of funds

in donations following TC Vania (OCHA FTS

and the maximum amounts of funding available2011). This is equivalent to approximately 13

to Vanuatu following an event, made up of thepercent of the funds provided by the government.

combined resources of the disaster provision,

After TC Vania, many international partners camethe supplementary funding, and the maximum

to assist with the post-disaster assessment, but

aggregate payout under the catastrophe risk

little finance arrived on the back of this, leaving

insurance pilot.

///

///

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VA N UAT U

It is estimated that there is a 21.5 percent///

chance in any year that disaster losses will
exceed the VT 1.2 billion (US$13.5 million)
ex-ante provision. The probability of exceeding///

ex-ante funds may actually be higher, however,given that the supplementary funding is not
exclusively for disaster response and that the fullamount is unlikely to be available for disaster
response. In comparison, there is as stated earlier a
91 percent chance that disaster losses could exceed
the dedicated disaster provision of VT 25 million(US$260,000) in any given year.

Figure 5 — Amount of Ex-Ante Funds Available for Immediate Response

Disaster risks

Disaster risk ﬁnancing
instruments

Amount of funds
available

High-risk layer(E.G. Major earthquake,major tropical cyclone)

Disaster risk insurance

Total catastrophe risk
insurance coverage
VT950m (US$9.9m)

Medium-risk layer(E.G. Floods, small earthquakes)

Contingent credit

Low-risk layer(E.G. Localized ﬂood, landslides)

Contingency budget,
national reserves, annual
budget allocation

Source: World Bank.

Section05

Supplementary:
VT214m (US$2.3m)
Disaster Provision:
VT25m (US$0.26m)

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Post-Disaster
Budget Execution

165

programs immediately after the supplementarybudget was published.
While it is commonly accepted that following///

Following TC Vania the disaster provision wasa Statement of Emergency normal tenderingdrained, and supplementary funds of VT 37

procedures are waived, this practice has///

million (US$383,400) were also used to meet

yet to be formally documented. In the past,

response costs. Over half of this funding wasthis omission has caused significant delays toused to cover transportation costs, and 22 percent

the purchase of necessary relief supplies. If thiswas used to cover the cost of food. The remainder

procedure remains undocumented or unlegislated,

was used for communications and on-the-groundproblems may arise in the future.

///logistics to facilitate distribution of goods. In
addition, a further supplementary amount of VT 66
million (US$680,000) was approved to cover thecost of school fees within the Tafea Province.

///

Overall, the post-disaster budget execution///

process works well in Vanuatu, although
there is limited access to immediate cash.

///

Vanuatu uses a mix of ex-ante and ex-post

Anecdotal evidence revealed that thefinancial tools; the ex-ante instruments provide

endorsement of the supplementary budget

access to limited amounts of cash and the ex-post

took several weeks, largely because Parliament

tools can take several weeks to mobilize. Not all

had yet to meet. As a result, there were temporary

post-disaster procedures, such as the waiving

budget reallocations from other programs toof normal tendering procedures, are embedded

continue response and relief efforts. The diverted

within the financial legislature, an omission thatbudgets were replenished to their respective

could significantly delay future response efforts.

///

///

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Insurance of
Public Assets
In 2012, all classes of non-life insurance

are met, that there is adequate reinsurance

premiums in Vanuatu were estimated toprotection in place for large and catastrophe

total VT 1.5 billion (US$15.6 million). Of this,risks, and that property and other accumulations

///

///

VT 1.3 billion (US$13.5 million) was placed withlocal insurers and VT 0.2 billion (US$2.1 million)
with offshore insurers. Vanuatu’s non-life (general)
insurance market is small and currently has two
locally registered insurers, QBE Insurance (Vanuatu)

are monitored. Offshore insurance placements
must be approved by RBV before coverage isplaced overseas.
Insurance for catastrophe insurance perils of///

Limited and Dominion Insurance Limited.

earthquake and cyclone is available in the

Non-life premium per capita is estimated at VT

market and can be included in property insurance

6,400 (US$67.00), which is lower than the rate inproducts. Cyclone insurance is not automaticallymost other Pacific Island Countries.

included in standard property coverage wordings,

///

///

There is legislation in place—the Insurance///

and is available by extension only. Property///

Act (2005) and regulations—that regulates

insurance rates for cyclone in Vanuatu are below

the insurance industry. The Reserve Bank

average rates for PICs, while the earthquakeof Vanuatu (RBV) is the regulator. The RBV

insurance rates are higher than in other PICs due///

undertakes reviews to ensure that solvency margins

to the frequency of earthquake events in Vanuatu.

Photo Credit

///

///

Kyle Post/Flickr b

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VA N UAT U

The Vanuatu government does not have

167

Most statutory bodies and state-owned

///

///

indemnity property insurance programs inenterprises in Vanuatu that manage public
assets have insurance programs in place;register, however. This is in place for land,these include indemnity property insurance,building, property, and infrastructure assets and isalthough some programs do not include themanaged by the Ministry of Finance and Economic

cyclone extension. The utility (electricity and water)Management. The MFEM advised that a project hasconcession holders are not required by the Utilities

been proposed to identify and reconcile all land,

Regulatory Authority to purchase indemnity

building, and infrastructure assets and ensure thatproperty insurance for the assets they manage.

values in the register are correct.

///

Maarten Danial/Flickr bd

place for its assets. It does have an asset///

Photo Credit

///

///

For the full insurance review that was undertaken

At present there is no insurance ofin Vanuatu, please refer to annex 3.

///

government key infrastructure assets, including///

major transportation assets such as wharves, roads,
and bridges. This situation could result in delays inreconstruction following a catastrophic event.

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Options for
Consideration
Vanuatu has developed some DRFI tools to

Recommendation 2: Develop a post-disaster///mitigate its fiscal exposure to natural disasters.

budget execution manual to minimize the loss

To further these developments, the following

of institutional knowledge should personnel

recommendations for future consideration havebeen made.

leave DoFT. This document would build on the///policies and procedures already in existence andcollate them into a single document. This would

Recommendation 1: Develop an integrated

provide staff with a step-by-step procedural///

DRFI strategy. This strategy would identify///

options for the provision of quick liquidity. It could
also consider transforming the existing disasterprovision into a fund that could accrue over time,
subject to estimation of opportunity costs andbenefits of such an accrual; an optimal amountguide to facilitate swift budget mobilization andexecution. The guide would help to reduce the lossof institutional knowledge should key staff leave
DoFT.
Recommendation 3: Explore the use of///contingent credit to access additional liquidity
post-disaster, including identification of the///of finance would need to be established and thefund maintained at this level. The establishment

this approach is that countries would receive a pre-of such a fund would also require amendments

agreed upon amount of finance shortly after theto the PFEM Act and the financial regulations ofevent. This would act as a form of budget support

Vanuatu to provide clear guidelines on access andand could be spent on previously agreed upon

expenditures to avoid misuse.

Section05

providers of this type of finance. The advantage ofoptions or at the discretion of the government.

PCRAFI

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169

End Notes
1 Priority for Action 4—“Reduce the Underlying Risk Factors”—<sup></sup>

has an associated key activity of financial risk-sharing mechanisms, such as insurance, while Priority for Action 5—“Strengthen
disaster preparedness for effective response at all levels”—includes the establishment of emergency funds such as contingency
budget, national reserves, and annual budgetary allocations. See
UNISDR (2005).
2 This is equivalent to a contingency budget in many other coun-<sup></sup>

tries.
3 The Vanuatu Constitution is available at http://www.paclii.org/<sup></sup>

vu/legis/consol_act/cotrov406/.
4 This is equivalent to the cabinet in many other countries.

<sup></sup>

5 Information was provided anecdotally during the research for<sup></sup>

this report, so the figures may vary.

Section05

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170

References
GFDRR (Global Facility for Disaster Reduction and Recovery)

SPC-SOPAC (Secretariat of the Pacific Community, Applied

2012 The Sendai Report: Managing Disaster Risks for Resilient

Geoscience and Technology Division). 2011. “Investment inFuture, Washington D.C., U.S.A.

DRM—Cook Islands.” Secretariat of the Pacific Community,

Government of Vanuatu. 1998. Public Finance and Economic
Management Act 1998. Government of the Republic of
Vanuatu.
———. 2006. “National Action Plan for Disaster Risk Management (2006–2016).” Government of the Republic of Vanuatu
and Pacific Islands Applied Geoscience Commission (SOPAC),
Suva, Fiji.
———. 2013. “Budget Books 2013: Volume 1 & 2.” Government

Suva, Fiji.
SPC (Secretariat of the Pacific Community) 2011 Cook Islands:
Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment
in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Republic of
Marshall Islands: Investment in DRM, Suva, Fijiof the Republic of Vanuatu.
SPC (Secretariat of the Pacific Community) 2011 Vanuatu: InvestIMF (International Monetary Fund). 2013. “Republic of Vanuatu

ment in DRM, Suva, Fiji2013 Article IV Consultation.” IMF, Washington, DC.
SPC (Secretariat of the Pacific Community) 2012 Papua New
NDMO (National Disaster Management Office). 2011. “Tropical

Guinea: Investment in DRM, Suva, Fiji

Cyclone Vania Narrative Food Distribution Report and Financial
Acquittal.” Government of Vanuatu.
OCHA FTS (Office for the Coordination of Humanitarian Affairs
Financial Tracking Service). 2011. “Natural Disasters 2011
Summary of Contributions (per disaster) as of 27th February, 2014.” http://fts.unocha.org/reports/daily/ocha_R12_
Y2011_1402270303.pdf.
PDN (Pacific Disaster Net). 2013. www.pacficdisaster.net.
PCRAFI (Pacific Catastrophe Risk Assessment and Financing

UNISDR (United Nations International Strategy for Disaster
Reduction). 2005. Hyogo Framework for Action 2005–2015:
Building the Resilience of Nations and Communities to Disasters. UNISDR, Hyogo, Japan.
Vanuatu NSO (National Statistics Office). 2009. “2009 National
Census of Population and Housing Summary Release.” Ministry of Finance and Economic Management, Government of

September. www.pacris.sopac.org.

the Republic of Vanuatu, Port Vila, Vanuatu.

Pacific Disaster Risk Reduction and Disaster Management

05

Pacific Community, Suva, Fiji.

Initiative). 2011. “Country Risk Profile: Republic of Vanuatu.”

SOPAC (Pacific Islands Applied Geoscience Commission). 2005.

SectionSPC 2012 “Investment in DRM—Cook Islands.” Secretariat of the

Framework for Action (Regional Framework for Action or RFA)
2005–2015. SOPAC, Suva, Fiji.
SPC-SOPAC (Secretariat of the Pacific Community Applied Geoscience and Technology Division). 2011. “Vanuatu Investment in
Disaster Risk Management 2011.” SPC, Suva, Fiji.

VMS (Vanuatu Meteorological Service). 1994. “Tropical Cyclones
in Vanuatu 1847–1994.” Government of the Republic of
Vanuatu, Port Vila, Vanuatu.
World Bank 2010 Financial Protection of the State against Natural
Disasters; A Primer, Washington D.C., U.S.A.

VA N UAT U

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Annex 3

Insurance Market Review, March 2014

Executive Summary

products. Cyclone insurance is not automatically

Total non-life insurance premium, all classes,

and is available by extension only. Property

was VT 1.5 billion (US$15.6 million) ininsurance rates for cyclone in Vanuatu are below

Vanuatu in 2012. Of this premium, VT 1.3

average rates for PICs, at 0.17 percent of the sum

billion (US$13.5 million) was placed with local

insured, while the earthquake insurance rates are

insurers and VT 0.2 billion (US$2.1 million)

higher than in other PICs, at 0.30 percent, duewith offshore insurers.

to the frequency of recent earthquake events inincluded in standard property coverage wordings

///

///

The Vanuatu non-life (general) insurance

Vanuatu.

///market is small and currently has two locally

The Vanuatu government does not have///registered insurers, QBE Insurance (Vanuatu)

indemnity property insurance programs in

Limited (QBE) and Dominion Insurance Limited

place for its assets.

(Dominion).

///

///

The government does have an asset register///

Non-life premium per capita is estimated at VT

in place for land, building, property, and6,400 (US$67.00), which is lower than the rate ininfrastructure assets. This is managed

most other Pacific Island Countries (PICs).

by the Ministry of Finance and Economic

///

///

There is legislation in place—the Insurance///

Act (2005) and regulations—that regulates
Vanuatu’s insurance industry. The Reserve
Bank of Vanuatu (RBV) is the regulator. The

Management (MFEM). The MFEM advised that a///

project has been proposed to identify and reconcile
all land, building, and infrastructure assets andensure that values are correct in the register.

///RBV undertakes reviews to ensure that solvency

At present there is no insurance of///margins are met, that there is adequate reinsurance

government key infrastructure assets,

protection in place for large and catastrophe

including major transportation assets such as

risks, and that property and other accumulations

wharves, roads, and bridges. This situation could

are monitored. Offshore insurance placements

result in delays in reconstruction following a

must be approved by RBV before coverage iscatastrophic event.

placed overseas.

///

Most statutory bodies and state-owned///

Insurance for catastrophe insurance perils ofenterprises in Vanuatu that manage public

earthquake and cyclone is available in theassets have insurance programs in placemarket and can be included in property insurance

that include indemnity property insurance,

///

///

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although some programs do not include the

As a subsidiary, QBE (Vanuatu) has no additional

cyclone extension.

financial security in place beyond that provided///

The utility (electricity and water) concession///

holders are not required by the Utilities
Regulatory Authority to purchase indemnity
property insurance for the assets managed bythem.

under the solvency requirements of the Insurance
Act (2005). QBE (Vanuatu) does not have its own
financial security rating. The ultimate parent, QBE
Insurance Group Limited, has a security rating ofA- from Standard & Poor’s (dated May 22, 2013)
and an A+ rating for core operating entities.

///

The Insurance Act (2005) and regulations///

Insurance Market Overview
Total non-life insurance premium, all classes,///

in 2012 was VT 1.5 billion (US$15.6 million).
Of this premium, VT 1.3 billion (US$13.5
million) was placed with local insurers and VT
0.2 billion (US$2.1 million) (13 percent) with
offshore insurers.

restrict the placement of insurance offshore,
and all offshore placements must be approvedby the Reserve Bank of Vanuatu (RBV).

///

Insurance industry sources suggested that mostof these offshore placements are for specialist
marine and aviation insurance and are placed with
the London market (including Lloyd’s), the majorinternational insurance market. As part of the///

The Vanuatu non-life (general) insurance

approval process for offshore placements, the RBV///

market is small and currently has two locallyregistered insurers, Dominion Insurance

checks the financial status of the offshore insurer.
The non-life premium per capita in Vanuatu,///

Limited (Dominion) and QBE Insurance

at VT 6,400 (US$67.00), is lower than the rate///

(Vanuatu) Limited (QBE). Dominion has no///

additional financial security in place beyond thatprovided by the solvency requirements of the
Insurance Act (2005). Dominion does not havean independent security rating. QBE Insurance(Vanuatu) Limited is a wholly owned subsidiaryof QBE Insurance Group Limited, an Australian

in most other Pacific Island Countries (PICs) andequates to 2.11 percent of gross domestic product(GDP) (see table 1). This low premium per capita
is likely the result of low market penetration
by non-life insurers and a concentration of
insurance channels in the main cities of Port Vila

company listed on the Australian stock exchange.

Table A .1— Pacific Non-life Insurance Premium per Capita 2012 (US$)
MARKET

Section05

GDP MILLIONSPOPULATION

GDP PERCAPITA

MARKET
PREMIUM

PREMIUM PER
CAPITA$342

Cook Islands$305

19,300$15,823$6,600,000

Fiji$3,908874,700$4,467$97,500,000$111

Marshall Islands$182

52,560$3,470$3,000,000

$57

Samoa

$683

188,900$3,619$17,000,000$90

Solomon Islands$1,008549,600$1,130$13,000,000

$24

Tonga

$471

104,900$4,495$4,400,000$42

Vanuatu$781

247,300$3,182$16,500,000$67

Source: World Bank 2014

PCRAFI

VA N UAT U

and Luganville, as well as the lack of an insurance
program for government assets.

173

Direct//////Both of the non-life insurers in Vanuatu offer
domestic household, medical, and motor vehicle

Distribution channels

Photo Credit

///

///

Phillip Capper/
Flickr b

insurance products on a direct basis. No insurance
Agents and bancassurance

services are available via the Internet in Vanuatu.

RBV advises that Vanuatu has four licensed general

There is a wide range of distribution channels

insurance agents, Surata Tomaso Travel Limited.,

available in the marketing of general insurance

John Lum and Associates, ANZ Bank (Vanuatu)

products in Vanuatu.

///

///

Limited., and National Bank of Vanuatu. All four
have agency arrangements with QBE.
Brokers///

Catastrophe Risk Exposure
and Capacity///

Vanuatu has four licensed insurance brokers,
Aon (Vanuatu) Limited. (Aon), Marsh Limited.,
Willis New Zealand Limited, and a local broker,
Chartered Pacific Insurance Brokers Limited(CPIB). Only Aon and CPIB have local offices;
Marsh and Willis service clients from Fiji and New
Zealand respectively.

Catastrophe risk insurance represents a particularchallenge to insurers’ exposure management, sinceunlike other types of insurance, it presents thepossibility of large correlated losses. Insurers need
to use a combination of reinsurance, reserves, anddiversification within their portfolios to ensure

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PCRAFI174

Box 1— Reinsurance Programs
QBE (Vanuatu) is reinsured for catastrophe events under the QBE Group reinsurance program. QBE Group has a detailed risk management process that
includes monitoring of catastrophe claims concentration and reinsurance protection to mitigate the exposures (QBE Insurance Group Limited 2012).
Reinsurance arrangements for Dominion were not available for review. It is known, however, that Dominion is regulated by the Reserve Bank of Fiji,
which undertakes annual reviews of all Fijian insurers and publishes a comprehensive insurance annual report (Reserve Bank of Fiji 2012).

that they can withstand large disaster shock losses

All insurers with catastrophe exposures needwithout threatening their solvency.

to obtain reinsurance to increase their capacity.

There are two major catastrophe hazards in
Vanuatu, tropical cyclones and earthquakes.
Insurers advised that they were aware of thepotential cyclone exposure and insured only those
properties that had an engineer’s certification ofcompliance with the cyclone (wind load) standard.
Around 80 percent of their accumulation exposure
was in Port Vila and the island of Efate; 15 percent
was in Luganville on Santo; and the balance was

Reinsurance is even more important when theinsurer or the insurance market pool is small, suchas in the Pacific. As regulators become increasingly
vigilant about insurers having sufficient capital anda good solvency margin to protect their interestsfrom catastrophic events, they are requiring
adequate reinsurance programs, placed withrobust reinsurers.

Reinsurance

spread throughout the islands.
In 2011, natural catastrophe insured losses in

Section05

The market is constrained by its small size.

the global reinsurance market were the second-

Although additional capacity is available offshore

largest ever, at over US$110 billion (Swiss Re

from the London market, restrictions on offshore2012). What made this year significant for insurers

placement and the often higher premium costs(and reinsurers) in the Pacific was the number of

involved have discouraged use of this option.

events that occurred in the Asia Pacific region:

New Zealand–based insurers have shown limited

earthquakes in New Zealand and Japan, floods inwillingness to provide such capacity to Vanuatu

Australia and Thailand, and a cyclone in Australia.

in the past, as evidenced by the withdrawal in

According to the Global Insurance Market Report

1987, following Cyclone Uma, of Pan Pacific(IAIS 2012), these Asia Pacific events accounted

Underwriters Limited. (Crocombe 1992) and Towerfor 61 percent of the insured losses from natural

Insurance Limited.

catastrophes in 2011, compared to a 30-year
average of 18 percent. As a consequence, there

VA N UAT U

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VA N UAT U

were adjustments in reinsurance capacity andhigher risk premiums. In 2012 the natural disasterlosses dropped to US$77 million (Swiss Re 2013),
but this was still the third-highest year for natural
catastrophe insured losses since 1970. In the
Pacific, Tropical Cyclone Evan caused insured losses
of F$57 million in Fiji (Reserve Bank of Fiji 2012)and estimated insured losses of SAT 3 million in
Samoa in December 2012.
Insurers throughout the Pacific have expressed
concern at recent increases in reinsurance
premiums, especially premiums for catastrophe
reinsurance. They have limited ability to pass on thefull costs of these increases to insured clients dueto the small size and economic constraints in thosemarkets.

175

Products
Photo Credit

///

///

There are no specific catastrophe insurance

Phillip Capper/

products available in the Vanuatu market. The

Flickr b

property and engineering insurance products
include the catastrophe perils of earthquake andtsunami. Cyclone insurance is not automaticallyavailable and is included only as an extension
to property policies once an engineer’s cyclone
certification has been received.
QBE uses Industrial Special Risks (ISR) wordings
for major commercial, public authority, andstate-owned enterprise property insurance. The
ISR wording, which is based on the AustralianMark IV insurance industry standard wording, isfor material damage and includes natural perils
such as earthquake and tsunami; it does not
automatically include cyclone. Dominion uses a

SectionCommercial Package policy with defined perils; it

05

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VA N UAT U

Table A .2— Pacific Commercial Property Insurance Rate and Deductible Comparison

MARKETAVERAGE
EARTHQUAKERATEGENERAL
EARTHQUAKEDEDUCTIBLESAVERAGE CYCLONE
RATE

GENERAL CYCLONE
DEDUCTIBLE

Cook Islands

0.12%

2% of sum insured

0.45%

20% of sum insured

Fiji

0.08%

10% of sum insured

0.30%

Samoa
Solomon Islands

0.12%

2% of sum insured or
5% of loss
1% or 5% of sum

0.17%

insured

0.20%

20% of loss
2% of sum insured or
5% of loss

0.13%

5% of loss

Tonga

0.15%

5% of sum insured

0.25%

5% of sum insured

Vanuatu

0.30%

5% of loss

0.17%

20% of loss

Source: World Bank 2013.
Note: Tables shows average market rate percentage of value based on insurance industry sources.

makes cyclone/earthquake available by extension

Cyclone insurance is available by extension only

only.

from local insurers and is limited to those buildings

A major limitation of the ISR wording forgovernments is that infrastructure assets suchas roads, bridges, and wharves are specificallywith an engineering cyclone certificate confirmingthat the building meets the building code for
cyclone. The certificates are valid for seven years.

excluded. Insurance brokers advised that it wasCompleted Civil Works insurance for infrastructurecommon practice for major commercial accounts

assets is available from QBE, and local insurance

to include smaller infrastructure items in an

brokers advised that a number of major resorts

ISR schedule and waive the exclusion. Major

had such insurance in place for their infrastructure

infrastructure items, however, would need to beassets.

insured under a Completed Civil Works policy.

Market capacity

Commercial Package or Business Protection

Sectionwordings are used for small and medium

The local market does not appear to have any

enterprises, and coverage is taken as either Multi

major capacity limitations for property insurance.

Risks (accidental damage including earthquake andInsurance intermediaries advised that QBE is

cyclone by extension) or Specified Risks (fire andthe only local insurer with reasonable capacity

extraneous perils). These policies generally follow

for large property risks and accumulations. If

the perils insured under the ISR, although coverage

additional capacity is necessary, it is available bymay be more restricted.

way of offshore placements, but these need to beapproved by RBV. According to insurance industry

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VA N UAT U

177

Box 2— Past Catastrophe Events
Cyclones///

event indicated that some older commercial buildings were constructed to///only 40 percent of the earthquake code (NZS4203).
The most destructive cyclones within Vanuatu occurred in 1959 (Amanda),
1985 (Eric, Nigel, and Odette), 1987 (Uma), and 1999 (Dani) (VMS 1994).

In 2010 and 2011, there were three earthquakes with a magnitude of

Of these, Cyclone Uma was the most destructive, with estimated damage

between 7.0 and 7.1; the epicenters were 40–60km from Port Vila.

and economic losses at over VT 1.4 billion (US$150 million) in 1987 values.

Insurance industry sources advised that these earthquakes caused insured

The government expended over VT 87 million (US$9 million) for initialdamage estimated at VT 100 million (US$1 million).

emergency relief in the two months following the cyclone (Government
Insurance consequences of catastrophe eventsof Vanuatu 1987). Insurance sources advised that over 750 claims were///lodged following Cyclone Uma, with damage valued at over VT 460 million(US$4.7 million). There was significant property damage in the capital city,

Cyclone Uma was a major catastrophe for the insurance industry in
Vanuatu. Industry sources advise that while there were eight insurers

Port Vila, with some estimates suggesting that 90 percent of properties
suffered extensive or major damage. There was also a loss of over 40 vessels
throughout the islands.

operating in the market in 1987, within two years only three insurers
remained. These remaining insurers were unable to provide cyclone
insurance following the event because their reinsurance coverage had been
exhausted and they were unable to access alternative reinsurance capacity

Earthquakes

///

///

///

for windstorm.
On January 3, 2002, Vanuatu experienced a 7.4 magnitude earthquake,with an epicenter approximately 30km to the west of Efate island and

The 2002 earthquake had a similar impact. Five insurers were operating

Port Vila. According to a report by SOPAC (2003), the earthquake caused

prior to the event, and within two years there were only three. There wasdamage estimated at over VT 880 million (US$8.8 million). The reportno limitation of earthquake insurance coverage following this event, but

indicated that insured losses totaled A$8.4 million (US$7.11 million), andprices for earthquake insurance coverage did increase due to reduction

damage from uninsured government buildings and infrastructure lossesof global reinsurance capacity that year and the consequential increase incame to a further A$2 million (US$1.69 million). The report did notreinsurance premium costs.

analyze any uninsured private properties but did estimate the total cost ofdamage at A$15 million (US$12.675 million), which indicates a high level of
insurance market penetration. Analysis by engineers undertaken after the

There were no actual insurer financial failures in either event, although
there were reportedly some significant delays in claim settlements after
Cyclone Uma and some settlement delays after the 2002 earthquake.

offshore placements are made into corporate

earthquake rates are due to the frequency of

global programs. The absence of significant

major earthquake events in recent years.

capacity issues notwithstanding, insuranceintermediaries were concerned about possible
competition issues arising from the dominantmarket position of QBE (estimated at over 90
percent for the commercial property class).

There are a number of limitations with thiscomparison related to variables in property
insurance rating, such as location of premises,
construction, occupation, fire protection,
frequency of expected losses, and the amount andProperty insurance rates for cyclone in Vanuatu

type of deductible on policies. It is not possible

are below average for PICs, although earthquake

to use average rating data as an exact basis for arates are higher, as detailed in table 2. These highspecific company or individual risk. It is possible,

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PCRAFI178

VA N UAT U

Box 3— Unelco Suez
Vanuatu Utilities and Infrastructure

The supply of electricity and water within Port Vila, Malekula, and Tanna

///

///

is the responsibility of concession holder, Unelco Suez. The utility assets
are managed by Unelco during the periods of the concession agreements

The supply of electricity to Luganville town on the island of Espiritu Santo is

and revert to the government of Vanuatu, in good order and condition,

the responsibility of the concession holder, VUI. The concession agreement

at the end of those concessions. The concession agreements require thatwas not available for review, but URA advised that it had investigateda replacement fund for assets be set up and that any damage caused

property insurance with VUI when the concession was first granted in 2011

by force majeure events be repaired out of that fund or from operating

and concluded that it was an unnecessary additional cost to consumers.

expenses if the replacement fund is exhausted. There is no requirement inInsurance industry sources advised that VUI has a property insurance

the concession agreements for the assets to be insured (Government ofprogram, including earthquake, for some of the concession assets.

Vanuatu and Unelco Suez 1975).

Building Control and Standards

however, to offer a general comparison of theproperty insurance rates in respective markets.

Vanuatu does not have a building act in place///

Insurance Law and Regulation

as at March 2014. A bill for the National Building///

In Vanuatu, insurance companies, agents,///

brokers, and loss adjusters are all required tobe licensed under the Insurance Act (2005) andare regulated by the Insurance Regulations(2006). The RBV is the current regulator; it///

requires quarterly and annual returns from insurers

but was never enacted. A further bill for a National
Building Code Act was presented and passed
by Parliament in January 2014, and government
sources advised in March 2014 that the act was
awaiting gazetting before becoming law.

and brokers and also undertakes biannual on-site

A Vanuatu draft National Building Code wasreviews of licensed entities. In addition to the

distributed in 1990. It used the New Zealand2005 law and 2006 regulations that govern theearthquake code (NZS4203) and Australian

insurance industry, there are a number of guidancewind loads (AS1170.2) for cyclone code. Local

notes on relevant issues that the RBV provides.

engineers advised that major commercial andLocal insurers must provide a quarterly update of
their solvency to the RBV. RBV requires insurers
to annually submit a reinsurance management
strategy with their insurance license renewal
application. During the on-site reviews, RBV checks
the reinsurance arrangements and the financial
security of insurers. These reviews ensure that
SectionCode Act was presented to Parliament in 1999,

public buildings, as well as the more substantial
residential buildings, are constructed in accordancewith these codes. Prior to building construction,plans for all buildings in the Port Vila andLuganville municipalities are submitted to themunicipalities for approval, and these plans arealso checked by the Public Works Department.

reasonable financial protection is in place forIn the absence of a legally enforceable building

consumers of insurance products within Vanuatu.

code, insurers have taken proactive steps to ensurebuilding cyclone standard compliance by requiring

05

engineering certificates for insured properties.

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VA N UAT U

Insurance of Public Assets
Government assets

179

Statutory bodies and stateowned enterprises
MFEM is responsible for the overall supervision of

The Ministry of Finance and Economic

all statutory bodies and state-owned enterprises.

Management (MFEM) advised that there is

The ministry advised that it does not require

no property insurance program in place forstatutory bodies and state-owned enterprises togovernment building or infrastructure assets

have property insurance programs in place forin Vanuatu. According to insurance industry

public assets. Because of notes in annual reports,

sources, some individual ministries have property

the MFEM is aware that a number of these entities

insurance in place for specific assets. In the 1990s

have insurance programs, but the ministry does

a comprehensive risk management program was

not keep a record of those programs, leaving it todeveloped for the Vanuatu government, one

the individual statutory bodies and state-owned

including risk financing and insurance. This riskenterprises to report to their respective boards on

management program is no longer in place.

insurance arrangements.

The government does have an asset register

Insurance industry sources advised that somein place for land, building, property, andstatutory bodies and most state-owned enterprises

///

///

///

infrastructure assets, managed by MFEM.

///

that held major public assets had property

MFEM advised that a project has been proposed

insurance programs that included earthquakethat would identify and reconcile all governmentand cyclone perils. Among these entities are Air

land, building, and infrastructure assets and ensure

Vanuatu (Operations) Limited, National Bank

that these are recorded correctly in the register.

of Vanuatu Limited., Reserve Bank of Vanuatu,

The existing asset register could be used to identify

Vanuatu Financial Services Commission, andkey government assets for any risk financing or

Vanuatu Post Limited. Airports Vanuatu Limited

insurance program.

has a property insurance program but does notinclude the cyclone peril for buildings, and the
airport runways are not insured (SOPAC 2003).

Photo Credit

///

///

Phillip Capper/Flickr b

PCRAFI180

The government keeps no centralized registerof insurance arrangements made by individual

References

statutory bodies or state-owned enterprises.
A register of this type would allow a morecoordinated approach to property insurance
management and purchasing, which could in turnCrocombe, R. G. 1992. Pacific Neighbours: New Zealand’s Relations with other Pacific Countries. Christchurch, New Zealand:
MacMillan Brown Centre for Pacific Studies and Institute for
Pacific Studies.
Government of Vanuatu. 1987. “National Disaster Co-ordinating

generate premium cost benefits.

Committee, Cyclone Uma February 1987.” Government of
Vanuatu, Port Vila, Vanuatu. March.

Public assets managed underconcession agreements

Government of Vanuatu and Unelco Suez. 1975. “Convention

The Utilities Regulatory Authority (URA) advised

IAIS (International Association of Insurance Supervisors). 2012.

that it did not require concession holders to insure
the assets under their management. There are
two concession holders, Unelco Suez and Vanuatu
Utilities and Infrastructure (VUI).

Relating to the Concession for the Generation and Public
Supply of Electrical Power in Port Vila.”
Global Insurance Market Report. 2012 edition. http://iaisweb.
org/index.cfm?event=getPage&nodeId=25308.
QBE Insurance Group Limited. 2012.Annual Report 2012. http://
www.group.qbe.com/.
Republic of Vanuatu. 2005. Insurance Act No. 54 of 2005. http://
www.vfsc.vu/Download/laws/insuranceactno54of2005.pdf.
———. 2006. Insurance Regulations Order No. 16 of 2006.

Options for Consideration
Recommendation 1: The government should///

develop a broad disaster risk financing andinsurance strategy that includes an insurance
program for key public assets. This approach///

would use the existing asset register to identify key
assets, would assess probable losses, and would
carry out a costing of indemnity insurance for the
major catastrophe perils of earthquake/tsunami andcyclone/sea surge.

http://www.vfsc.vu/Download/regulations/insuranceregulationorderno16of2006.pdf.
Reserve Bank of Fiji. 2012. Insurance Annual Report 2012. Suva,
Fiji. http://www.rbf.gov.fj/Publications/Publications/Insurance-Annual-Reports.aspx.
SOPAC (Pacific Islands Applied Geoscience Commission). 2003.
“Catastrophe Insurance Pilot Study, Port Vila, Vanuatu.”
SOPAC Joint Contribution Report 147, vols. 1 and 2. December.
Swiss Re. 2012. “Natural Catastrophes and Man-Made Disasters
in 2011.” Sigma 2/2012. http://www.swissre.com/sigma/.
———. 2013. “Natural Catastrophes and Man-Made Disasters in
2012.” Sigma 2/2013. http://www.swissre.com/sigma/.
VMS (Vanuatu Meteorological Service). 1994. “Tropical Cyclones
in Vanuatu 1847 to 1994.” Publication no. VMS/C/01/9.3.

Recommendation 2: The government///

should include the current replacement
value of key public assets in the asset
register held by the Ministry of Finance andEconomic Development.

///

Recommendation 3: The government should///

set up a central insurance register, for all
government departments, statutory bodies,or state-owned enterprises as part of thedisaster risk financing and insurance strategy
Sectionand update the register as insurance contracts
fall due.

05///

May 19.

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181

Glossary
Someone who acts for the insurance company in arranging insurance contracts. There are two mainAgenttypes of agents: tied agents, who act for one insurer only, and general agents, who act for multiple
insurance companies.

BrokerCapacity

Captive insurer

Someone who acts as an agent for the insured in arranging an insurance or reinsurance programwith a provider of capacity.

The ability of an insurance company to provide insurance protection to clients, which is limited byits own financial strength and the reinsurance protection it has in place.

An insurance company wholly owned by a company or entity that insures the risks of the parent
entity and subsidiaries.
Insurance that reimburses individuals or entities for loss or damage to a financial position as close

Indemnity insurance

as possible to the position they were in prior to the event, in the context of the financial terms ofthe coverage (such as deductible/excess and limit).

Intermediaries

Net retention

Parametric insurance

Probable maximum loss
(PML)

The general term given to insurance agents and brokers.

The amount that an insurance company retains on a reinsurance contract and in particular anexcess of loss of contract.

A type of insurance that is triggered by the occurrence of a specific measured hazard event, suchas a certain magnitude of earthquake or category of cyclone.

The maximum value of a claim from a large or catastrophe event. May also be called MPL.

The insurance of physical assets such as buildings, plant and equipment, stock, and machinery.
Property insurance

The products used for this insurance are variously named as fire and perils, commercial or businesspackage, industrial special risks, or material damage insurance.

A risk transfer method used by insurance companies to transfer part of a single large risk or an
Reinsurance

accumulation of similar risks and so increase their capacity. Reinsurance helps to smooth theextreme results and effects of specific perils (such as catastrophe events) and therefore to reducethe volatility of an insurance portfolio.

Solvency margin

The extent by which an insurer’s assets exceed its liabilities. Minimum statutory solvency
requirements are normally included in insurance acts or regulations.

Section05

TONGA
February 2015
Disaster Risk Financing and Insurance

CHAPTER
06
PCR AFI 2015

Country Note

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184

Tonga

Executive Summary
Tonga is an archipelago composed of 172
islands spread across a combined land andsea area of 720,000km2. According to the 2011
census, Tonga had a population of 103,252 people
spread across 36 of the 172 islands. A population
scattered so widely across such a large area canpose logistical problems for efforts to facilitate andfinance disaster response.
///

<sup>

</sup>///In January 2014, Tropical Cyclone Ian caused
widespread damage and destruction on theislands of Ha’apai and Vava’u. Approximately
1,094 buildings in Ha’apai were either destroyed
or damaged, and some 2,335 people sought
shelter in evacuation centers. There were reports ofsignificant damage to houses, infrastructure, andagriculture across 18 villages located on the islandsof Ha’apai, including Uiha, Uoleva, Lifuka, Foa,
Ha’ano, and Mo’unga’one. Total ground-up loss forthis event was estimated at T$90 million (US$50.3
million), of which T$20.5 million (US$11.5 million)
was attributable to emergency loss (PCRAFI 2014).1
///

///

Tonga is expected to incur, on average, T$28.2
million (US$15.8 million) per event per year
in losses due to earthquakes and tropical
cyclones. In the next 50 years, Tonga has a 50
percent chance of experiencing a per event loss
exceeding T$319 million (US$178.2 million), anda 10 percent chance of experiencing a per event
loss exceeding T$783 million (US$437.4 million)(PCRAFI, 2012).
///

annual appropriation into the emergency fund,and the aggregate coverage limit from thecatastrophe risk insurance pilot. It should beemphasized that this amount is a maximum and—given the nature of the contingency budget—
dependent on how much remains in the budget
during the fiscal year when the event occurs.
Similarly, the aggregate payout is the absolute
maximum that Tonga could receive following
an earthquake/tsunami or tropical cyclone. It isestimated that there is a 4.4 percent chance thatdisaster losses will exceed this amount in any
given year.
The Tongan government does not have an
indemnity property insurance program in place
for its infrastructure assets or property. The
government keeps no centralized register of
insurance arrangements made by individual
government departments, public authorities, orstate-owned enterprises.
This report presents for consideration a number of
options for improving current measures for disasterrisk financing and insurances:///

Section06

Tonga has the ability to raise a maximumof T$21.5million (US$12 million) for disaster
response. This figure is based on the contingency
budget for the fiscal year 2013/14, the maximum
///

///

(a) develop an overarching disaster risk financing
strategy aligned to existing processes;(b) develop an operations manual detailing theprocesses required to facilitate swift postdisaster budget mobilization and execution;and(c)develop an insurance program for key public
assets.

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Tonga

185

Introduction
Tonga is an archipelago composed of 172
islands spread across a combined land andsea area of 720,000km2. According to the 2011
census Tonga had a population of 103,252 people
spread across 36 of the 172 islands; this represents
an increase of only 1.2 percent since 2006. A
population scattered so widely over such a large
area can pose logistical problems for efforts tofacilitate and finance disaster response.
///

<sup>

adaptation at the national, subregional, andinternational level. These include the following:///</sup>In January 2014, Tropical Cyclone (TC) Ian
caused widespread damage and destruction
on the islands of Ha’apai and Vava’u.
Approximately 1,094 buildings in Ha’apai were
either destroyed or damaged, and some 2,335
people sought shelter in evacuation centers.
Significant damage was reported to houses,
infrastructure, and agriculture across 18 villages
located on the islands of Ha’apai, including Uiha,
Uoleva, Lifuka, Foa, Ha’ano, and Mo’unga’one.
Total ground-up loss for this event was estimated
at T$90 million (US$50.3 million), of which T$20.5(US$11.5 million) was attributable to emergency
loss (PCRAFI 2014).2• Hyogo Framework for Action (HFA) 2005–2015• Pacific Disaster Risk Reduction and Disaster
Management Framework for Action (Regional
Framework for Action, or RFA) 2005–2015• Tonga’s National Disaster Management Plan andEmergency Procedures///• Tonga’s Joint National Action Plan (JNAP) for
Disaster Risk Management and Climate Change///

The government of Tonga, in conjunction with
the Secretariat of the Pacific Community Applied
Geoscience Division (SPC-SOPAC), the Secretariatof the Pacific Regional Environment Programme(SPREP), the United Nations Development
Programme (UNDP) Pacific Centre, and the United
Nations International Strategy for Disaster Risk
Reduction (UNISDR) as well as other partners,
has developed several institutional frameworks
on disaster risk management and climate change

Adaptation, 2010–2015
Disaster risk financing and insurance (DRFI) isa key activity of the HFA Priorities for Action
4 and 5.3 The HFA is a result-based plan of action
adopted by 168 countries to reduce disaster risk
and vulnerability to natural hazards and to increase
the resilience of nations and communities todisasters over the period 2005–2015. In the Pacific,
the HFA formed the basis for the development of
the Pacific Disaster Risk Reduction and Disaster
Management Framework for Action (Regional
Framework for Action, or RFA).
///

<sup>

///

</sup>The Regional Framework for Action cites
DRFI activities as a key national and regional
activity. Theme 4—“Planning for effective
preparedness, response and recovery”—hasan associated key national activity, “Establish anational disaster fund for response and recovery.”Moreover, Theme 6 of the RFA—“Reduction ofunderlying risk factors”—cites the development
///

///

Section06

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186

Tonga

of “financial risk-sharing mechanisms, particularly
insurance, re-insurance and other financial
modalities against disasters as both a key nationaland regional activity” (SOPAC 2005). These
regional implementation activities align withthe three-tiered disaster risk financing strategy
promoted by the World Bank.

align to the basic principles of sound publicfinancial management, such as the efficient
allocation of resources, access to sufficient
resources, and macroeconomic stabilization. The
three tiers acknowledge the different financial
requirements associated with different levels of
risk:

DRFI is included in Goal 1 of Tonga’s Joint
National Action Plan for Disaster Risk
Management and Climate Change Adaptation(GoT 2010). The overarching outcome for this goal
is to mainstream disaster risk management andclimate change adaptation into planning, decision
making, and budgetary processes.

(a) Self-retention, such as a contingency budget

The Pacific DRFI Program enables countries
to increase their financial resilience against
natural disasters by improving their capacity
to meet post-disaster funding needs withoutcompromising their fiscal balance. This programis one application of the Pacific Catastrophe Risk
Assessment and Financing Initiative (PCRAFI). The
Pacific DRFI Program is built upon a three-tiered
approach to disaster risk financing. These layers

cover major natural disasters. See Figure 1.

///

and national reserves, to finance small but
recurrent disasters;///(b) A contingent credit mechanism for lessfrequent but more severe events; and
(c)

///

///

Disaster risk transfer (such as insurance) toThis report aims to build understanding of the///existing DRFI tools in use in Tonga. Specifically,///

it aims to encourage peer exchange of regional
knowledge through dialogue on past experiences,lessons learned, optimal use of these financial
tools, and their effect on the execution of postdisaster funds.

Figure 1 — Three-Tiered Disaster Risk Financing Strategy

Risk Transfer

Low Frequency/
High Severity

International AssistanceSovereign Risk Transfer(e.g. Cat Bond/Cat Swap, (re)insurance)

SectionRisk Retention

High Frequency/
Low Severity

Contingent Credit Lines

06

Post Disaster Credit

Government Reserves, Contingency Budget / Funds

Emergency Funding

Source: World Bank 2010.

Insurance of Public Assets

Reconstruction

PCRAFI

Tonga

187

Economic Impact ofNatural Disasters
Since 1997 Tonga has experienced

Figure 2 — Land Use/Land Cover///0

50 100200

Kilometers

and Waka destroyed many homes along withmuch of the country’s agricultural crops, causing
T$134.2 million (US$75 million) in losses andVava'useverely harming the local economy. Tonga is also

Ha'apai2009 magnitude 8.1 earthquake and subsequenttsunami, which destroyed over half of the houseson NiuaT$utapu before continuing to cause further
damage on the shore of Samoa.
Tonga has a narrow economic base that is///led by the agriculture sector, closely followed
by tourism; both of these industries are
susceptible to natural disasters. In 2012/13,

0

2

E ua
175° W

8

Kilometers
Tongatapu & E ua

0 2 4

Tongatapu

4

Tongatapu

20° S

susceptible to earthquakes and was affected by the

Nuku'alofa

17° S

///

</sup>

18° S

<sup>

19° S

damaged over 1,500 homes.4 In 1982 TCs Isaac

21° S

affected a total of 109,000 people and16° S

approximately 14 natural disasters. These

8

Kilometers

Ha'apai0 2 4

Vava'u8

Kilometers

174° W

Tonga E ua

0 2 4

8

Kilometers

L and C over / L and Us e
C oconut C rops

S ettlement

Nut TreeOther

S quas h

Water

C oconut F ores t

Unknown C rops

F ores t

P alm Oil

VanillaTaro

Other P lantation

Gras s Land

Open Land

S and Bay

Wetland///the commerce, restaurants, and hotels sector

Source: PCRAFI 2012.

and the agriculture, fisheries, and forestry sectors
grew by 2.1 percent. Figure 2 shows land use andland cover in Tonga and demonstrates the level ofagricultural production, in particular the level ofinvestment in coconut and squash production.
Section06

PCRAFI

188

Tonga

Figure 3 — Direct Losses by Return Period

DIRECT LOSSES (MILLION USD)

500
400
300
200

TC + EQ
TC
EQ

100
0
0

100

200

300

400

500

600

700

800

900

1000

MEAN RETURN PERIOD (YEARS)

Source: PCRAFI 2012
Note: TC = tropical cyclone; EQ = earthquake

Tonga is expected to incur, on average, T$28.2

T$0.9 million and T$2.3 million (US$0.5 million–

million (US$ 15.8 million) per event per year

1.3million).

///in losses due to earthquakes and tropicalThe post-disaster economic assessment

cyclones. In the next 50 years, Tonga has a 50

///

///

conducted following TC Ian estimates thepercent chance of experiencing per event loss

combined physical damage and economic loss

exceeding T$319 million (US$178.2 million), and afrom this event to be T$90 million (US$50.3

10 percent chance of experiencing a per event loss

million), equivalent to 11 percent of Tonga’s

exceeding T$783 million (US$437.4 million) (seegross domestic product (GDP). This figure is

Figure 3).

///

based on the immediate physical damage, which

Average annual loss is depicted by area in Figure 4.

was largely to houses, transport infrastructure,

Those areas in red indicate high levels of average

and agriculture. Recorded damage accounts for 80

annual losses, with a range of loss between

percent of this figure, with losses accounting forthe remaining 20 percent.

Figure 4 — Average Annual Loss by Area

Kilometers

Vava'u20° S

Ha'apai

Section175° W

21° S

06

Eua

8

Tongatapu

Nuku'alofa

Building Replacement Cost
Density (million USD / km^2)

0 - 0.25
1 - 2.5
0.25 - 0.5
2.5 -&5Eua
Tongatapu
0.5 - 0.75
5 - 100.75 - 1
10 - 120
0 2 4

Tongatapu

4

17° S

200

2

Kilometers

18° S

50 100

19° S

0

16° S

0

8

Kilometers

Ha'apai0 2 4

Vava'u8

Kilometers

174° W

Tonga Eua

0 2 4

8

Kilometers

Source: PCRAFI 2012

PCRAFI

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189

Public Financial
Management of
Natural Disasters
Effective post-disaster financial response relies

This move helps to ensure that procurement ofon two fundamental capabilities:

emergency supplies occurs as quickly as possible;

///

///

normally it is senior staff with signing authority(a) The ability to rapidly mobilize funds post-

who are relocated.

disaster; and(b) The ability to execute funds in a timely,

Post-Disaster
Budget Mobilizationtransparent, and accountable fashion. Thissection discusses the existing proceduresfor post-disaster budget mobilization

Tonga has a variety of ex-ante and ex-postand execution.

///

financial tools at its disposal, and the timing
Where possible, the discussion will use

for mobilizing and executing these funds

examples from Tonga’s experience with TC Ian,

varies significantly. Building on the World Banka category 5 cyclone (with winds over 200kph

framework for disaster risk financing and insurance

recorded) that struck on January 11–12, 2014.

(see annex 1), table 1 shows the ex-ante and

///

///

///

TC Ian caused widespread damage and destruction

ex-post financial tools available, indicates thoseover the northeast islands of Ha’apai, and theutilized by Tonga, and gives indicative timings

response efforts placed considerable pressure on

for mobilization of the funds. The tools utilizedcore government staff.

by Tonga are highlighted in blue. Those sections

In particular, there was pressure on the///highlighted in gray are for generic instruments thatto date have not been used in Tonga.

National Emergency Management Office(NEMO) and the Ministry of Finance (MoF),

The sections below discuss in detail the ex-ante

both of which act immediately following aand ex-post finance tools available to Tonga,

disaster. Following a statement of emergency, theincluding the time it takes to mobilize these funds

Section///MoF relocates a member of staff to the NEMO.

and the amount of funds available.

06

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190

Ex-Ante Practices and Arrangements

Tonga

an emergency. It is estimated that there is a 21
percent chance that disaster losses will exceed the

The uncertainty surrounding international
assistance following a disaster has put pressure
on countries to establish domestic sources offinance for post-disaster relief, such as national

maximum amount that can be appropriated in any
given year.
On January 10, 2014, the day before TC Ian///

reserves and instruments that transfer risk tomade landfall, the early warning system

the international insurance market. The ex-anteand subsequent statement of emergency

arrangements that have been made by Tonga

facilitated access to the emergency fund via

include an emergency fund, a contingency budget,the national emergency operations account.

and sovereign catastrophe risk insurance.

Access to the fund facilitated the purchase of///

rations and electrical supplies and ensured that

Emergency fundsufficient stock was available for mobilization

Tonga’s emergency fund was established in

immediately after the event.

///June 2008. An annual appropriation up to aContingency budget

maximum of T$5 million (US$2.79 million) canbe placed into the fund in any fiscal year. The///

Each year, the level of the contingency fund///

fund is able to accrue, and the monies are usedis agreed upon by the Legislative Assembly,

exclusively for the purpose of providing timely

with the stipulation that it must not exceed 5

and efficient relief and reconstruction following

percent of the Tonga Government Fund. With///

Table 1— Sources of Funds Available
SHORT TERM
(1-3 MONTHS)
Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Flash Appeal
Ex-ante Financing
Emergency FundContingency Budget
Contingent Credit

SectionSovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance

06

Source: Government of Tonga; World Bank.

MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)PCRAFI

Tonga

191

Box 1— The Pacific Catastrophe Risk Insurance Pilot
The Pacific Catastrophe Risk Insurance Pilot aims to provide

government in the aftermath of a severe natural disaster that disrupts theimmediate budget support following a major tropical cyclone orprovision of government services. Countries can choose between threeearthquake/tsunami. The insurance is designed to cover emergency

layers of coverage—low, medium, and high—depending on the frequency

losses, which are estimated using both a modeled representation of theof events. The lower layer will cover events with a return period of 1 in 10

event based on hazard parameters and a calculation of total modeled

years, that is, more frequent but less severe events. The medium layer will

physical damage. Unlike a conventional insurance scheme, where a payout

cover events with a 1-in-15-year return period, while the higher layer will

would be assessed against actual incurred costs, this scheme pays out oncover less frequent but more severe events, or those with a return period

the results of a model. The advantage of this approach is that it results inof 1 in 20 years. However, countries may request that a more customized

a much faster payout. The payout would act as a form of budget support

option be developed for them.

///

///

and would go some way to cover the costs that would be incurred by thethe approval of the Privy Council, the minister of(contingency budget) for the fiscal year

finance may release funds from the contingency

2014/15 (see table 2). Tonga chose the lowest

fund as deemed necessary, as long as they remainlevel of coverage available, that is, it opted forwithin the limits of the set contingency. In 2013/14,

coverage of more frequent but less severe events

the contingency budget was set at T$1.5 million(those with a return period of 1 in 10 years) for///(US$0.84 million), equivalent to 0.75 percent ofboth tropical cyclone and earthquake/tsunami. The

total expenditure.

coverage is in effect from November 1, 2014, toSovereign catastrophe risk insurance

October 31, 2015.
In January 2014, the government of Tonga

The coverage selected by Tonga provides

///

///

an aggregate coverage limit worth more

received T$2.3 million (US$1.27 million)

than five times the unforeseen paymentsfrom its catastrophe risk insurance policy,

Table 2— Sources of Funds Available
TROPICAL CYCLONE
Policy period
Peril selected
Layer of coverage selected
Coverage limit as a percentage ofcontingency budget
Reporting agencies

EARTHQUAKE

November 1, 2014–October 31, 2015
Tropical cyclone

Earthquake

1 in 10 years

1 in 10 years>300 percent>300 percent

Joint Typhoon Warning Center

United States Geological Survey

SectionSource: Government of Tonga; World Bank.

06

PCRAFI

192

equivalent to more than the 2013 contingency

Tonga

Tonga National Reserve Fund. Following TC Ian,

These budget variations must be reported in thefinancial statements for that year. Anecdotally it isunderstood that it may take two to three days to

Tonga was the first country to receive a payouttransfer funds.

budget, or half of the current reserves of the///under the Pacific Catastrophe Risk Insurance Pilot.

Ex-Post Practices and Arrangements

External debt
The stock of debt at the end of fiscal year
2013/14 was T$368.2 million (US$206 million),equivalent to 44 percent of GDP, with external
debt accounting for approximately 92 percentof this. Following steps to strengthen fiscal
management, including a debt sustainability
analysis conducted by the World Bank and theInternational Monetary Fund, in 2013 Tonga’srate of debt distress was downgraded from highto moderate.
///

By definition, a disaster exceeds a country’s capacity
to cope with it, and there will therefore always bea need for ex-post practices and arrangements. An
optimal strategy for DRFI relies on a combination of
ex-ante and ex-post financial instruments. Ex-postarrangements benefit from being able to establish
the extent of the disaster and prioritize theresponse needs. Hence these arrangements takelonger to implement than ex-ante arrangements,
but they can often mobilize larger amounts offinance. This section discusses the ex-post practices
and arrangements that have been made by Tonga.

Budget reallocation
Under the Public Financial Management Act(2002), program funds may be transferred
within a ministry at the request of theminister and with the approval of the ministerof finance. The amount transferred must leave
the total appropriation for that ministry unalteredand cannot increase the appropriation for thatparticular program by more than 10 percent.
///

///

Section06///

Debt-servicing costs in fiscal year 2013/14
amounted to T$19.5 million (US$10.9 million),of which 61.5 percent was attributable toexternal creditors. This figure is expected toincrease in fiscal year 2014/15, as repayments
for three major loans commence. The majorityof loans are spilt between three main providers,the Asian Development Bank, the International
Development Association, and the Export-Import
Bank of China.
///

///

PCRAFI

Tonga

193

Cyclone Ian Response Plan (GoT 2014). As

Flash appeal///

The Cyclone Ian Relief Account was///established by Ministry of Finance and hadreceived over T$1.5 million (US$837,000)
in contributions by March 20, 2014. These///

donations came from development partners,
communities, businesses, individuals, and the
Tongan diaspora, all of whom wished to contributetoward the relief efforts.

of March 2014, however, a further T$64.5
million (US$36 million), which was needed to
fully implement the response plan, was stilllacking. It is anticipated that this figure will get
smaller as donors align the work to their existingdevelopment priorities in country. This experience
serves to demonstrate that while smaller amounts
for initial relief and recovery may arrive quickly,
it can take time to mobilize larger amounts ofFive weeks after TC Ian, all relief and earlyfunding to finance reconstruction activities.

///

recovery expenditures were diverted to the
Cyclone Ian Relief Account. This means that any

Total Response Funds Available///

further contributions will be deposited into thisTonga has the ability to raise a maximum ofaccount; the goal is to keep any remaining funds inT$21.5million (US$12 million) for disasterthe emergency fund in case another event occurs

response. This figure is based on the contingency

during the same fiscal year.

budget for the fiscal year 2013/14, the maximum

Donor funds for relief
and reconstruction
While donor funds will always be required

annual appropriation into the emergency fund,and the aggregate coverage limit from the Pacific
Catastrophe Risk Insurance Pilot (see figure5). It should be emphasized that this amount///following a disaster, there is often an elementof uncertainty surrounding how much
will be provided, what will be provided, andis a maximum and—given the nature of thecontingency budget—dependent on how muchremains in the budget during the fiscal year when///

when funds will arrive in country. Consequently,
overdependence on international relief as asource of post-disaster financing can delay theprovision of initial relief and inhibit ex-antecontingency planning. Development partners,
international organizations, local nongovernmental

the event occurs. Similarly, the aggregate payout
is the absolute maximum that Tonga could receive
following an earthquake/tsunami or a tropical
cyclone. It is estimated that there is a 4.4 percent
chance that disaster losses will exceed this amountin any given year.

organizations, businesses, and individuals
contribute in the form of cash grants and aid inkind. The provision of aid in kind, while vital, canaffect the costs borne by governments for the
distribution of these goods.
In addition to the cash donations received///

from the international community in themonth after TC Ian—as mentioned above,
worth over T$1.5 million (US$837,000)—a

Sectionfurther T$25.7 million (US$14.4 million) has
been committed to facilitate the Tropical06

PCRAFI

194

Post-Disaster
Budget Execution

Tonga

On January 31, 2014, T$2.3 million (US$1.27///

million) was received under Tonga’s policy
with the Pacific Catastrophe Risk Insurance
Pilot and deposited into the emergency

Because of the early warning system and///subsequent statement of emergency, accessto the emergency fund was granted before
TC Ian made landfall. This early access facilitated///the purchase of rations and electrical supplies andensured that sufficient stock was available forfund. Anecdotal evidence from the government///

suggests that knowledge of the payout not only
enabled initial expenditures (since the government
knew it would be reimbursed), but also provided
an injection of cash to ensure that relief efforts
could continue.

mobilization immediately after the event.

During the first week after TC Ian, some line

The Cyclone Ian Relief Account was///

ministries made internal budget reallocations///

established alongside the emergency fundto facilitate donations from members of the
public, donors, and development partners.

///

One month after TC Ian made landfall, all relief
and response expenditures were diverted to thisto facilitate their own response efforts. It is///

not known how much was reallocated via these
intraministry transfers, since at the time of writing
the acquittal process was still underway.

account; the goal is to preserve the remainingbalance of the emergency fund in case anotherevent occurs within the same fiscal year.

Figure 5 — Sources of Response Funds Available

Section

06

Disaster risks

Disaster risk ﬁnancing
instruments

Amount of funds
available

High-risk layer(E.G. Major earthquake,major tropical cyclone)

Disaster risk insurance

Total catastrophe risk
insurance coverage
T$ 15m (US$8.4M)

Medium-risk layer(E.G. Floods, small earthquakes)

Contingent credit

Low-risk layer(E.G. Localized ﬂood, landslides)

Contingency budget,
national reserves, annual
budget allocation

Source: Government of Tonga; World Bank.

Contingency:
T$ 1.5M (US$0.8m)
Emergency fund:
T$ 5m (US$2.8m)

PCRAFI

Tonga

Fuel, distribution, and travel and freightand stockpile relief goods. NEMO was provided

accounted for 39 percent of initial relief

with the funds to purchase satellite phones but///

expenditures from the emergency fund. This

not for the required subscription; this meant thatlarge share demonstrates how costly it can be tocommunications to Ha’apai were delayed whileaccess the outer islands when facilitating response

NEMO sought to source access to satellite phones

efforts.

from Tonga Communications Corporation and///

On January 31, 2014, the cabinet approved///

the Tropical Cyclone Ian Response Plan, which
identified T$90.2 million (US$50.4 million) in
total requirements for the 12 to 18 months
following TC Ian (GoT 2014). By March the///government had been able to identify T$25.7
million (US$14.4 million) toward this amount froma combination of government and donor funds.
One of the key lessons learned following///

TC Ian was the importance of adequately
equipping the NEMO for response andensuring that its budgetary allocation is
sufficient to pay for satellite phones subscriptions///

New Zealand.

195

PCRAFI

196

Tonga

Domestic Catastrophe
Risk Insurance Market
The non-life (general) insurance market inproperties that had an engineer’s certification of

Tonga is small not only in absolute terms,

compliance with the cyclone (wind load) standard.

///

but also relative to the size of the country’s
population and economy. Total non-life

The primary accumulation of exposure is on the///insurance premium is T$$7.6 million (US$4.3

island of Tongatapu, which includes the capital,

million). This equates to premium per capita of

Nuku’alofa.

around T$75.2 (US$42), which is lower thanrates in other Pacific Island Countries (PICs).
It is estimated that around 15 percent of theinsurance business in Tonga is placed offshore byinternational insurance brokers.

Tonga’s comparatively low non-life premium///

per capita—T$75.2 (US$42), as mentioned
above—suggests low uptake of insurance
across the country. This could be because Tonga,///

Tonga has no legislation in place to regulate///

its insurance industry. In the absence of aunlike many other PICs, does not make motor///

regulator, the solvency of domestic insurers, andhence their ability to pay claims and withstandshocks such as natural disasters, are not being

Insurance for catastrophic perils of///assessed by any government agency. It is notearthquake and cyclone is available in thepossible to confirm that insurers have adequate

market and can be included in property

financial security to meet any catastrophe
exposures. The absence of a regulator also has

insurance products. The peril of earthquake is///implications for consumer protection, as nocovered as standard under property policies (suchgovernment agency is ensuring the appropriatenessas homeowner policies, for example). Cycloneof insurance products sold in the market.
The main catastrophic hazard in Tonga is the///Sectionvehicle insurance compulsory.

tropical cyclone, although earthquake andtsunami exposures are also present. Insurers

insurance is not covered under standard property
coverage wordings, and is available by extension
only. Property insurance rates for the cyclone peril

///

06

advised that they were aware of the potential(0.25 percent) and earthquake peril (0.15 percent)cyclone exposure and that they insured only thoseare average for PICs.

PCRAFI

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197

The Tongan government does not have an///

indemnity property insurance program inplace for its infrastructure assets or property.

///

The government keeps no centralized registerof insurance arrangements made by individual
government departments, public authorities, orstate-owned enterprises (SOEs).
Most public enterprises in Tonga that manage///

public assets have insurance programs in placethat include indemnity property insurance.

///

The Ministry of Public Enterprises does not keep acentral record of those programs, leaving it to theindividual public trading authorities and SOEs toreport to their respective boards. It is not known
whether catastrophe risks are covered in theexisting property insurance programs.

Section06

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198

Tonga

Options for
Consideration
Tonga has implemented several DRFI tools

program for key public assets. This program

disasters. To strengthen those tools, the following

would include a full review of the current

recommendations have been suggested

insurance program for the government by MoF.

for consideration.

In addition, it would identify assets to be included

Recommendation 1: Develop an overarching///disaster risk financing strategy aligned toexisting processes. Tonga has a proactive
ex-ante approach to DRFI. To further enhance///existing procedures, it is recommended that
Tonga create an overarching DRFI strategy forendorsement by the cabinet. This would createa single document that articulated the financing
options available along with the associatedpolicies behind these tools. An action plan for
implementation activities is also recommended.
Recommendation 2: Develop an operations///

manual detailing the processes required
to facilitate swift post-disaster budget
mobilization and execution. This manual///

should clearly document the post-disaster budget
mobilization and execution procedures andprocesses for MoF staff. A manual that details
the processes in a single document would embed
Section06

Recommendation 3: Develop an insurance///

to improve its financial resilience to natural

existing process, such as the transfer of a staff
member from MoF to the NEMO, and would thus
be useful to staff who need to understand thecorrect procedures to follow during a disaster.

///and indicate appropriate coverage selection
for these assets. The potential for establishingan insurer vehicle could also be investigated if
deemed if appropriate.

PCRAFI

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199

End Notes
1 Modeled emergency loss is estimated to be 23 percent of total<sup></sup>

ground-up losses. Losses are modeled to provide an estimate ofsome of the costs that governments face when providing relief
supplies to those affected.

2 Modeled emergency loss is estimated to be 23 percent of total<sup></sup>

ground-up losses. Losses are modeled to provide an estimate ofsome of the costs that governments face when providing relief
supplies to those affected.

3 Priority for Action 4—“Reduce the Underlying Risk Factors”—<sup></sup>

has an associated key activity of financial risk-sharing mechanisms, such as insurance, while Priority for Action 5—“Strengthen
disaster preparedness for effective response at all levels”—includes the establishment of emergency funds such as contingency
budget, national reserves, and annual budgetary allocations(UNISDR 2005).

Section06

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200

References
GFDRR (Global Facility for Disaster Reduction and Recovery)
2012 The Sendai Report: Managing Disaster Risks for Resilient

SPC (Secretariat of the Pacific Community) 2011 Republic of
Marshall Islands: Investment in DRM, Suva, Fiji

Future, Washington D.C., U.S.A.
SPC (Secretariat of the Pacific Community) 2011 Vanuatu: InvestGoT (Government of Tonga). 2008. “Tonga’s National Disasterment in DRM, Suva, FijiManagement Plan.” Government of Tonga, Tongatapu, Tonga.
SPC (Secretariat of the Pacific Community) 2012 Papua New———. 2010. “Tonga’s Joint National Action Plan for Disaster Risk

Guinea: Investment in DRM, Suva, FijiManagement and Climate Change Adaptation.” Governmentof Tonga, Tongatapu, Tonga.

UNISDR (United Nations International Strategy for Disaster
Reduction). 2005. Hyogo Framework for Action 2005–2015:———. 2014. “Budget Statement 2014/2015.” Government of
Tonga, Tongatapu, Tonga.
———. 2014. “Tropical Cyclone Ian Response Plan.” National
Emergency Operations Committee, Government of Tonga,

Building the Resilience of Nations and Communities to Disasters. UNISDR, Hyogo, Japan.
World Bank 2010 Financial Protection of the State against Natural
Disasters; A Primer, Washington D.C., U.S.A.

Tongatapu, Tonga.
World Bank. 2011. Pacific Catastrophe Risk Financing Initiative:
IMF (International Monetary Fund). 2012. “Tonga 2012 Article IV
Consultation.” IMF, Washington, DC.
PCRAFI (Pacific Catastrophe Risk and Financing Initiative). 2012.
“Country Risk Profile: Tonga.” PCRAFI, [http://pacris.sopac.org](http://pacris.sopac.org).
———. 2014. “TC Ian Event Brief.” Prepared by AIR Worldwide.
San Francisco.
SOPAC (Pacific Islands Applied Geoscience Commission). 2005.
Pacific Disaster Risk Reduction and Disaster Management
Framework for Action (Regional Framework For Action or RFA)
2005-2015. SOPAC, Suva, Fiji.
SPC (Secretariat of the Pacific Community) 2011 Cook Islands:

SectionInvestment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment in

06

DRM, Suva, Fiji

Catastrophe Risk Assessment and Options for Regional Risk
Financing. Phase 1 Report . Washington, DC: World Bank.

Tonga

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201

Annex 3

Insurance Market Review, February 2014

Executive Summary

possible to confirm that insurers have adequate

The non-life (general) insurance market in

exposures. The absence of a regulator alsofinancial security to meet any catastrophe///

Tonga is small not only in absolute terms,
but also relative to the size of the country’s
population and economy. Total non-life

has implications for consumer protection,
as no government agency is ensuring theinsurance premium is T$$7.6 million (US$4.2

appropriateness of insurance products sold in the

million). This equates to premium per capita ofmarket.

///around T$75.2 (US$42), which is lower than rates
in other Pacific Island Countries. It is estimated thataround 15 percent of the insurance business in

The main catastrophe hazard in Tonga is///

tropical cyclone, although earthquake andTonga is placed offshore by international insurance

tsunami exposures are also present. Insurers

brokers.

advised that they were aware of the potential

Tonga has no legislation in place to regulate///

its insurance industry. In the absence of a///cyclone exposure and that they insured only those
properties that had an engineer’s certification of///regulator, the solvency of domestic insurers, andcompliance with the cyclone (wind load) standard.

hence their ability to pay claims and withstandThe primary accumulation of exposure is on theshocks such as natural disasters, are not beingisland of Tongatapu, which includes the capital,

assessed by any government agency. It is not

Nuku’alofa.

Table A .1— Non-life Insurers Operating in Tonga 2012

COMPANY
National Pacific Insurance(Tonga) Ltd
Federal Pacific Insurance
Company Ltd
Dominion Insurance (Tonga)
Ltd.
Source: World BankCOUNTRY OF
INCORPORATIONSTATUSFINANCIAL SECURITY

Tonga

Local company

None prescribed

Samoa

BranchNone prescribed

Section
Tonga

Local company

None prescribed06

PCRAFI

202

Tonga

Table A .2— Pacific Non-life Insurance Premium per Capita 2012 (US$)

MARKET

GDP MILLIONSPOPULATION

GDP PERCAPITA

MARKET
PREMIUM

PREMIUM PER
CAPITA$342

Cook Islands$305

19,300$15,823$6,600,000

Fiji$3,908874,700$4,467$97,500,000$111

Marshall Islands$182

52,560$3,470$3,000,000

$57

Samoa

$683

188,900$3,619$17,000,000$90

Solomon Islands$1,008549,600$1,130$13,000,000

$24

Tonga

$471

104,900$4,495$4,400,000$42

Vanuatu$781

247,300$3,182$16,500,000$67

Source: World Bank

Tonga’s comparatively low non-life premiumthat include indemnity property insurance.

per capita—T$75.2 (US$42), as mentioned

The Ministry of Public Enterprises does not keep aabove—suggests low uptake of insurance

central record of those programs, leaving it to the

///

///

across the country. This could be because unlike

individual public trading authorities and SOEs tomany other PICs, Tonga does not make motor

report to their respective boards. It is not known

vehicle insurance compulsory.

whether catastrophe risks are covered in the///

Insurance for catastrophic perils of earthquake

existing property insurance programs.

///

and cyclone is available in the market and canbe included in property insurance products.

Insurance Market Overview///

The peril of earthquake is covered as standard
under property policies (such as homeowner

Total non-life (general) insurance premium,///policies, for example). Cyclone insurance is not

all classes including aviation, is estimated incovered under standard property cover wordings,

Tonga at T$$7.6 million (US$4.2 million). The

and is available by extension only. Property

majority of risks underwritten are placed withinsurance rates for the cyclone peril (0.25 percent)domestic insurers. Insurance industry sourcesand earthquake peril (0.15 percent) are average for

estimated that only 15 percent of the local

PICs.

insurance business is placed with offshore insurers,///

which is low in the context of the region.

The Tongan government does not have an///

indemnity property insurance program inplace for its infrastructure assets or property.

Section

There are three non-life insurers operating in///(Tonga) Limited (NPI) is a subsidiary of NPI (Samoa);

of insurance arrangements made by individual

Dominion Insurance (Tonga) Limited is a subsidiary

government departments, public authorities, orof Dominion Insurance Limited (Fiji); and Federal

state-owned enterprises (SOEs).

Pacific Insurance Company Limited is a branch of a

Most public enterprises in Tonga that manage

///

06

the Tongan market: National Pacific Insurance

The government keeps no centralized register

public assets have insurance programs in place

Samoan company (see table 1).

PCRAFI

Tonga

203

Table A .3— Pacific Commercial Property Insurance Rate and Deductible Comparison

MARKET

GENERAL
EARTHQUAKEDEDUCTIBLESAVERAGE
EARTHQUAKE RATEAVERAGE CYCLONE
RATE

GENERAL CYCLONE
DEDUCTIBLE
20% of sum insured

Cook Islands

0.12%

2% of sum insured

0.45%

Fiji

0.08%

10% of sum Insured

0.30%

Samoa

0.12%

2% of sum insured, or
5% of loss

0.20%

20% of loss
2% of sum insured, or
5% of loss

Tonga

0.15%

5% of sum insured

0.25%

5% of sum insured

Vanuatu

0.30%

5% of loss

0.17%

20% of loss

Source: World Bank 2013
Note: Average market rate percentage of value based on insurance industry sources.

The main broker active in the market is Willis

London market, a major international insurance

New Zealand Limited; it handles most insurance

market that includes Lloyd’s of London.

arrangements for commercial businesses, publicauthorities, and state-owned enterprises (SOEs) in
Tonga. Insurance industry sources reported that
there were other brokers from New Zealand andAustralia who managed some smaller businessinsurance accounts.

Local property insurance rates in Tonga are similar
to those charged in other PICs, as detailed intable 3. The local earthquake insurance averagebasis rate used in Tonga is 0.15 percent, whichis consistent with the earthquake basis rate usedin other Pacific countries and by New Zealand’s

As shown in table 2, the estimated non-life

Earthquake Commission. The local average basis

premium per capita in Tonga—T$75.2 (US$42)—israte for cyclone extension was quoted at 0.25

lower than rates in other Pacific Island Countries

percent, again consistent with other PICs.

(PICs). The low premium per capita could be
explained by a number of factors. On the supply
side, limited market penetration by non-life insurers
could result from the pricing of policies, an effectof competition in a small market and of insurers
having offices on Tongatapu only. On the demandside, there could be limited awareness of the roleand value of insurance products, or issues withproducts’ affordability. A mix of all these factors
may explain why take-up of insurance is low in
Tonga.

There are a number of limitations with thiscomparison, such as variation in property
insurance rating due to the location of premises,
construction, occupation, fire protection,
frequency of expected losses, and the amount andtype of deductible on policies. It is not possible
to use average rating data as an exact basis for a
specific company or individual risk. It is possible,
however, to get a general sense of how property
insurance rates in respective markets compare to
one another.

There are no restrictions on placing insurance
offshore. Of the estimated 15 percent of themarket premium that is placed offshore by Willis

SectionNew Zealand Limited, most is placed into the06

PCRAFI

204

Catastrophe Risk Exposure
and Capacity
The main catastrophe hazard in Tonga is fromtropical cyclones, although earthquake andtsunami exposures are also present. Insurers
advised that they were aware of the potential
exposure and insured only those properties that
had an engineer’s certification of compliancewith the cyclone (wind load) standard. Anecdotal
comments suggest that under half of insured
properties are insured for cyclone. The primary
insurance accumulation exposure was on the mainisland of Tongatapu, which includes the capital,
Nuku’alofa.
Catastrophe risk insurance presents a particularchallenge to insurers’ exposure management,
because unlike other types of insurance, it presents
the possibility of large correlated losses. Insurers
need to use a combination of reinsurance, reserves,and diversification within their portfolio to ensurethat they can withstand large disaster shocks
without threatening their solvency. The capacityof the domestic market in Tonga is constrainedby the small number of participants and thelimited premium volume. Although some risk isplaced offshore, the high cyclone risk has proveda deterrent to market expansion in the past. In
1985, for example, New Zealand Insurance Limited
withdrew from the Tonga market; and in general
New Zealand–based insurers have shown limited
willingness to provide catastrophe risk insurance
capacity to Tonga because of its exposure to
cyclones (Crocombe 1992).
Reinsurance

///

///

NPI companies. In its 2011 annual report, Tower
Insurance Limited specifically advised that its
event excess (net retention) had increased to $NZ
6.7 million and that it had protection for two
catastrophe events within the program for the
2011–2012 period (Tower Limited/Tower Capital
Limited 2011). The reinsurance program is notdetailed in the 2012 report, but it would be
expected to follow the previous arrangements.
Insurers in the Pacific region using the international
reinsurance markets have been adversely impacted
by significant increases in reinsurance costs inrecent years. These increases have been partly
driven by a number of catastrophe events in
the Asia Pacific region, which have caused large
losses to the international markets and prompted
them to review their pricing of “nonpeak
risks—that is, risks underwritten outside of thecore markets of the United States, Europe, andJapan. In particular, in 2011 the global market
suffered natural catastrophe insured losses ofover US$110 billion—the second-largest ever
(Swiss Re 2012). What made this year significant
for insurers (and reinsurers) in the Pacific was thenumber of events that occurred in the Asia Pacificregion: earthquakes in New Zealand and Japan,
floods in Australia and Thailand, and a cyclone
in Australia. The Global Insurance Market Report(IAIS 2012) advised that these Asia Pacific events
accounted for 61 percent of the insured losses
from natural catastrophes in 2011, compared to a
30-year average of 18 percent. As a consequence,adjustments were made in reinsurance capacity
and risk premiums went up.
Products///

Section06

It is understood that at least one of the threedomestic insurers uses the international reinsurance
markets to increase its capacity to underwrite
catastrophe risks. NPI (Samoa) advised that its
operation in Tonga is included in the groupreinsurance program arranged by Tower Insurance
Limited for all Pacific subsidiaries, including the

Tonga

///

NPI uses Industrial Special Risks (ISR) wordings
for major commercial, public authority, and SOE
property insurance. Its ISR wording is based on
PNG insurance industry standard wording. If theinsurance is placed with the London market, thena Material Damage/Business Interruption (MDBI)
wording, which is similar to the ISR wording, isPCRAFI

Tonga

205

Box 2— Past Catastrophe Events
Cyclones///

Earthquakes

///

///

///

Damaging cyclones within Tonga have been reported in 1961 (unnamed),On September 29, 2009, an 8.1 magnitude earthquake struck 185km (1151982 (Isaac), 1997 (Hina), 2001 (Waka), and 2004 (Heta). Of these, Cyclone

miles) east-northeast of Hihifo in northern Tonga. It is reported that houses

Hina caused the most damage—the total was estimated at T$$18.2

on islands nearest to the epicenter suffered damage. The resulting tsunami

million (US$10.2 million) in 1997 values (Fiji Meteorological Service 1997).

killed nearly 200 people, injured hundreds more, and caused damage inInformation on the insurance impacts of these earlier events is not available.

Tonga, American Samoa, and Samoa. There have been no insurance claims
reported in Tonga, but insurance industry sources in Samoa advised that

More recently—that is, in January 2014—Cyclone Ian caused significant

approximately 150 claims were lodged there, with insured losses estimateddamage to property in the Ha’apai island group. Modeled ground-up losses

at SAT $10 million (US$4.3 million).

from the cyclone have been estimated at US$49.3 million (PCRAFI 2014),
Insurance consequences of recent catastrophe eventswith damage reported to 1,094 buildings. As Tonga has no insurance

///

///

regulator, it has not been possible to obtain accurate details of insurance
claims. But according to industry sources, 70 claims have been lodged

The earthquake and tsunami in 2009 and Cyclone Ian in 2014 have had

locally with an estimated incurred value of T$$1.18 million (US$660,000).

limited impact on local insurers in Tonga. But these events are likely to

There are no data available on insurance claims lodged with offshore

affect reinsurance capacity and rates for property catastrophe risk over the

insurers. The low number of claims and low value suggest a very low

next few years, and possibly to raise property insurance rates for Tonga.

insurance penetration in the Ha’apai group, and this was confirmed by
Darryl Williamson, NPI (Samoa) General Manager, in a Radio New ZealandInternational interview on February 11, 2014.

used. These wordings include coverage of specified
natural perils, such as earthquake, but do not
automatically cover cyclone risk.

Insurance Law and Regulation
There is currently no insurance law or///

regulation in place in Tonga. The National///

Cyclone insurance is available only by extension
from local insurers and is limited to thosebuildings where the insurers are provided with anengineering cyclone certificate confirming that thebuilding meets the building code for cyclone. Thesecertificates are valid for seven years. The London
market may include windstorm automatically, butwith higher deductibles, increasing the risk retainedby the insured party.
Commercial Package or Business Protection
wordings are used for small to medium enterprises,
and coverage is taken as either Multi Risks(accidental damage including earthquake andcyclone by extension) or as Specified Risks (fireand extraneous perils). These policies generally
follow the perils insured under the MDBI, although
coverage may be more restricted.

Reserve Bank of Tonga is currently the regulator
for banks, and in many PICs the reserve or central
bank also acts as insurance regulator. The National
Reserve Bank of Tonga advised that it would giveconsideration to taking the role of supervisor ofpension funds and insurance, but would needtechnical assistance with any legislation.
With no insurance law, there are no specificrequirements for local insurers in relation to capitaland solvency, other than those provided in the
Companies Act 1995. Insurance accounting is
specialized, and most countries have recognizedthat specific insurance capital and solvency
requirements are needed, over and above those

Sectionprovided in company legislation.

06

PCRAFI206

Box 3— Tonga Airports Ltd.
Tonga Airports Ltd. (TAL) is a state-owned entity managing the airport

is required to insure the public assets and report details of the insurance

facilities. TAL has an operational risk management policy in place, which

program to the Electricity Commission. TPL has a coinsured MDBI property

includes risk mitigation and financial solutions. It also has a risk register ininsurance policy; 50 percent is placed with NPI and 50 percent is with aplace and is able to assess the potential financial impacts of identified risks.

panel of London market (Lloyd’s) insurers. Buildings, generation plant, andTAL advised that it has property insurance, though this insurance is forother contents are insured. Transmission and distribution lines are excluded.

current market (indemnity) value only. The property insurance includes the

The perils insured include earthquake, tsunami, cyclone, and flood. TPL isperils of earthquake and cyclone. The airport runway pavements are also

aware of deductibles and property excluded from the coverage, and has

insured for physical damage. TAL advised that its insurance is placed with

set aside T$$1 million to allow for potential disasters, such as earthquakes

the London market (Lloyd’s).

or cyclones.

TAL has a reserve fund and contingency budget to cater for small events

In January 2014, when Cyclone Ian passed over the outer island Ha’apaithat are below policy deductibles. They also have retained earnings to covergroup, it damaged property managed by TPL. It has been reported thata long-term development plan, and in the event of a major disaster these

the costs to repair the damage to transmission and distribution lines

could be reallocated to assist with reconstruction.

will exceed T$$3 million (US$1.7 million) (PACNEWS 2014). Because
the existing coverage excludes damage to transmission and distribution

Tonga Power Ltd.

///lines, these costs will be an uninsured loss. TPL advised that insured///

Tonga Power Ltd. (TPL) is a state-owned entity that has the concession
to manage the electricity supply. TPL has a risk management policy andrisk register in place, and its risk management committee meets every six
months to review them. Included in the policy is a section on risk financing,including insurance. Under the terms of the concession agreement, TPL

losses to generator building, transformers, and equipment totalled over
T$$700,000 (US$391,000). In addition to the insurance claim, T$2.1
million (US$1.2 million) has been donated by the New Zealand government
for restoration and upgrading of the power network (Radio New ZealandInternational 2014).

Building Controls and Standards

Insurers have taken proactive steps to ensure
cyclone building standard compliance by requiring

Tonga has a solid legal basis for all

engineering certificates for insured properties,

construction in the Building Act 2002, Building

rather than relying on the government’s

Regulations 2007, and a standard building

enforcement of the building code.

///

code. The code is based on Australian and New///

Zealand standards, including the New Zealandearthquake code (NZS4203) and Australianwind loads code (AS1170.2) for cyclone. A local
engineer in Tonga advised that most commercial

Section06

Insurance of Public Assets
There is no insurance program in place forgovernment property or infrastructure assets

and government buildings constructed after 2007

in Tonga. The Ministry of Finance and National

were built in accordance with the code for both

Planning has a project underway to complete anearthquakes and cyclones. Building inspectors

asset register, which will allow the government

are known to carry out inspections on larger

to identify those key public assets to be insured.

construction projects, which suggests that the

According to the Ministry of Finance andbuilding code is being followed for commercial

National Planning, consideration was being given

structures. According to the engineer, there islimited supervision of residential construction, andto including government property indemnity
insurance in the 2015 plan.

it is not clear whether residential properties comply

The Ministry of Public Enterprises is responsible

with codes.

for the overall supervision of all public trading

Tonga

PCRAFI

Tonga

207

authorities and SOEs. The ministry advised thatin other PICs. Tonga has no regulator, so insurer

most public trading authorities and SOEs had

capital, solvency, reinsurance, catastrophe

property insurance programs in place. It does not

exposures, and aggregates are not reviewed bykeep a central record of those programs, leaving

any government agency. Proper regulation would

it to the individual public trading authorities andensure that local insurers have adequate financial

SOEs to report to their respective boards. It is notsecurity and capacity to meet any catastrophe

known whether catastrophe risks are covered in

exposures.

///the insurance programs in place.
The government keeps no centralized registerof insurance arrangements made by individual
government departments, public authorities, or
SOEs. A register of this type would allow a more

References
Crocombe, R. G. 1992. Pacific Neighbours: New Zealand’s Relations with Other Pacific Countries. Christchurch, New Zealand:

coordinated approach to property insurance

MacMillan Brown Centre for Pacific Studies and Institute formanagement and purchasing, which in turn might

Pacific Studies.

provide premium cost benefits.

Fiji Meteorological Service. 1997. “Tropical Cyclone Report 96/8:
Tropical Cyclone Hina, 13–16 March 1997.” http://www.

Options for Consideration

pacificdisaster.net/pdnadmin/data/original/CRPTON1998TC
Hina.pdf.

Recommendation 1: The government should

IAIS (International Association of Insurance Supervisors). 2012.

develop an insurance program for key public

Global Insurance Market Report. 2012 edition. http://www.

assets and include this in a broader disasteriaisweb.org/index.cfm?event=getPage&nodeId=25308.

///

risk financing and insurance strategy. This///approach would include completing a centralized

PACNEWS. 2014. “$3 Million to Rebuild Ha’apai Power Network.” Vanuatu Daily Post, January 16.

asset register with up-to-date replacement values,
an assessment of probable losses, and a review
of existing indemnity insurance to ensure that the
major catastrophe perils of earthquake/tsunami
and cyclone/ sea surge are included, and thatthe government and SOEs are getting the best

PCRAFI (Pacific Catastrophe Risk and Financing Initiative). 2014.
“TC Ian Event Brief.” Prepared by AIR Worldwide. San Francisco.
Radio New Zealand International. 2014. “US$3.5 Million to
Restore Ha’apai in Tonga’s Power.” January 22.

available terms and conditions for the property
insurance premiums paid.
Recommendation 2: The government shouldStandards Australia Limited, AS1170 Minimum design loads on
structure, Part 2 Wind forces 1989, (superseded standard,
replaced by AS/NZS 1170.2:2011)///

set up a central insurance register as partof the disaster risk financing and insuranceStandards New Zealand, NZS4203 1984, Code of practice forgeneral structural design and design loadings for buildings,

strategy and update the register as insurance

Part 3 Earthquake provisions, (superseded standard, replaced

contracts fall due. The government currently has

by NZS 1170.5:2011)///no central register of property insurance in place
for individual government departments, publicauthorities, and SOEs.
Recommendation 3: Tonga should introduce///

legislation to regulate insurance companies,
modeled on insurance acts already in place

Swiss Re. 2012. “Natural Catastrophes and Man-Made Disasters

Sectionin 2011.” Sigma 2/2012. [http://www.swissre.com/sigma/](http://www.swissre.com/sigma/).
Tower Limited/Tower Capital Limited. 2011. Annual Reports.
http://www.tower.co.nz/investor-centre/reports/.

06

PCRAFI

208

Glossary
Someone who acts for the insurance company in arranging insurance contracts. There are two mainAgenttypes of agents: tied agents, who act for one insurer only, and general agents, who act for multiple
insurance companies.

BrokerCapacity

Captive insurer

Someone who acts as an agent for the insured in arranging an insurance or reinsurance programwith a provider of capacity.

The ability of an insurance company to provide insurance protection to clients, which is limited byits own financial strength and the reinsurance protection it has in place.

An insurance company wholly owned by a company or entity that insures the risks of the parent
entity and subsidiaries.
Insurance that reimburses individuals or entities for loss or damage to a financial position as close

Indemnity insurance

as possible to the position they were in prior to the event, in the context of the financial terms ofthe coverage (such as deductible/excess and limit).

Intermediaries

Net retention

Parametric insurance

Probable maximum loss
(PML)

The general term given to insurance agents and brokers.

The amount that an insurance company retains on a reinsurance contract and in particular anexcess of loss of contract.

A type of insurance that is triggered by the occurrence of a specific measured hazard event, suchas a certain magnitude of earthquake or category of cyclone.

The maximum value of a claim from a large or catastrophe event. May also be called MPL.

The insurance of physical assets such as buildings, plant and equipment, stock, and machinery.
Property insurance

The products used for this insurance are variously named as fire and perils, commercial or businesspackage, industrial special risks, or material damage insurance.

A risk transfer method used by insurance companies to transfer part of a single large risk or an
Reinsurance

accumulation of similar risks and so increase their capacity. Reinsurance helps to smooth theextreme results and effects of specific perils (such as catastrophe events) and therefore to reducethe volatility of an insurance portfolio.

Solvency margin

Section

06

The extent by which an insurer’s assets exceed its liabilities. Minimum statutory solvency
requirements are normally included in insurance acts or regulations.

Tonga

MARSHALL ISLANDS
February 2015
Disaster Risk Financing and Insurance

CHAPTER 07

Country Note

PCRAFI

210

MARSHALL ISLANDS

Executive Summary
The likelihood that a hazardous event will

US$100,000. Consequently the government relies

have a significant impact on the Marshallheavily on donor support to fund post-disaster

Islands has risen with the increasing levels

expenditures.

///of population and assets in the urban areasof Majuro and Ebeye. The low-lying atolls are

The Marshall Islands has a maximum amount

///

///

at risk of damage to both assets and people as aof US$15.6 million potentially available inresult of storm surges and tsunamis. In December

ex-ante instruments to facilitate disaster

2008, a state of emergency was declared following

response, which is equivalent to 44 percent ofweeks of high seas, which resulted from storm

the recurrent budget in 2013. These contingent

surges coinciding with high tides and two tropicalfunds are composed of US$0.2 million from thedepressions (Marshall Islands Government 2009;

contingency budget, US$0.1 million from theUNOCHA 2008). These events caused damage to

DAEF, and the maximum payout of US$15.3

roads, houses, and other infrastructure on the low-

million from the Pacific Catastrophe Risk Insurance

lying atolls of Majuro and Ebeye. Similar events are

Pilot. It is estimated that there is a 1 percent

expected to become more frequent with climatechance in any year that disaster losses will exceedchange and rising sea levels.

the total amount available. However, it should

The Marshall Islands is expected to incur, on///

average over the long term, annual losses of
US$3 million due to earthquakes and tropical
cyclones. In the next 50 years, the Marshall Islands///

be noted that the risk insurance pilot will release
funds only if certain pre-agreed upon event
magnitudes are reached. If the contingency budget
and DAEF alone are considered, there is an 18.6///

has a 50 percent chance of experiencing a loss
exceeding US$53 million, and a 10 percent chanceof experiencing a loss exceeding US$160 million

percent chance that funds will be exceeded in any
one year.
The government’s post-disaster budget///(PCRAFI 2011).

execution process relies on a variety of

The government takes an ex-ante approachfinancial tools, but the size of the economy

to financing the cost of disasters, but thelimits access to immediate post-disaster cash///

resources available are limited. While theresources. The government has dedicated, yetgovernment has a contingency budget and accesslimited, funds that can be accessed following

to the Disaster Assistance Emergency Fund (DAEF),

an event and used effectively; however, not all

the immediate cash available through the former

currently followed procedures are embedded

is only US$200,000 and through the later only

within the financial legislature, including those///

Section07///

PCRAFIMARSHALL ISLANDS

211

related to the unique requirements of post-disaster
financing.
A number of options for improving disaster risk
financing and insurance are presented here forconsideration:(a) develop an integrated disaster risk///

financing and insurance strategy;///(b) assess the domestic insurance market for///

both public and private assets to establish
what products are currently offered andto determine their level of uptake;
(c)

///

carry out a quantitative analysis to///determine whether contingent credit
could be an effective tool to access
additional liquidity post-disaster; and///(d) investigate the possibility of establishing///policies for financial assistance to disastervictims in remote communities.

///

Photo Credit

///

///

Stefan Lins/Flickr b

PCRAFI212

MARSHALL ISLANDS

Introduction
The Marshall Islands has a land area of 181km2

The Marshall Islands government, in conjunction

///

<sup>

</

scattered across a collection of 29 atolls andwith the Secretariat of the Pacific Community

five islands. Most of the atolls and islands

Applied Geoscience Division (SPC-SOPAC), thehave an elevation of less than 6m above sea

Secretariat of the Pacific Regional Environment

sup>level, including the capital, Majuro, many parts ofProgramme (SPREP), the United Nations

which are less than 1m above sea level. The low-

Development Programme (UNDP) Pacific Centre,

lying atolls and islands lie in an expanse of ocean

the United Nations International Strategy forof almost 2 million km2. This scattered geography

Disaster Reduction (UNISDR), and other partners,

increases both the time and cost involved in initial

has developed several institutional frameworks

post-disaster response.

on disaster risk management (DRM) and climate///

According to the 2011 Population and Household
Census, the population of the Marshall Islands

change adaptation at the national, subregional,
and international level, including the following:• Hyogo Framework for Action (HFA) 2005–2015

is 53,158.1 The two urban centers, Majuro andEbeye (a small islet on Kwajalein atoll), have

• Pacific Disaster Risk Reduction and Disaster

populations of 28,000 and 9,614, respectively.

Management Framework for Action (Regional

Ebeye has the highest population density in the

Framework for Action or RFA) 2005–2015

Pacific, equivalent to an estimated 66,750 people
per square mile; this is higher than the population• National Action Plan for Disaster Risk

density in Tokyo, estimated at 15,619 people perManagement, 2008–2018

square mile.2• Marshall Islands Emergency Response Plan,
Events in 2013 demonstrated that the

2010

///

Marshall Islands is extremely vulnerable tothe threat of both storm surge and drought.

• Policy for Climate Change Adaptation, 2006///

In May 2013 a statement of emergency was issued
because of severe drought conditions in the atolls• Joint National Action Plan (JNAP) for Disaster
Risk Management and Climate Changeof Mejit and Utrik, located in the north. In contrast,

Adaptation, 2011–2014

flooding forced the airport on the main island of
SectionMajuro to close on June 25, 2013. The seawallthat protects the runway broke in four places as a

07

Disaster risk financing and insurance (DRFI) is///a key activity of the HFA Priorities for Action

result of high tides and an associated storm surge.

4 and 5. The HFA is a result-based plan of action

Both of these incidents highlight the vulnerability

adopted by 168 countries to reduce disaster riskof the population and their assets, both public

and vulnerability to natural hazards and to increase

and private.

the resilience of nations and communities to///PCRAFIMARSHALL ISLANDS

disasters over the period 2005–2015. In the Pacific,
the HFA formed the basis for the development of
the Regional Framework for Action.

213

to meet post-disaster funding needs withoutcompromising their fiscal balance. This programis one application of the Pacific Catastrophe Risk
Assessment and Financing Initiative (PCRAFI).

The RFA cites DRFI activities as a key national

The Pacific DRFI Program is built upon a three-and regional activity. Theme 4—“Planning fortiered approach to disaster risk financing. These

effective preparedness, response and recovery”—

layers align to the basic principles of sound public

has an associated key national activity, “Establish afinancial management, such as the efficient

national disaster fund for response and recovery.”allocation of resources, access to sufficient

Theme 6 of the RFA—“Reduction of underlying

resources, and macroeconomic stabilization. The

risk factors”—cites the development of “financial

three tiers acknowledge the different financial

risk-sharing mechanisms, particularly insurance,

requirements associated with different levels

re-insurance and other financial modalities

of risk: (i) self-retention, such as a contingency

against disasters as both a key national andbudget and national reserves, to finance small

regional activity” (SOPAC 2005). These regional

but recurrent disasters; (ii) a contingent credit

implementation activities align with the three-tiered

mechanism for less frequent but more severe

disaster risk financing strategy developed by theevents; and (iii) disaster risk transfer (such as

World Bank.

insurance) to cover major natural disasters. See

///

///

Goal 2 of the Marshall Islands (2007) National

figure 1.

///

Action Plan for Disaster Risk Management

This report aims to build understanding///

seeks to “mainstream DRM in planning,of the existing DRFI tools in use in thedecision making and budgetary processes at

Marshall Islands and to identify gaps where

national and local levels.” This goal includes

engagement could further develop financial

establishing a sustainable fund for DRM.

resilience. The report also aims to encourage peer///

The Pacific Disaster Risk Financing and///Insurance Program enables countries toincrease their financial resilience against
natural disasters by improving their capacity
///

///

exchange of regional knowledge, specifically byencouraging dialogue on past experiences, lessons
learned, optimal use of these financial tools, andthe effect these tools may have on the executionof post-disaster funds.

Figure 1 — Three-Tiered Disaster Risk Financing Strategy

Risk Transfer

Low Frequency/
High Severity

International AssistanceSovereign Risk Transfer(e.g. Cat Bond/Cat Swap, (re)insurance)

Risk Retention

High Frequency/
Low Severity

Contingent Credit Lines

Source: World Bank 2010.

Insurance of Public Assets

Post Disaster Credit

SectionGovernment Reserves, Contingency Budget / Funds

07
Emergency Funding

Reconstruction

PCRAFI214

MARSHALL ISLANDS

Economic Impact ofNatural Disasters
Between 1988 and 2008, 18 natural disasters

Figure 2 — Building Locations///

affected around 12,700 people in the
Marshalls Islands. The estimated direct cost ofthese events was US$317 million (SPC-SOPAC
2012). Half of these disasters were slow-onset///

disasters such as droughts. Droughts have madeaccess to safe water an especially important issue
for the Marshall Islands. Droughts also increase therisk of water-borne diseases, since the supply ofwater for both drinking and sanitation is limited.
The frequency of drought events suggests that
there may be a case for establishing a drought
response budget line.
The likelihood that a hazardous event will///

have a significant impact on the MarshallIslands has risen with the increasing levelsof population and assets in the urban areasof Majuro and Ebeye. These low-lying atolls are///

at risk of damage to both assets and people as aresult of storm surges and tsunamis. In December
2008, a state of emergency was declared following
weeks of high seas, which resulted from storm
surges coinciding with high tides and two tropicaldepressions (Marshall Islands Government 2009;
Section07

UNOCHA 2008). These events caused damage toroads, houses, and other infrastructure on the lowlying atolls of Majuro and Ebeye. Similar events are
expected to become more frequent with climate

Source: PCRAFI 2011.

PCRAFIMARSHALL ISLANDS

215

Figure 3 — Direct Losses by Return Period

DIRECT LOSSES (MILLION USD)

300
250

TC + EQ

200

EQ

TC

150
100
50
Source: PCRAFI 2011

0
0

100

200

300

400

500

600

700

800

900

Note: TC = tropical cyclone; EQ = earthquake.

1000

MEAN RETURN PERIOD (YEARS)

change and rising sea levels. Figure 2 shows the

0 0.25 0.5

10° N

The remote atoll and island subsistence///

economies are highly dependent on

1

8° N

accrued over time.

Kilometers

agriculture, which in turn is highly susceptible

Kwajalein Atollto adverse weather conditions. An estimated

0///6,384 people were affected by the drought in

150 300

600

MajuroAtoll

Kilometers2013 (RMI 2013b). Household water catchments

6° N

MarshallIslands

provides an indication of the assets that have

12° N

Figure 4 — Average Annual Losses by Area

location of buildings in the Marshall Islands and162° E 164° E 166° E 168° E 170° E 172° E

and other water storage facilities ran out of water,
and levels of salinity in underground water sources

Ebeye

breached safety levels for consumption. The

KwajaleinAtoll

prolonged drought and high groundwater salinity

Lauralevels devastated food crops such as breadfruit,0banana, and taro. This situation will have long-

1

2

Kilometers

lasting impacts on food security and the health of

Kwajalein 0

0.5

1

Total Average Annual
Loss (thousand USD)
0 - 10
10 - 15
15 - 30
30 - 50

50 - 75
75 - 100
650
1830

the populations of the affected atolls.
The Marshall Islands is vulnerable to losses///

0

from tropical cyclones, which cause damage
to buildings, infrastructure, and livelihoods. In

0

0.25

1

0.5

1

Kilometers

2

3

///

1997, for example, Typhoon Paka caused US$80
million of damage to crops and affected 70 percent

KilometersDelapof houses on Ailinglaplap Atoll (PCRAFI 2011).
During a 20-year period, cyclones in the MarshallIslands caused on average US$63 million per

Laura
Majuro Atoll

Source: PCRAFI 2011

0 2 4

8

Kilometers Delap

Section07

PCRAFI216

MARSHALL ISLANDS

cyclone (SPC-SOPAC 2012); Typhoons Zelda, Axel,and Gay caused significant damage and loss within
the span of one year (1991–1992).
The Marshall Islands is expected to incur,///

on average, US$3 million per year in losses
due to earthquakes and tropical cyclones. In///

the next 50 years, it has a 50 percent chance ofexperiencing a per-event loss exceeding US$53
million, and a 10 percent chance of experiencing a
per-event loss exceeding US$160 million (see figure
3).
The expected average annual loss can also be
shown by area, as in figure 4. Areas colored in
red indicate high levels of average annual losses,
ranging from US$0.78 million to US$2.1 million.
The full risk profile for the Marshall Islands can befound in annex 3.

Photo Credit

///

///

Stefan Lins/Flickr b

MARSHALL ISLANDSPCRAFI

217

Public Financial
Management of
Natural Disasters
In the Marshall Islands, a major constraint///

The CFA agreement was amended in 2004 to///in financial response to natural disasters is

include specific guidance on establishing thethe limited number of staff to implement

Disaster Assistance Emergency Fund (DAEF)—

activities. Authority lies with a few key individuals

discussed below—and accessing additional post-

who are also responsible for many other portfolios

disaster financial support from the U.S. Agency for

///

///

of work. The drought response occurred at an
already busy time—that is, when the Ministry of
Finance was preparing for the annual regional
Forum Leaders Meeting and working on the 2014
budget and annual donor round table.
The Compact of Free Association (CFA)International Development (USAID). According to
the amended CFA, additional finance is available
once one of the following criteria is met: “(i) the
President of the Republic of the Marshall Islands
officially declares a national state of emergency
in accordance with the laws of the Governmentof the Republic of the Marshall Islands; (ii) the///

agreement, established with the United Statesin 1986, provides the Marshall Islands witheconomic assistance worth around US$45
million a year until the agreement expires in
2023. In 2013 the CFA agreement provided over///disaster is deemed to be beyond the ability of
the Government of the Republic of the MarshallIslands to respond, including taking into accountthe available resources of the Disaster Assistance
Emergency Fund and the need to protect thesustainability of the Fund; or (iii) the Government

US$72 million in funds in total. But use of theof the Republic of the Marshall Islands has

funds must be related to the specific areas detailed

requested assistance through the United Nationsin the agreement, which states that “funds

designated representative for the coordination ofreceived under the CFA, as amended shall not bedisaster and humanitarian assistance.” (CFA 2004).

transferred to any other activity, or reprogrammed
or expended for any other purpose during thefinancial year” (Marshall Islands Government
2013a).4

In 2004, the renewal of the CFA agreement

Section///provided a stream of grants, due to decline
over time, that were aimed primarily at

07

PCRAFI218

MARSHALL ISLANDS

Post-Disaster
Budget Mobilization

the education, health, and infrastructure
sectors. When the annual grants under the
CFA agreement cease in 2023, the MarshallIslands’ fiscal stress is likely to increase, as is
its financial vulnerability to natural disasters.

///

The Marshall Island already faces many challenges
associated with gaining economic and fiscal selfsufficiency, and these are made greater by theoccurrence of natural disasters.

The Ministry of Finance plays a leading role///in facilitating disaster response efforts. The///

ministry waives normal tendering procedures uponreceipt of the statement of emergency, and it
executes payments rapidly, sometimes on the sameday. Following the declaration of disaster in May

Effective post-disaster financial response relies on

2013, the Ministry of Finance led a national post-

two fundamental capabilities:

disaster assessment of the ongoing drought in the(a) The ability to rapidly mobilize funds postdisaster; andnorthern islands, and it led a flash-funds appeal togenerate and consolidate donations from membersof the public and local businesses.

(b) The ability to execute funds in a timely,

The government takes an ex-ante approach///transparent, and accountable fashion.
The next section discusses the existing proceduresfor post-disaster budget mobilization and execution
and where possible provides examples of their use.

to DRFI, but its available resources are limited.
While the government has a contingency budget
and access to the DAEF, the immediate cash
available through the former is US$200,000 and

Table 1— Sources of Funds Available
SHORT TERM
(1-3 MONTHS)
Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Tax Incentives (Flash Appeal)
Ex-ante Financing
Emergency FundContingency Budget
Contingent Credit

SectionSovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance

07

Source: Government of Marshall Islands; World Bank.

MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)///PCRAFIMARSHALL ISLANDS

219

Box 1— The Pacific Catastrophe Risk Insurance Pilot
The Pacific Catastrophe Risk Insurance Pilot aims to provide

government in the aftermath of a severe natural disaster that disrupts theimmediate budget support following a major tropical cyclone orprovision of government services. Countries can choose between threeearthquake/tsunami. The insurance is designed to cover emergency

layers of coverage—low, medium, and high—depending on the frequency

losses, which are estimated using both a modeled representation of theof events. The lower layer will cover events with a return period of 1 in 10

event based on hazard parameters and a calculation of total modeled

years, that is, more frequent but less severe events. The medium layer will

physical damage. Unlike a conventional insurance scheme, where a payout

cover events with a 1-in-15-year return period, while the higher layer will

would be assessed against actual incurred costs, this scheme pays out oncover less frequent but more severe events, or those with a return period

the results of a model. The advantage of this approach is that it results inof 1 in 20 years. However, countries may request that a more customized

a much faster payout. The payout would act as a form of budget support

option be developed for them.

///

///

and would go some way to cover the costs that would be incurred by thethrough the latter is US$100,000. Consequently

in gray are for generic instruments that to date

the government relies heavily on donor support tohave not been used in the Marshall Islands.

fund post-disaster expenditures.

Ex-Ante Practices and Arrangements

Ex-post financial measures such as post-///disaster budget reallocation take between

The uncertainty surrounding international

one and two weeks to mobilize and requireassistance has increased pressure on countries tocabinet approval.Reprogramming of funds canestablish domestic sources of finance for post-

be done only following the declaration of disaster,

disaster relief. This includes the establishment

which is normally a few weeks after the statementof national reserves or the transfer of risk toof emergency. This means that the reprogrammingthe international insurance market. The ex-anteof funds between ministries can take up to six

practices and arrangements that have been madeweeks, although ministers can reprogram up toby the Marshall Islands are described below.

///

5 percent of their budget between departments

Disaster Assistance Emergency Fundwith relative ease. Interdepartment reprogramming
can be done within one or two days following thedeclaration of disaster.
The Marshall Islands has a variety of ex-ante///and ex-post financial tools, and the time ittakes to mobilize and execute these funds
varies significantly. Building on the World Bank///

disaster risk financing and insurance framework(see annex 1), table 1 shows the ex-ante andex-post financial tools available, indicates thoseutilized by the Marshall Islands, and gives indicative
timings. The tools utilized by the Marshall Islands
are highlighted in blue. Those sections highlighted

Under the CFA agreement with the United///States government, the DAEF was legally
established in 2004. The fund, which may///

be drawn on only to pay for assistance andrehabilitation after a disaster or emergency,
was first implemented in 2005. Each year, uponreceipt of US$200,000 from the Marshall Islands
government, the DAEF receives an equal amountin the form of a grant from the United States. The
funds held within the DAEF can accrue interest

Sectionuntil they are released post-disaster. The total

07

PCRAFI

220

Sovereign catastrophe risk insurance

amount in the fund as of June 2013 was just over
$1.5 million.

MARSHALL ISLANDSThe Marshall Islands’ participation in the///

The amount of funding released following

Pacific Catastrophe Risk Insurance Pilot

an event was increased in 2013 as a means

provides access to an injection of liquidity///of setting a precedent for other donor funds.

///

within the first month of an eligible disaster.

///

After the government declares a state of national

The pilot was launched on January 17, 2013, andemergency, it can withdraw an amount of up

the Marshall Islands opted for coverage against

to US$100,000 per event. This amount reflects

tropical cyclones with the associated hazards ofrenegotiation in 2013: initially, the amount wasstorm surge, precipitation from tropical cylone,

S$50,000, but it became apparent that otherand flooding caused by tropical cyclone (see table

donors saw this amount as a precedent and2).

contributed the same amount. The same pattern
was witnessed during the drought response in
March 2013: after the government withdrew
US$100,000, other donors matched this amountIn the event that the Marshall Islands///

experiences a tropical cyclone with anestimated emergency loss that exceeds thewith their initial contributions.

selected attachment point, the country will

Contingency budget

its contingency budget. Events that generate

be eligible for a payout worth over five times///

an emergency loss beneath the attachment point
5

The Marshall Islands holds a nominal///

contingency budget for the payment of
unforeseen expenditures equivalent tomust be managed by optimizing the use otherfinancial tools.

US$200,000 each year. The process for deciding

External debt///

to draw on these funds is not legislated but reflects
self-imposed restraint and prudence by the staff
at the Ministry of Finance. The limited amount ofcash means it can be easily exhausted either by adisaster or another unforeseen event.

The current stock of public debt is equivalent///

to 55.9 percent of gross domestic product(IMF 2013). Of this, approximately 97 percent
is external. An estimated 64 percent of theexternal debt is central government debt

Table 2— Selected Insurance Coverage, 2014–2015 Pilot Season
TROPICAL CYCLONE

Section

Policy period

November 1, 2014–October 31, 2015

Peril selected

Tropical cyclone

Layer of coverage selected

1 in 15 years

Coverage limit as a percentage of contingency budget>500 percent

Reporting agency

Joint Typhoon Warning Center

Source: World Bank.

07

PCRAFIMARSHALL ISLANDS

to the Asian Development Bank, with the221

Budget reallocation

balance being state-owned enterprise debt

The Marshall Islands, like many small island

guaranteed by the central government.

///

states, has limited sources of domestic

The Asian Development Bank debt is all on
concessional terms. It is therefore expected thatrevenue and limited budget flexibility. The
///

///

the level of existing debt will remain manageable
in the coming years, although an increase in bothprincipal repayments and interest is expected tolargest sources of domestic revenue are taxes
on trade and consumption, closely followed byrevenue from taxes on income and profits, which
respectively generated US$17.3 million andoccur from about 2017. The current debt-service
ratio is estimated to be equivalent to 10 percent of
the export of goods and services, down from 16.5

US$11.3 million in fiscal year 2012/13 (IMF 2013).
Grants from the CFA and from development

percent in 2010 (IMF 2013).

partners amounted to $59.2 million. This means

Given the relatively low levels of debt

approximately 62 percent of the annual budget.

servicing, increasing the use of contingent

The country’s limited budget flexibility and limited

that contributions from donors account for///

credit could be explored as an alternative tosecuring cash reserves for disaster response.

immediate access to cash make it difficult to fund///The opportunity cost of holding cash is high for acountry that is driven by the expenditures of the
public sector. Holding cash may also result in thediversion of funds from investment in the healthand education sectors, which would have long-disaster response domestically.
The reprogramming of funds requires cabinet///

approval under Article VII, Section 7 of the
Marshall Islands Constitution, and a maximumof 5 percent of funds can be reprogrammed.

term development impacts.

However, under the Financial Management Act

Ex-Post Practices and Arrangements

their departments with approval from the

Because disasters often exceed a country’s capacity
to cope with them, there will always be a needfor ex-post practices and arrangements. An
optimal strategy for DRFI relies on a combinationof ex-ante and ex-post financial instruments.
Ex-post arrangements benefit from being able
to establish the extent of the disaster andprioritize the response needs. As a result thesearrangements take longer to implement than exante arrangements, but they can often mobilize
larger amounts of finance. This section discusses
the ex-post practices and arrangements that havebeen made by the Marshall Islands.

///

1990, ministers may reprogram funds between
Secretary of Finance (Marshall Islands Government
1990). Table 3 shows the total budget classified
into three core categories: wages, commitments,and operations. Of those three categories, only
the amount allocated for operations could be
reprogrammed in the wake of a disaster—that is,
US$3.6 million for the fiscal year 2013.

Donor funds for relief
and reconstruction
While donor funds will always be required///

following a disaster, there will always be
an element of uncertainty surrounding how
much will be provided, what will be provided,///

and when the funds will arrive in country.

SectionConsequently, overdependence on internationalrelief as a source of post-disaster financing can

07

PCRAFI

222

MARSHALL ISLANDS

Table 3— Fiscal Year 2013 Proportion of General Budget Expenditures
FISCAL YEAR 2013 US$M

% OF TOTAL NUDGET

Wages and salaries

19

53 percent

Commitments

13.1

37 percent

Operations

3.6

10 percent

Total budget

35.7

100 percent

Source: Marshall Islands Government 2013a.

Total Response Funds Available

delay the provision of initial relief and can inhibit
ex-ante contingency planning. Development
partners, international organizations, local
nongovernmental organizations, businesses, andindividuals contribute in the form of cash grants
and aid in kind. The provision of aid in kind, whilevital, can affect the costs borne by governments for///which is equivalent to 44 percent of the recurrent
budget in 2013. Figure 5 shows the three-tiered
DRFI strategy alongside the sources of funds andDonor assistance for reconstruction often

the Marshall Islands following an event. However,takes significant amounts of time and involves

it should be acknowledged that the contingency

negotiation between the country and its

budget is not exclusively for disaster response, anddonors to establish key priorities. However,

it is unlikely that the full US$0.2 million would

significant amounts of finance can be assigned. For

be available for response. In addition, there isexample, the total response plan for the drought

likely to be a significant gap after the contingency

in 2013 was estimated at US$4.8 million, of which

and DAEF have been exhausted before a payout

US$1.5 million was funded by contributions fromunder the catastrophe risk insurance pilot would

donors and development partners.

be triggered. Additional tools and donor funds

the maximum amounts of funding available to///Flash appeal
Following the statement of emergency for the
drought in 2013, the Ministry of Finance led aflash appeal to generate and consolidate donations
from members of the public and local businesses.
This is the first time the government has led
such an appeal to collect funds for relief andresponse efforts.

07

instruments to facilitate disaster response,the distribution these goods.
///

Section

The Marshall Islands has a maximum amount///of US$11.2 million available in ex-anteshould be used to minimize any such gap. It isestimated that there is a 1 percent chance in any
year that disaster losses will exceed total response
funds available. However, there is an 18.6 percent
chance that disaster losses will exceed the
combined funds of the contingency and DAEF in
any one year.

PCRAFIMARSHALL ISLANDS

Post-Disaster
Budget Execution

223

disbursement of US$100,000 from the DAEF setsa precedent for other donors that in the future
could prove insufficient and that will require
regular revisions.

While it is commonly accepted that the///

Ministry of Finance waives normal tendering
procedures following the statement of

The process for budget reallocation is detailed///in Article VII, Section 7 of the Marshall Islands

emergency this process has yet to be formally

Constitution and appears to be working well.

documented. This oversight could give rise

The process for the transfer of funds between

to problems in the future. At the moment, thesubcategories in the same program area isprocess depends on the knowledge of a few

stipulated in the Financial Management Act, which

key individuals, but without adequate formalsays that budget reallocation from one ministry to

documentation ministry staff could cease thisanother requires cabinet approval, while transfers

practice in the future. Given that the statement of

between subcategories in the same department

emergency allows access to the DAEF and enables

require the approval of the minister responsible

expenditure from the contingency fund, thisand the secretary of finance.

///

possibility poses some concern.

///

In the past, ministers have made only limited///

The CFA clearly lays out the eligibility process

use of their authority to reprogram funds

for accessing funds post-disaster. This means

following a disaster. Anecdotal evidence

that it has been easy to access and expend funds

suggests that on average, only 1 percent of funds

following events such as the storm surge in 2008

are reprogrammed. Instead the favored approachand the drought in 2013. However, the initialhas been to reduce budgetary allocations for the

///

///

///

Figure 5 — Amount of Ex-Ante Funds Available for Immediate Response

Disaster risks

Disaster risk ﬁnancing
instruments

Amount of funds
available

High-risk layer(E.G. Major earthquake,major tropical cyclone)

Disaster risk insurance

Catastrophe risk insurance
coverage:(US$10.9m)

Medium-risk layer(E.G. Floods, small earthquakes)

Contingent credit

Low-risk layer(E.G. Localized ﬂood, landslides)

Contingency budget,
national reserves, annual
budget allocation

Source: World Bank.

Contingency budget:(US$0.2m)
DAEF:(US$2.8m)

Section07

PCRAFI224

MARSHALL ISLANDS

following fiscal year. In 2008 a national state ofmillion, of which US$1.1 million was identified for

emergency was declared as the prices of imports,

immediate needs.

notably fuel, soared. To help fund the rising importbill, all government departments were asked toreduce their total budget expenditure by 5 percent
in 2011. As a small island economy with limited
reserves, the Marshall Islands has little capacity todeal with increasing prices.

The government covered about 10 percent of///

the total cost of the 2013 drought responseplan, equivalent to 14 percent of theoperational budget, and more than could be
reprogrammed under section Article VII of
the constitution. Given the limited availability of///

The 2013 drought highlights the vulnerability

immediate cash, the Marshall Islands governmentof communities located in the outer islands

could have trouble meeting its financial

and the high cost of facilitating response tocommitments beyond 2013.

///

these areas. The estimated cost of transporting///

the relief supplies to the affected islands was over
US$1 million (Marshall Islands Government 2013b).
This includes the hire of five boats to visit threeislands each, with each trip expected to take 14
days. It also includes the charter of a plane to bringnecessary medical supplies to all 15 of the affectedislands. The total response plan was estimated tocost US$4.8 million, of which US$2.1 million was
financed by contributions from donors and thegovernment. This left a financing gap of US$2.7

Overall, the post-disaster budget execution///

process works well in the Marshall Islands
and employs a variety of financial tools,
but the small size of the economy meansthat access to immediate cash is limited. The///

government has dedicated, yet limited, funds thatcan be accessed following an event and is able
to utilize these effectively, but not all procedures
are embedded within the financial legislature,especially those related to the unique requirementsof post-disaster financing.
Photo Credit

///

///

Australian Department of Foreign
Affairs and Trade/Flickr b

PCRAFIMARSHALL ISLANDS

225

Domestic Catastrophe
Risk Insurance Market
The non-life (general) insurance market in thethis and hopes to encourage growth in thisMarshall Islands is small, with an estimatedindustry going forward.

///

total premium of US$3 million.

///

Insurance for catastrophe insurance perils///

There are no local non-life insurers, and allof typhoon (cyclone) and earthquake arebusiness is placed offshore by two insurance

not readily available in the market. Typhoon

///

///

agencies. The Marshalls Insurance Agency advised///that it places the majority of its insurance businesswith Century Insurance Co. Ltd., a company basedout of Saipan in Northern Mariana Islands, with
an A. M. Best financial security rating of BBB.
Meanwhile, Moylan’s Insurance Underwriters Inc.
is based in Guam and has a branch in the Marshall(cyclone) insurance is available only on an
individual building-by-building basis, subject
to insurance underwriters’ express acceptance.
Property insurance rates for the typhoon peril
are considerably higher than the Pacific average,
at between 1 percent and 3 percent of value

Islands. Moylan’s (Marshall Islands) advised that it(depending on construction and value), with aplaces its insurance business with two companies,

deductible of 10 percent of the sum insured.

Dongbu Insurance Co. Ltd., which is based in

No rating information was available on theSouth Korea and has an A. M. Best financial

earthquake/tsunami peril.

security rating of A, or First Net Insurance Co. Ltd.,
which is based in Guam and has an A. M. Bestfinancial security rating of B

The Marshall Islands government does///

not have a formal risk financing or
property insurance program in place for

The non-life insurance premium in the

key public buildings or infrastructure

Marshall Islands is approximately US$57.00

assets. Consequently, it is not known whether

///

///

per capita, lower than the average for Pacific///Island Countries, which indicates relatively low
insurance penetration.

government-owned statutory authorities and utility
companies have property insurance programsin place. It is known that the Ministry of Public

At present the insurance industry is

Works insures some individual public buildings but

unregulated. However, anecdotal evidence

not whether those policies include the perils ofsuggests that the government is looking to change

typhoon and earthquake/tsunami.

///

///

Section07

PCRAFI226

MARSHALL ISLANDS

Options for
Consideration
The Marshall Islands has implemented several DRFIThe extent of insurance coverage remains to be

tools to improve its financial resilience to natural

ascertained.

disasters. To build further on these developments

Recommendation 3: Explore the use of otherand minimize any potential loss of institutional///

DRFI instruments, such as contingent credit,

knowledge the following recommendations areto access additional liquidity post-disaster,suggested for consideration.

and identify providers of this type of finance.
The advantage of this type of instrument is

Recommendation 1: Develop an integrated///

disaster risk financing and insurance strategy.

///

///

that countries would only be receive the funds

This strategy would identify solutions to provide

following an event. This could be a plausible

additional liquidity to complement the US$0.3

option for financing response to comparatively

million available. It would also aim to produce afrequent events, such as droughts andpost-disaster budget execution manual to help

storm surge.

embed the existing processes and remove the

Recommendation 4: Investigate the possibility///

risk of lapse should key staff leave the Ministryof Finance.

of establishing disaster-linked social safety
net programs. These could involve the application///

Recommendation 2: Conduct an assessment ofof insurance to a social safety net program or///

the domestic insurance market for both public
and private assets to establish what products areperhaps the utilization of cash-for-work programs.
These measures could help those located furthest///

currently offered and to determine their uptake. At
present the domestic insurance market is extremely
limited. It appears that insurance can be purchased
only on the two largest atolls of Majuro and Ebeye.

away from the main economic centers. These
communities are often the most vulnerable tonatural hazards and suffer disproportionate
impacts on their living standards following
an event.
Photo Credit

///

///

Kyle Post/Flickr b

07

MARSHALL ISLANDSPCRAFI227

End Notes
1

A summary of the Marshall Islands 2011

Population and Household Census is available at
http://www.doi.gov/oia/reports/upload/RMI-2011Census-Summary-Report-on-Population-andHousing.pdf.
2

The calculation is based on figures from Tokyo

Metropolitan Government, http://www.metro.
tokyo.jp/ENGLISH/PROFILE/overview03.htm.
3

Priority for Action 4—“Reduce the Underlying

Risk Factors”—has an associated key activityof financial risk-sharing mechanisms, such as
insurance, while Priority for Action 5—“Strengthen
disaster preparedness for effective response at alllevels”—includes the establishment of emergency
funds such as contingency budget, national
reserves, and annual budgetary allocations. See
UNISDR (2005).
4“Reprogrammed” funds are those transferred

between ministries; as defined in the Financial
Management Act 1990, they are “appropriatedfunds which are shifted to another program area”(Marshall Islands Government 1990).
Section07

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228

MARSHALL ISLANDS

References
GFDRR (Global Facility for Disaster Reduction and Recovery)

Republic of the Marshall Islands.” Secretariat of the PacificFuture, Washington D.C., U.S.A.

Community, Suva, Fiji.

———. 2013. “Republic of the Marshall Islands 2013 Article IV
Consultation.” IMF, Washington, DC.
Marshall Islands Government. 1990. Financial Management Act
1990. Available at http://www.paclii.org/mh/legis/consol_act/
fma1990164.pdf.
———. 2003. “A Situation Analysis of Children, Youth and
Women, with assistance from UNICEF.” UNICEF, New York.
———. 2006. “Climate Change Strategic Plan, 2006.” Office ofEnvironmental Planning and Policy Coordination and Office of
the President, Majuro, Marshall Islands.
———. 2007. “National Action Plan for Disaster Risk Management 2008–2018_._” Available at http://www.pacificdisaster.
net/pdnadmin/data/original/RMI_2008_2018_NAP_DRM.pdf.
———. 2009. “State of Emergency on the December High Tidal
Waves Incident.” Office of the Chief Secretary, February 16.
———. 2010. “RMI Emergency Response Plan, 2010.”———. 2013a. Appropriation Act Fiscal Year 2013. MarshallIslands Government. March.
———. 2013b. “Immediate and Near-Term Drought Response
Plan for the Republic of the Marshall Islands.” Marshall Islands
Government. May.
PCRAFI (Pacific Catastrophe Risk Assessment and Financing
Initiative). 2011. “Country Risk Profile: Republic of the MarshallIslands.” September. www.pacris.sopac.org.

Section

SOPAC (Pacific Islands Applied Geoscience Commission). 2005.
Pacific Disaster Risk Reduction and Disaster Management
Framework for Action (Regional Framework For Action or RFA)

07

ence and Technology Division). 2012. “Investment in DRM—

2012 The Sendai Report: Managing Disaster Risks for Resilient

2005–2015. SOPAC, Suva, Fiji.
SPC-SOPAC (Secretariat of the Pacific Community Applied Geosci-

SPC (Secretariat of the Pacific Community) 2011 Cook Islands:
Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment
in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Republic of
Marshall Islands: Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2011 Vanuatu: Investment in DRM, Suva, Fiji
SPC (Secretariat of the Pacific Community) 2012 Papua New
Guinea: Investment in DRM, Suva, Fiji
UNISDR (United Nations International Strategy for Disaster Reduction). 2005. Hyogo Framework for Action 2005-2015: Building
the Resilience of Nations and Communities to Disasters.
UNISDR, Hyogo, Japan.
UNOCHA (United Nations Office for the Coordination of Humanitarian Affairs). 2008. “Situation Report No. 1—AbnormallyHigh Sea Levels Affecting Kiribati, the Solomon Islands, Federated States of Micronesia, and Marshall Islands.” UNOCHA,
Suva, Fiji. December 13.
World Bank 2010 Financial Protection of the State against Natural
Disasters; A Primer, Washington D.C., U.S.A.

Annex 1 & 2World Bank Framework for
Disaster Risk Financing and InsurancePCRAFI

230

Annex 1ANNEX 1&2

World Bank Framework for Disaster Risk Financing
and Insurance

Major disasters increase public spending

development projects (see figure A.2). This layer

requirements and reduce revenues, placing further

uses tools such as contingency budgets andstrain on limited national budgets. The immediatenational reserves. The aim is to finance small

and long-term fiscal consequences of a disasterbut high-frequency disasters. The second layer isdepend on the sources of revenue available toaimed at less frequent but more severe events thatthe government versus its public expenditure

are too costly to pre-finance through retention

commitments. Investment in disaster risk financing

mechanisms. Here, liquidity mechanisms—such as

instruments can help prevent the diversion of funds

contingent credit, which can mobilize additionalfrom key development projects and significantly

funds immediately following an event—become

reduce the time needed to activate an initialcost-effective.

response. Financial protection is a core componentof any comprehensive disaster risk management

The third layer, disaster risk transfer (such as

strategy, and should be implemented alongside

insurance), focuses on mobilizing large volumes

the pillars of risk identification, risk reduction,of funds for large but infrequent natural disasters.

preparedness, and post-disaster reconstruction (seeFor events of this type, risk transfer instruments—

figure A.1).

such as insurance or catastrophe swaps andbonds—become cost-effective in averting a

The World Bank framework for disaster risk

liquidity crunch.

financing and insurance advocates a three-tiered
approach for the development of financing

There is a clear time dimension to post-disasterarrangements to cover the residual disaster risk

funding needs and the various phases of relief,that cannot be mitigated. These layers align torecovery, and reconstruction. Some financing

the basic principles of sound public financial

instruments can be activated rapidly. Others

management, such as the efficient allocation

may take longer to activate but can generateof resources, access to sufficient resources, andsubstantial funding. The disaster risk financing

macroeconomic stabilization. The first layer,

strategy needs to reflect both time and costretention, relates to countries’ development ofdimensions, ensuring that the volume of funding

an internal layer of protection against naturalavailable at different stages in the response efforts

disasters to prevent the diversion of funds frommatches actual needs in a cost-efficient manner.

PCRAFI

ANNEX 1&2

231

Figure A .1 — Disaster Risk Management Framework

PILLAR 1: RISK IDENTIFICATION

Improved identification and understanding of disasterrisks through building capacity for assessments andanalysisPILLAR 2: RISK REDUCTION

Avoided creation of new risks and reduced risks insociety through greater disaster risk consideration inpolicy and investment

PILLAR 3: PREPAREDNESS

Improved capacity to manage crises through developing
forecasting and disaster management capacities

PILLAR 4: FINANCIAL PROTECTION

Increased financial resilience of governments, private
sector and households through financial protection
strategies

PILLAR 5: RESILIENT RECOVERY

Quicker, more resilient recovery through support forreconstruction planning

Figure A .2 — Three-Tiered Disaster Risk Financing Strategy

Risk Transfer

Low Frequency/
High Severity

International AssistanceSovereign Risk Transfer(e.g. Cat Bond/Cat Swap, (re)insurance)

Risk Retention

High Frequency/
Low Severity

Contingent Credit Lines

Insurance of Public Assets

Post Disaster Credit

Government Reserves, Contingency Budget / Funds

Emergency Funding

Reconstruction

PCRAFI232

ANNEX 1&2

The initial relief phase requires a quick injection

the funds for this phase can therefore be raisedof liquidity from day 0 but does not need to be

via post-disaster budget reallocation and thesustained for a long period of time (see figure

realignment of national investment priorities.

A.3). Rapid budget mobilization and execution

However, the opportunity cost for these options

are key for financing initial disaster response, andis high, given that they can lead to reduced

governments should develop appropriate policies

expenditure on other key investment areas, such as

and procedures for procurement and acquittals
to facilitate them. Initial relief should be met via
annual budget allocations and the establishmentof dedicated reserves for disaster response that

health and education. Consequently, governments
may also choose to utilize development partner
contingent credit arrangements.

can be accessed immediately; major catastrophes

In contrast, the reconstruction phase has much

will exhaust these funds quickly. The residual risklarger financing requirements needed over aassociated with higher-cost events should bemuch longer period of time (see figure A.3).

transferred to third parties via a mixture of more

Given the large funding requirements associatedexpensive (re)insurance tools and catastrophebonds and, for the most extreme events,
international assistance.

with reconstruction, this phase often requires
post-disaster reconstruction loans to complement
traditional disaster insurance. Governments

The recovery phase requires additional funds

may also introduce temporary post-disaster tax

but not immediately (see figure A.3). Some ofincreases aligned to budget restructuring.

Figure A .3 — Post-Disaster Phases: Funding Requirements and Duration`

RecoveryReconstruction

Resource Requirements ($)

ReliefTime

Source: Ghesquiere and Mahul (2010)

PCRAFI

ANNEX 1&2

233

If adequate and timely funding arrangements areinnovative nature of the work in this area and the

not in place, the adverse socioeconomic impact

number of products under development, this list isof a disaster can be significantly exacerbated, at

not exhaustive.

both the macroeconomic and household levels.
An optimal disaster risk financing and insurance
strategy aims to combine ex-ante and ex-post
financial instruments to secure adequate andtimely funding at lower cost for the successive
post-disaster phases. The optimal mix of financeinstruments will be unique to each country based
upon its associated hazard and exposure. Table
A.1 lists potential finance instruments that can beused to address disasters. Those that are shaded inblue indicate the generic timelines for mobilizing
and executing these funds, though each country
may be slightly faster or slower depending on its

Ex-post financing vehicles are those that become
available in the wake of an event. The mostfamiliar form of ex-post disaster financing isdonor assistance for relief. There are two forms
this finance can take, cash grants and aid in kind,and both play an important role in response. The
provision of aid in kind, while vital, can affect the
distribution costs for these goods. While donor
funds will always be required, there can often be
an element of uncertainty surrounding how much
will be provided, what will be provided, and whenfunds will arrive in country.

internal processes. The table can be adapted by

Budget reallocation often plays a key role for thecountries to reflect these differences according tocontinuation of relief and the initial stages of thethe financial instruments they have utilized and therecovery program. Generally, this process takes

time it takes to mobilize these funds. Given thetime, as the reallocation of funds will need to be

Table A .4— Availability of Financial Instruments Over TimeSHORT TERM
(1-3 MONTHS)
Ex-post Financing
Donor Assistance (relief)
Budget Reallocation
Domestic Credit
External Credit
Capital Budget Realignment
Donor Assistance (reconstruction)
Tax Increase
Flash Appeal
Ex-ante Financing
Emergency FundContingency Budget
Contingent Credit
Sovereign (parametric) Catastrophe
Risk Insurance
Traditional Disaster Insurance
Source: World Bank 2013.

MEDIUM TERM
(3-9 MONTHS)

LONG TERM(OVER 9 MONTHS)PCRAFI

234

agreed upon by the cabinet and across ministries.

Donor assistance for reconstruction can be

Budget reallocation can sometimes divert funds

delivered as a form of direct budget support,

from key development projects and hence seriously

grant, or a post-disaster reconstruction loan.

harm the long-term growth prospects of the

The form of finance used here will depend on

country. The same issues are relevant to capitalthe size of the event, the development status ofbudget realignment, although the timelines fora country (for example, low-income countries

that process are typically significantly longer.

may have access to concessional loans and haveDomestic credit, such as the issuance ofgovernment bonds, can be used to raise additional
revenue to fund post-disaster expenditures. Again,
due to the processes involved, domestic credit willtake some time to operationalize and is best suited

more access to grants), and the debt-servicing
ratio of a country. Typically, this form of financeis conditional and requires sufficient lead time foraligning the priorities of countries and donors tomeet reconstruction and recovery needs.

to financing recovery and reconstruction activities.

Tax increases will help redress the increase in public

External credit will likewise take time to be

expenditure following a disaster by generating

agreed upon with providers and will require clear

additional revenue. Although higher taxes could

articulation of the activities it is to finance. Both of

be politically unfavorable, they create a sustainable

these forms of credit will have an impact on thesource of finance for reconstruction activities.

debt-servicing ratio of a country and may not be a

Conversely, some governments have applied tax

viable option for heavily indebted countries.

incentives to encourage donations to response

ANNEX 1&2

PCRAFI

ANNEX 1&2

funds from both the private sector and members of

Parametric insurance uses hazard triggers, linking

the public. This approach can be popular when tax

immediate post-disaster insurance payouts

credits are written off on annual tax returns.

to specific hazard events. Unlike traditional

Ex-ante financing provides an element of financial
certainty during a disaster, because governments
have established these sources of finance inadvance. These funds can be quickly disbursed
following an event so that essential relief workcommences immediately. A reserve fund provides
a dedicated amount of funding for response
and if properly managed can accrue over time toincrease the level of funding available. However,insurance settlements that require an assessmentof individual losses on the ground, parametricpolicies do not pay based on actual losses incurred.
Instead, the payout disbursements are triggeredby specific physical parameters for the disaster(e.g., wind speed and earthquake ground motion).
The payouts provide a rapid, yet limited, injectionof liquidity that can be a valuable boost to
relief funds.

the opportunity cost of holding money in a

Traditional disaster insurance offers indemnity

dedicated fund is high, as it diverts funds fromcoverage. Receipt of funds may take longer thanthe operational budget. Careful analysis should bewith parametric insurance, as a detailed damage

undertaken to identify the optimal level of reserves

assessment is required. However, as payoutsthat a country should hold and maintain.

are directly linked to the damage experienced,

Contingent credit is a relatively new instrument,with current forms offering disbursement following

the payout will better match the needs of theinsured party.

an event whose magnitude has been agreed upon

Public financial management in the Pacific is

in advance. It can be fungible or conditional by

dictated by the fact that many PICs are classified

design. As with other sources of credit, the amountas Small Island Developing States (SIDS). Typically,

available will depend on the development status

countries in this classification have a narrowof the country and the debt-servicing ratio. The

revenue base, are net importers, and have aadvantage of contingent credit is that a drawdown

consequential reliance on aid as an income stream.

can be made within a 24-hour period.

These characteristics can limit the options available
for post-disaster finance. It is unlikely that a SIDS
government could afford to reallocate the capital235

PCRAFI

236

budget, and a tax increase could make many items

in post-disaster budget reallocation and build

unaffordable and hence be detrimental to citizens’

a case for establishing national reserves. Whilequality of life. Given these constraints on theinternational assistance will always play a valuable

national budget, alternatives such as contingentrole, overdependence on such assistance as acredit and risk transfer options should be used tosource of financing carries limitations; international

reduce the drain on limited public funds.

aid can be uncertain, which inhibits contingency

PIC governments face critical challenges forfinancial resilience to natural disasters. Most PICs
have restricted options for securing immediateliquidity for swift post-disaster emergency response

planning, and can be slow to materialize.
Increasingly, PICs such as the Cook Islands are
establishing national reserves for funding initial
response.

without compromising their long-term fiscal

The World Bank, SPC, and their partners, withbalance. In addition, PICs are constrained by their

grant funding from the government of Japan, havesize, borrowing capacity, and limited access to

implemented the Pacific Disaster Risk Financing

international insurance markets. In the absence ofand Insurance Program to help the PICs increaseeasy access to debt and well-functioning insurance

their financial resilience to natural disasters andmarkets, a large portion of the economic losses

improve their financial response capacity in thestemming from adverse natural events is borne byaftermath of natural disasters. This program is partgovernments and households, with support fromof the Pacific Catastrophe Risk Assessment anddevelopment partners.

Financing Initiative (PCRAFI).

The Pacific has seen several recent cases that show
the need for immediate liquidity post-disaster. In
the Cook Islands, in the immediate aftermath of
TC Pat in 2010, a delay in the receipt of travel
funds meant that key government personnel could
not immediately commence the initial damage
assessment. Following TC Vania in 2010, Vanuatu
had to reallocate a significant amount of thenational budget. Similarly, Fiji and Samoa had toreallocate budgetary funds in the wake of TC Evan
in 2012 and 2013; and the Santa Cruz earthquake
in the Solomon Islands in February2013 drained
the annual budget for the National Disaster
Management Office and used the majority of thenational contingency budget.
Lacking contingency reserves and access to shortterm loan funds, PICs have limited post-disasterbudget flexibility and rely heavily on post-disaster
donor assistance. Studies by SPC (2011 and 2012)that look at the fiscal impact of past disasters inselected PICs demonstrate the financial constraints

ANNEX 1&2

PCRAFI

ANNEX 1&2

Annex 2Glossary

Attachment point. The attachment point (deductible) amount is essentially the excess payable before any

///

///

payout is made under a policy. That is, anything under this value will be borne by the policy holder.
Catastrophe swap. A catastrophe swap, also known as a cat swap, is a financial tool used to transfer some

///

///

of the risk that the covered party faces from catastrophes to the international reinsurance or capital markets.
In the case of the Pacific Catastrophe Risk Insurance Pilot, tropical cyclone and/or earthquake risk is passed
to the financial markets.
Coverage limit. This indicates the maximum payout as defined under the policy.

///

///

Emergency losses. Emergency losses in the context of the Pacific Catastrophe Risk Insurance Pilot are

///

///

calculated by using a percentage of the estimated ground-up losses.
Exhaustion point. The exhaustion point indicates the loss level at which the payout under a policy reaches

///

///

its maximum point.
Ground-up losses. Ground-up losses in this context refer to estimated total damage to buildings,

///

///

infrastructure, and cash crops.
Payout. A payout refers to the amount of cash that countries will receive following an eligible event.

///

///

Premium. The premium is the cost that an insured party will pay for a given level of coverage: the more

///

///

that is included in the coverage provided, the higher the premium will be. Premiums are determined by theamount of coverage a country chooses, the event attachment point (deductible) and exhaustion point (limit)of that coverage, and the risk profile of the country.
Risk pool. A risk pool is a group of people, institutions, or countries that collaborate to manage risk

///

///

financially as a single group.

237

Risk Profiles

PCRAFI

FIJI

239

Risk Profile: Fiji
Population, Buildings, Infrastructure
and Crops Exposed to Natural Perils
An extensive study has been conducted toTable 1— Summary of Exposure in Fiji (2010)

GENERAL INFORMATION:

Total Population:

847,000

and properties at risk. Properties include residential,

GDP Per Capita (USD):

3,550

commercial, public and industrial buildings;

Total GDP (million USD):

3,009.4

infrastructure assets such as major ports, airports,

Asset Counts:

power plants, bridges, and roads; and major crops,

Residential Buildings:

240,958

such as coconut, palm oil, taro, sugar cane andPublic Buildings:

8,204

many others.

Commercial, Industrial, and Other Buildings:

16,974

All Buildings:

266,140

Hectares of Major Crops:

169,733

assemble a comprehensive inventory of population

Table 1 summarizes population and the inventoryof buildings, infrastructure assets, and major crops(or “exposure”) at risk as well as key economic
values for Fiji. It is estimated that the replacement
value of all the assets in Fiji is 22.2 billion USD, ofwhich about 85% represents buildings and 14%
represents infrastructure.

COST OF REPLACING ASSETS (MILLION USD):

Buildings:

18,865

Infrastructure:

3,094

Crops:

216

Total:

22,175

GOVERNMENT REVENUE AND EXPENDITURE:

Figures 1 and 2 illustrate the building exposure

Total Government Revenue

location and replacement cost distribution,(Million USD):

652.5

respectively. The footprints of about 100,000 of the(% GDP):

21.7%

approximately 266,000 buildings shown in Figure

Total Government Expenditure

1 were digitized from high-resolution satellite(Million USD):

2,734.5

imagery. More than 18,000 of such buildings,(% GDP):

24.4%

most near the vicinity of the nation’s capital ofSuva, were also field surveyed and photographedby a team of inspectors deployed for this purpose.
Figure 3 displays the land cover/land use map that
includes the location of major crops. The datautilized for these exhibits was assembled, organized
and, when unavailable, produced in this study.

1
Data assembled from various references including WB, ADB, IMF and The Secretariat of the PacificCommunity (SPC).
2
The projected 2010 population was trended from the 2006 census using estimated growth rates
provided by SPC.

PCRAFI

240

Tropical Cyclone and Earthquake
Hazards in Fiji

FIJI

Figure 1 — Building Locations

The Pacific islands region is prone to natural
hazards. Fiji is located south of the equator in anarea known for the frequent occurrence of tropical
cyclones with damaging winds, rains and storm
surge between the months of October and May. In
the South Pacific region from the equator to New
Zealand in latitude and from Indonesia to east of
Hawaii in longitude, almost 1,000 tropical cyclones
with hurricane-force winds spawned in the last
60 years, with an average of about 16 tropicalstorms per year. Fiji was affected by devastating
cyclones multiple times in the last few decades.
For example, tropical cyclones Kina and Ami, in

Figure 2 — Building replacement cost density by district.

1993 and 2003, caused about 40 fatalities. Strong
winds and widespread coastal flooding damaged
homes, infrastructure and crops in the main islandsof Viti Levu and Vanua Levu with about 200 to
300 million USD in losses that weakened the
local economy. Figure 4 shows the levels of windspeed due to tropical cyclones that have about
a 40% chance to be exceeded at least once inthe next 50 years (100-year mean return period).
These wind speeds, if they were to occur, arecapable of generating severe damage to buildings,
infrastructure and crops with consequent large
economic losses.
Fiji is situated in a relatively quiet seismic area but
is surrounded by the Pacific “ring of fire,” whichaligns with the boundaries of the tectonic plates.
These boundaries are extremely active seismic
zones capable of generating large earthquakes
and, in some cases, major tsunamis traveling great
distances. Local faults can also generate fromtime to time damaging earthquakes. A tragic
example is the 1953 magnitude 6.5 earthquake,
which triggered a tsunami that killed 8 people andseverely damaged the wharf and buildings in the
Fijian capital of Suva with significant monetarylosses. Figure 5 shows that Fiji has a 40% chance

Figure 3 — Land Cover / Land Use Map

PCRAFIFIJI

241

in the next 50 years of experiencing, at least once,

Figure 4 — Maximum 1-minute sustained wind speed (inmoderate to strong levels of ground shaking. These

miles per hour) with a 40% chance to be exceeded at leastlevels of shaking are expected to cause light toonce in the next 50 years.

moderate damage to well-engineered buildings
and moderate to heavy damage to structures builtwith less stringent criteria.

Risk Analysis Results
To estimate the risk profile for Fiji posed by tropical
cyclones and earthquakes, a simulation model ofpotential storms and earthquakes that may affectthe country in the future was constructed. Thismodel, based on historical data, simulates morethan 400,000 tropical cyclones and about 7.6
million earthquakes, grouped in 10,000 potential
realizations of the next year’s activity in the entire
Pacific Basin. The catalog of simulated earthquakes
also includes large magnitude events in Southand North America, Japan and the Philippines,
which could generate tsunamis that may affectFiji’s shores.

Figure 5 — Peak horizontal acceleration of the ground(Note: 1g is equal to the acceleration of gravity) that has about

The country’s earthquake and tropical cyclone

a 40% chance to be exceeded at least once in the next 50

risk profiles are derived from an estimation of theyears.

direct losses to buildings, infrastructure assets andmajor crops caused by all the simulated potential
future events. The direct losses comprise the costof repairing or replacing the damaged assets,
but do not include other losses such as contents
losses, business interruption losses and losses toprimary industries other than agriculture. The direct
losses for tropical cyclones are caused by wind andflooding due to rain and storm surge, while forearthquakes they are caused by ground shaking
and tsunami inundation. After assessing the costof repairing or rebuilding the damaged assets dueto the impact of all the simulated potential future
events, it is possible to estimate in a probabilistic
sense the severity of losses for future catastrophes.
The simulations of possible next-year tropical
cyclone and earthquake activity show that someyears will see no storms or earthquakes affecting

PCRAFI

242

FIJI

Fiji, while other years may see one or more events

Figure 7 — Contribution from the different villages to theaffecting the islands, similar to what has happened

average annual loss for tropical cyclone and earthquake

historically. The annual losses averaged over the(ground shaking and tsunami).

many realizations of next-year activity are shownin Figure 6 separately for tropical cyclone and forearthquake and tsunami, while the contributions to
the average annual loss from the different tikinas
are displayed in absolute terms in Figure 7 andnormalized by the total asset values in each tikina
in Figure 8. Figure 8 shows how the relative risk
varies by tikina across the country.
The same risk assessment carried out for Fiji wasalso performed for the 14 other Pacific Island
Countries. The values of the average annual loss ofFiji and of the other 14 countries are compared in
Figure 9.
Figure 8 — Contribution from the different villages to the
In addition to estimating average risk per calendar

tropical cyclone and earthquake (ground shaking and tsunami)

year, another way of assessing risk is to examine

average annual loss divided by the replacement cost of thelarge and rather infrequent, but possible, future

assets in each village.

tropical cyclone and earthquake losses. Table 2
summarizes the risk profile for Fiji in terms of both
direct losses and emergency losses. The former
are the expenditures needed to repair or replace
the damaged assets while the latter are theexpenditures that the Fijian government may needto incur in the aftermath of a natural catastrophe
to provide necessary relief and conduct activities
such as debris removal, setting up shelters forhomeless or supplying medicine and food. The

Figure 6 — Average annual loss due totropical cyclones and earthquakes (groundshaking and tsunami) and its contribution fromthe three types of assets.

PCRAFI

FIJI

243

emergency losses are estimated as a percentage of

Figure 9 — Average annual loss for all the 15 Pacific Island

the direct losses.

Countries considered in this study.

Table 2 includes the losses that are expected to
be exceeded, on average, once every 50-, 100-,
and 250-years. For example, a tropical cyclone loss
exceeding 834 million USD, which is equivalent
to about 28% of Fiji’s GDP, is to be expected, on
average, once every 100 years. In Fiji, tropical
cyclone losses are expected to be substantially more
frequent and severe than losses due to earthquake
ground shaking and tsunami. The latter, however,remain potentially catastrophic events.
A more complete picture of the risk can befound in Figure 10, which shows the mean
return period of direct losses in million USD
generated by earthquake, tsunami and tropical
cyclones combined. The 50-, 100-, and 250-year

Figure 10 — Direct losses caused by either tropical storms

mean return period losses in Table 2 can also beor earthquakes that are expected to be equaled or exceeded,

determined from the curves in this figure. The

on average, once in the time period indicated. Losses

direct losses are expressed both in absolute terms

represented in absolute terms and normalized by GDP.

and as a percent of the national GDP.
In addition to causing damage and losses to thebuilt environment and crops, future earthquakes
and tropical cyclones will also have an impact
on population. The same probabilistic proceduredescribed above for losses has been adopted toestimate the likelihood that different levels ofcasualties (i.e., fatalities and injuries) may result
from the future occurrence of these events.
As shown in Table 2, our model estimates, forexample, that there is a 40% chance in the next
fifty years (100 year mean return period) that
one or more events in a calendar year will cause
casualties exceeding 1,300 people in Fiji. Events
causing 2,000 or more casualties are also possible
but have much lower likelihood of occurring.

244

PCRAFI

FIJI

Table 2— Estimated Losses and Casualties Caused by
Natural Perils
Mean Return Period (years)

AAL

50

100

250

(Million USD)

76.5

609.9

834.0

1,190.9(% GDP)

2.5%

20.3%

27.7%

39.6%

17.6

140.0

191.6

274.3

2.4%

19.1%

26.1%

37.3%

126

988

1,292

1,773

Risk Profile: Tropical Cyclone
Direct Losses

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profile: Earthquake, and Tsunami
Direct Losses(Million USD)(% GDP)

2.5

10.1

22.3

98.2

0.1%

0.3%

0.7%

3.3%

0.0

2.1

4.4

17.5

0.0%

0.3%

0.6%

2.4%

5

35

64

167

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profiles: Tropical Cyclone, Earthquake, and Tsunami
Direct Losses(Million USD)(% GDP)

79.1

620.1

844.8

1,203.6

2.6%

20.6%

28.1%

40.0%

18.1

141.0

193.4

274.6

2.5%

19.2%

26.3%

37.4%

131

996

1,323

1,835

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

COOK ISLANDSPCRAFI

245

Risk Profile: Cook Islands
Population, Buildings, Infrastructure
and Crops Exposed to Natural Perils

Table 1— Summary of Exposure in Cook Islands (2010)

An extensive study has been conducted to

GENERAL INFORMATION:

assemble a comprehensive inventory of population

Total Population:

19,800and properties at risk. Properties include residential,

GDP Per Capita (USD):

12,330commercial, public and industrial buildings;

Total GDP (million USD):

244.1

infrastructure assets such as major ports, airports,

Asset Counts:

power plants, bridges, and roads; and major crops,

Residential Buildings:

8,357

such as coconut, palm oil, taro and many others.

Public Buildings:

503

Commercial, Industrial, and Other Buildings:

1,742

All Buildings:

10.602

crops (or “exposure”) at risk as well as key

Hectares of Major Crops:

6,390

economic values for the Cook Islands. It is

COST OF REPLACING ASSETS (MILLION USD):

estimated that the replacement value of all the

Buildings:

1,296

assets in the Cook Islands is 1.4 billion USD of

Infrastructure:

118

which about 91% represents buildings and 8%

Crops:

8represents infrastructure.

Total:

1,422

Table 1 summarizes population and the inventoryof buildings, infrastructure assets, and major

Figures 1 and 2 illustrate the building exposure
location and replacement cost distribution,

GOVERNMENT REVENUE AND EXPENDITURE:

Total Government Revenue(Million USD):

86.9

approximately 11,000 buildings shown in Figure(% GDP):

35.6%

1 were digitized from high-resolution satellite

Total Government Expenditureimagery. More than 5,000 of such buildings, almost(Million USD):

77.9

all in the main island of Rarotonga and the rest in(% GDP):

31.9%

respectively. The footprints of almost 10,000 of thethe island of Aitutaki, were also field surveyed andphotographed by a team of inspectors deployed forthis purpose. Figure 3 displays the land cover/ land
use map that includes the location of major crops.
The data utilized for these exhibits was assembled,organized and, when unavailable, produced inthis study.

1
Data assembled from various references including WB, ADB, IMF and The Secretariat of the PacificCommunity (SPC).
2
The projected 2010 population was trended from the 2006 census using estimated growth rates
provided by SPC.

PCRAFI

246

Tropical Cyclone and Earthquake
Hazards in Cook Islands

COOK ISLANDS

Figure 1 — Building Locations

The Pacific islands region is prone to natural
hazards. The Cook Islands are located south ofthe equator in an area known for the frequent
occurrence of tropical cyclones with damaging
winds, rains and storm surge between the monthsof October and May. In the South Pacific region
from the equator to New Zealand in latitude andfrom Indonesia to east of Hawaii in longitude,
almost 1,000 tropical cyclones with hurricaneforce winds spawned in the last 60 years, withan average of about 16 tropical storms eachyear. The Cook Islands affected by devastating
cyclones multiple times in the last few decades.

Figure 2 — Building replacement cost density by district.

For example, in 1997, tropical cyclones Martin
and Pam caused 22 fatalities, 19 of which wereon Manihiki Atoll alone, where wind and storm
surge destroyed essentially every building on theisland, incurring about 48 million USD in losses
that crippled the local economy. More recently, in
2010, tropical cyclone Pat wrought widespread
damage on the island of Aitutaki. Figure 4 shows
the levels of wind speed due to tropical cyclones
that have about a 40% chance to be exceeded atleast once in the next 50 years (100- year mean
return period). These wind speeds, if they were tooccur, are capable of generating severe damage tobuildings, infrastructure and crops with consequent
large economic losses.
The Cook Islands are situated in a relatively quiet
seismic area, but is surrounded by the Pacific “ringof fire,” which aligns with the boundaries of thetectonic plates. These boundaries are extremely
active seismic zones capable of generating large
earthquakes and, in some cases, major tsunamisthat can travel great distances. No significant
earthquakes have been reported in recent times.
However, in 1909, a tsunami with waves up to
three meters damaged bridges and crop fields
in Rarotonga. Figure 5 shows that the Cook

Figure 3 — Land Cover / Land Use Map

COOK ISLANDSPCRAFI

247

Islands have a 40% chance in the next 50 years

Figure 4 — Maximum 1-minute sustained wind speed (inof experiencing, at least once, very weak levels of

miles per hour) with a 40% chance to be exceeded at least

ground shaking. These levels of shaking are notonce in the next 50 years.

expected to cause any damage to well-engineeredbuildings and infrastructure assets.

Risk Analysis Results
To estimate the risk profile for the Cook Islands
posed by tropical cyclones and earthquakes,
a simulation model of potential storms andearthquakes that may affect the country
in the future was constructed. This model,
based on historical data, simulates more than
400,000 tropical cyclones and about 7.6 million
earthquakes, grouped in 10,000 potential
realizations of the next year’s activity in the entire
Pacific Basin. The catalog of simulated earthquakes
also includes large magnitude events in South andNorth America, Japan and the Philippines, which
could generate tsunamis that may affect the Cook
Islands’ shores.

Figure 5 — Peak horizontal acceleration of the ground(Note: 1g is equal to the acceleration of gravity) that has about

The country’s earthquake and tropical cyclone risk

a 40% chance to be exceeded at least once in the next 50

profiles are derived from an estimation of the direct

years.

losses to buildings, infrastructure assets and major
crops that are caused by all the simulated potential
future events. The direct losses include the cost of
repairing or replacing the damaged assets, but do
not include other losses such as contents losses,
business interruption losses and losses to primaryindustries other than agriculture. The direct losses
for tropical cyclones are caused by wind andflooding due to rain and storm surge, while losses
for earthquakes are caused by ground shaking
and tsunami inundation. After assessing the costof repairing or rebuilding the damaged assets dueto the impact of all the simulated potential future
events, it is possible to estimate in a probabilistic
sense the severity of losses for future catastrophes.
The simulations of possible next-year tropical
cyclone and earthquake activity show that someyears will see no storms or earthquakes affecting

PCRAFI

248

COOK ISLANDS

the Cook Islands, while other years may see one

Figure 7 — Contribution from the different villages to theor more events affecting the islands, similar to

average annual loss for tropical cyclone and earthquake

what has happened historically. The annual losses(ground shaking and tsunami).

averaged over the many realizations of next-year
activity are shown in Figure 6 separately for tropical
cyclone and for earthquake and tsunami, while
the contributions to the average annual loss fromthe different electoral boundaries are displayed inabsolute terms in Figure 7 and normalized by the
total asset values in each electoral boundary in
Figure 8. Figure 8 shows how the relative risk varies
by electoral boundary across the country.
In addition to estimating average risk per calendar
year, another way of assessing risk is to examine
large and rather infrequent, but possible, future
tropical cyclone and earthquake losses. Table 2
summarizes the risk profile for the Cook Islands in

Figure 8 — Contribution from the different villages to theterms of both direct losses and emergency losses.

tropical cyclone and earthquake (ground shaking and tsunami)

The former are the expenditures needed to repair

average annual loss divided by the replacement cost of theor replace the damaged assets while the latter are

assets in each village.

the expenditures that the Cook Islands government
may need to incur in the aftermath of a natural
catastrophe to provide necessary relief and conduct
activities such as debris removal, setting up shelters
for homeless or supplying medicine and food. The
emergency losses are estimated as a percentage ofthe direct losses.
Table 2 includes the losses that are expected to
be exceeded, on average, once every 50, 100,
and 250 years. For example, a tropical cyclone**

Figure 6 — Average annual loss due totropical cyclones and earthquakes (groundshaking and tsunami) and its contribution fromthe three types of assets.

PCRAFI

COOK ISLANDS

249

loss exceeding 103 million USD, which is

Figure 9 — Average annual loss for all the 15 Pacific Islandequivalent to about 42% of the Cook Islands’

Countries considered in this study.

GDP, is to be expected on average once every
100 years. In the Cook Islands, tropical cyclone**

losses are clearly prominent in the risk profile
although earthquakes and earthquake-induced
tsunamis are also capable of generating losses.
A more complete picture of the risk can befound in Figure 10, which shows the mean
return period of direct losses in million USD
generated by earthquake, tsunami and tropical
cyclones combined. The 50-, 100-, and 250-year
mean return period losses in Table 2 can also be
determined from the curves in this figure. The
direct losses are expressed both in absolute terms
and as a percent of the national GDP.
In addition to causing damage and losses to the

Figure 10 — Direct losses caused by either tropical storms

built environment and crops, future earthquakes

or earthquakes that are expected to be equaled or exceeded,

and tropical cyclones will also have an impact

on average, once in the time period indicated. Losses

on population. The same probabilistic procedure

represented in absolute terms and normalized by GDP.

described above for losses has been adopted toestimate the likelihood that different levels ofcasualties (i.e., fatalities and injuries) may result
from the future occurrence of these events.
As shown in Table 2, our model estimates, forexample, that there is a 40% chance in the next
fifty years (100 year mean return period) that
one or more events in a calendar year will cause
casualties exceeding 145 people in the Cook
Islands. Events causing 300 or more casualties arealso possible but have much lower likelihood of
occurring.

250

PCRAFI

COOK ISLANDS

Table 2— Estimated Losses and Casualties Caused by
Natural Perils
Mean Return Period (years)

AAL

50

100

250

4.9

56.8

103.0

198.1

2.0%

23.3%

42.2%

81.2%

1.1

13.1

23.6

45.5

1.4%

16.8%

30.3%

58.4%

9

112

145

183

Risk Profile: Tropical Cyclone
Direct Losses(Million USD)(% GDP)
Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profile: Earthquake, and Tsunami
Direct Losses(Million USD)(% GDP)

0

0

0

0

0.0%

0.0%

0.0%

0.0%

0

0

0

0

0.0%

0.0%

0.0%

0.0%

0

0

0

0

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profiles: Tropical Cyclone, Earthquake, and Tsunami
Direct Losses(Million USD)(% GDP)

4.9

56.8

103.0

198.1

2.0%

23.3%

42.2%

81.2%

1.1

13.1

23.6

45.5

1.4%

16.8%

30.3%

58.4%

9

112

145

183

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

SOLOMON ISLANDSPCRAFI

251

Risk Profile: Solomon Islands
Population, Buildings, Infrastructure
and Crops Exposed to Natural Perils

Table 1— Summary of Exposure in Solomon Islands (2010)

An extensive study has been conducted toassemble a comprehensive inventory of populationand properties at risk. Properties include residential,commercial, public and industrial buildings;
infrastructure assets such as major ports, airports,
power plants, bridges, and roads; and major crops,
such as coconut, palm oil, taro, cocoa, rice andmany others.

GENERAL INFORMATION:

Total Population:

547,000

GDP Per Capita (USD):

1,240

Total GDP (million USD):

678.6

Asset Counts:
Residential Buildings:

157,035

Public Buildings:

4,615

Commercial, Industrial, and Other Buildings:

7,462

Table 1 summarizes population and the inventoryof buildings, infrastructure assets, and major crops(or “exposure”) at risk as well as key economic
values for the Solomon Islands. It is estimatedthat the replacement value of all the assets in
the Solomon Islands is 3.6 billion USD, of which
about 86% represents buildings and 12%
represents infrastructure.

All Buildings:

169,112Hectares of Major Crops:

83,955Figures 1 and 2 illustrate the building exposure
location and replacement cost distribution,
respectively. The footprints of about 35,000 of theapproximately 169,000 buildings shown in Figure
1 were digitized from high-resolution satellite
imagery. More than 12,000 of such buildings,
including more than 7,000 near the national
capital of Honiara, were also field surveyed andphotographed by a team of inspectors deployed forthis purpose. Figure 3 displays the land cover/ land
use map that includes the location of major crops.
The data utilized for these exhibits was assembled,organized and, when unavailable, produced inthis study.

Total Government Revenue

COST OF REPLACING ASSETS (MILLION USD):

Buildings:

3,059

Infrastructure:

420

Crops:

117

Total:

3,596

GOVERNMENT REVENUE AND EXPENDITURE:(Million USD):

297.6(% GDP):

43.9%

Total Government Expenditure(Million USD):

283.1(% GDP):

41.7%

1
Data assembled from various references including WB, ADB, IMF and The Secretariat of the PacificCommunity (SPC).
2
The projected 2010 population was trended from the 2006 census using estimated growth rates
provided by SPC.

PCRAFI

252

Tropical Cyclone and Earthquake
Hazards in Solomon Islands

SOLOMON ISLANDS

Figure 1 — Building Locations

The Pacific islands region is prone to natural
hazards. The Solomon Islands are situated along
one segment of the Pacific “ring of fire,” whichaligns with the boundaries of the tectonic plates.
These boundaries are extremely active seismic
zones capable of generating large earthquakes
and, in some cases, major tsunamis that can travel
great distances. A recent and tragic example is the2007 magnitude 8.1 earthquake, which struck theislands of the Western and Choiseul Provinces of
the Solomon Islands. The earthquake generated
a tsunami that killed 52 people and caused
widespread damage to housing, infrastructure,

Figure 2 — Building replacement cost density by district.

schools, and medical facilities, resulting in about
100 million USD in losses. Figure 4 shows that theSolomon Islands have a 40% chance in the next
50 years of experiencing, at least once, very strong
to severe levels of ground shaking. These levels of
shaking are expected to cause damage ranging
from moderate to heavy to well-engineeredbuildings and even more severe damage tostructures built with less stringent criteria.
The Solomon Islands are located south of theequator at the northern extremity of an area
known for the frequent occurrence of tropical
cyclones with damaging winds, rains and storm
surge between the months of October and May.
In the South Pacific region from the equator to
New Zealand in latitude and from Indonesia toeast of Hawaii in longitude, almost 1,000 tropical
cyclones with hurricane-force winds spawned in
the last 60 years, with an average of about 16
tropical storms per year. The Solomon Islands wereaffected by devastating cyclones multiple times in
the last few decades. For example, tropical cyclone
Namu in 1986 claimed more than 100 lives andtens of thousands were left homeless. The storm
caused massive landslides and flooding with severe
damage to the building stock, infrastructure andFigure 3 — Land Cover / Land Use Map

SOLOMON ISLANDSPCRAFI253

crops, incurring losses between 30 and 60 million

Figure 4 — Maximum 1-minute sustained wind speed (inUSD that considerably set back the country’s

miles per hour) with a 40% chance to be exceeded at least

development. Figure 5 shows the levels of wind

once in the next 50 years.

speed due to tropical cyclones that have about a
40% chance to be exceeded at least once in thenext 50 years (100-year mean return period). Thesewind speeds, if they were to occur, are capableof generating moderate to severe damage tobuildings, infrastructure and crops with consequentsignificant economic losses.

Risk Analysis Results
To estimate the risk profile for the Solomon Islands
posed by tropical cyclones and earthquakes,
a simulation model of potential storms andearthquakes that may affect the country
in the future was constructed. This model,
based on historical data, simulates more than
400,000 tropical cyclones and about 7.6 million
earthquakes, grouped in 10,000 potential
realizations of the next year’s activity in the entire
Pacific Basin. The catalog of simulated earthquakes
also includes large magnitude events in Southand North America, Japan and the Philippines,
which could generate tsunamis that may affect theSolomon Islands’ shores.
The country’s earthquake and tropical cyclone risk
profiles are derived from an estimation of the direct
losses to buildings, infrastructure assets and major
crops that are caused by all the simulated potential
future events. The direct losses include the cost of
repairing or replacing the damaged assets, but do
not include other losses such as contents losses,
business interruption losses and losses to primaryindustries other than agriculture. The direct losses
for tropical cyclones are caused by wind andflooding due to rain and storm surge, while forearthquakes they are caused by ground shaking
and tsunami inundation. After assessing the costof repairing or rebuilding the damaged assets dueto the impact of all the simulated potential future

Figure 5 — Peak horizontal acceleration of the ground(Note: 1g is equal to the acceleration of gravity) that has about
a 40% chance to be exceeded at least once in the next 50
years.

PCRAFI254

SOLOMON ISLANDS

events, it is possible to estimate in a probabilistic

Figure 7 — Contribution from the different villages to thesense the severity of losses for future catastrophes.

average annual loss for tropical cyclone and earthquake

The simulations of possible next-year tropical(ground shaking and tsunami).

cyclone and earthquake activity show that someyears will see no storms or earthquakes affecting
the Solomon Islands, while other years may see
one or more events affecting the islands, similar towhat has happened historically. The annual losses
averaged over the many realizations of next-year
activity are shown in Figure 6 separately for tropical
cyclone and for earthquake and tsunami, while thecontributions to the average annual loss from thedifferent wards are displayed in absolute terms in
Figure 7 and normalized by the total asset values
in each ward in Figure 8. Figure 8 shows how the
relative risk varies by ward across the country.
Figure 8 — Contribution from the different villages to the
The same risk assessment carried out for thetropical cyclone and earthquake (ground shaking and tsunami)

Solomon Islands was also performed for the 14

average annual loss divided by the replacement cost of theother Pacific Island Countries. The values of theassets in each village.

average annual loss of the Solomon Islands and of
the other 14 countries are compared in Figure 9.
In addition estimating average risk per calendar
year, another way of assessing risk is to examine
large and rather infrequent, but possible, future
tropical cyclone and earthquake losses. Table 2
summarizes the risk profile for the Solomon Islands
in terms of both direct losses and emergency
losses. The former are the expenditures needed
to repair or replace the damaged assets while thelatter are the expenditures that the Solomon Islands
Figure 6 — Average annual loss due totropical cyclones and earthquakes (groundshaking and tsunami) and its contribution fromthe three types of assets.

SOLOMON ISLANDSPCRAFI

255

government may need to incur in the aftermath

Figure 9 — Average annual loss for all the 15 Pacific Islandof a natural catastrophe to provide necessary relief

Countries considered in this study.

and conduct activities such as debris removal,
setting up shelters for homeless or supplying
medicine and food. The emergency losses are
estimated as a percentage of the direct losses.
Table 2 includes the losses that are expected to
be exceeded, on average, once every 50, 100,
and 250 years. For example, an earthquake loss
exceeding 270 million USD, which is equivalent toabout 40% of the Solomon Islands’ GDP, is to be
expected, on average, once every 100 years. In the
Solomon Islands, earthquake losses are expected
to be substantially more frequent and severe thanlosses due to tropical cyclones. The latter, however,remain potentially catastrophic events.
A more complete picture of the risk can be

Figure 10 — Direct losses caused by either tropical storms

found in Figure 10, which shows the meanor earthquakes that are expected to be equaled or exceeded,

return period of direct losses in million USD

on average, once in the time period indicated. Losses

generated by earthquake, tsunami and tropicalrepresented in absolute terms and normalized by GDP.

cyclones combined. The 50-, 100-, and 250-year
mean return period losses in Table 2 can also be
determined from the curves in this figure. The
direct losses are expressed both in absolute terms
and as a percent of the national GDP.
In addition to causing damage and losses to thebuilt environment and crops, future earthquakes
and tropical cyclones will also have an impact
on population. The same probabilistic proceduredescribed above for losses has been adopted toestimate the likelihood that different levels ofcasualties (i.e., fatalities and injuries) may result
from the future occurrence of these events.
As shown in Table 2, our model estimates, forexample, that there is a 40% chance in the next
fifty years (100 year mean return period) that
one or more events in a calendar year will cause
casualties exceeding 1,900 people in the Solomon
Islands. Events causing 3,000 or more casualties

PCRAFI256

SOLOMON ISLANDS

are also possible but have much lower likelihood of

Table 2— Estimated Losses and Casualties Caused byoccurring.

Natural Perils
Mean Return Period (years)

AAL

50

100

250

5.8

4 4.5

63.9

101 .5

0.9%

6.6%

9.4%

15.0%

1.3

10.2

14.7

23.4

0.5%

3.6%

5.2%

8.2%

63

489

691

1,019

Risk Profile: Tropical Cyclone
Direct Losses(Million USD)(% GDP)
Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profile: Earthquake, and Tsunami
Direct Losses(Million USD)

14.7

175.3

268.7

400.8

(% GDP)

2.2%

25.8%

39.6%

59.1%

0.0

28.2

43.7

65.3

0.0%

10.0%

15.4%

23.1%

96

1,043

1,780

3,106

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profiles: Tropical Cyclone, Earthquake, and Tsunami
Direct Losses(Million USD)

20.5

189.6

280.6

426.2

(% GDP)

3.0%

27.9%

41.4%

62.8%

3.8

32.8

46.6

68.6

1.3%

11.6%

16.4%

24.2%

159

1,234

1,914

3,246

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

PCRAFI

SAMOA

257

Risk Profile: Samoa
Population, Buildings, Infrastructure
and Crops Exposed to Natural Perils
An extensive study has been conducted toassemble a comprehensive inventory of populationand properties at risk. Properties include residential,commercial, public and industrial buildings;
infrastructure assets such as major ports, airports,

Table 1— Summary of Exposure in Samoa (2010)

GENERAL INFORMATION:

Total Population:

183,000

GDP Per Capita (USD):

3,090

Total GDP (million USD):

565.2

Asset Counts:
Residential Buildings:

41,960Public Buildings:

1,720

Commercial, Industrial, and Other Buildings:

5,151

All Buildings:

48,831

Table 1 summarizes population and the inventory

Hectares of Major Crops:

35,553of buildings, infrastructure assets, and major

COST OF REPLACING ASSETS (MILLION USD):

crops (or “exposure”) at risk as well as key

Buildings:

2,148

economic values for Samoa. It is estimated that

Infrastructure:465

the replacement value of all the assets in Samoa

Crops:

25

is 2.6 billion USD of which about 81% represents

Total:

2,638

power plants, bridges, and roads; and major crops,
such as coconut, banana, taro, sugarcane, papaya
and many others.

buildings and 18% represents infrastructure.
Figures 1 and 2 illustrate the building exposure
location and replacement cost distribution,
respectively. The footprints of all the approximately
49,000 buildings shown in Figure 1 were digitizedfrom high-resolution satellite imagery. More than
6,500 of such buildings, most of them in Apia,
were also field surveyed and photographed bya team of inspectors deployed for this purpose.
Figure 3 displays the land cover/land use map that
includes the location of major crops. The datautilized for these exhibits was assembled, organized
and, when unavailable, produced in this study.

GOVERNMENT REVENUE AND EXPENDITURE:

Total Government Revenue(Million USD):

170.8(% GDP):

30.2%

Total Government Expenditure(Million USD):

224.4(% GDP):

39.7%

1
Data assembled from various references including WB, ADB, IMF and The Secretariat of the PacificCommunity (SPC).
2
The projected 2010 population was trended from the 2006 census using estimated growth rates
provided by SPC.

PCRAFI

258

Tropical Cyclone and Earthquake
Hazards in Samoa
The Pacific islands region is prone to natural
hazards. Samoa is located south of the equatorin an area known for the frequent occurrence oftropical cyclones with damaging winds, rains andstorm surge between the months of October andMay. In the South Pacific region from the equator
to New Zealand in latitude and from Indonesia toeast of Hawaii in longitude almost 1,000 tropical
cyclones with hurricaneforce winds spawned in
the last 60 years, with an average of about 16
tropical storms per year. Samoa was affected bydevastating cyclones multiple times in the last few
decades. For example, tropical cyclones Ofa andVal, in 1990 and 1991, caused 21 fatalities andwidespread destruction with total economic losses
between 300 and 500 million USD that crippled
the local economy. Figure 4 shows the levels ofwind speed due to tropical cyclones that haveabout a 40% chance to be exceeded at least oncein the next 50 years (100-year mean return period).
These wind speeds, if they were to occur, arecapable of generating severe damage to buildings,
infrastructure and crops with consequent large
economic losses.
Samoa is situated in a relatively quiet seismicarea but is surrounded by the Pacific “ring offire,” which aligns with the boundaries of thetectonic plates. These boundaries are extremely
active seismic zones capable of generatinglarge earthquakes and, in some cases, major
tsunamis that can travel great distances. The 2009
magnitude 8.1 earthquake, which generated adevastating tsunami destroying many villages
on the island of Upolu, is a recent and tragic
example. Figure 5 shows that Samoa has a 40%
chance in the next 50 years of experiencing,at least once, moderate to very strong levelsof ground shaking. These levels of shaking areexpected to cause damage, ranging from light tomoderate, to well-engineered buildings and evenmore severe damage to structures built with lessstringent criteria.

SAMOA

Figure 1 — Building Locations

Figure 2 — Building replacement cost density by district.

Figure 3 — Land Cover / Land Use Map

PCRAFISAMOA

Risk Analysis Results
To estimate the risk profile for Samoa posed bytropical cyclones and earthquakes, a simulation

259

Figure 4 — Maximum 1-minute sustained wind speed (inmiles per hour) with a 40% chance to be exceeded at least
once in the next 50 years.

model of potential storms and earthquakesthat may affect the country in the future wasconstructed. This model, based on historical data,
simulates more than 400,000 tropical cyclones andabout 7.6 million earthquakes, grouped in 10,000
potential realizations of the next year’s activity inthe entire Pacific Basin. The catalog of simulated
earthquakes also includes large magnitude events
in South and North America, Japan and thePhilippines, which could generate tsunamis that
may affect Samoa’s shores.
The country’s earthquake and tropical cyclone
risk profiles are derived from an estimation of thedirect losses to buildings infrastructure assets andmajor crops caused by all the simulated potential
future events. The direct losses comprise the costof repairing or replacing the damaged assets but
do not include other losses such as contents losses,
business interruption losses and losses to primaryindustries other than agriculture. The direct losses
for tropical cyclones are caused by wind andflooding due to rain and storm surge, while losses
for earthquakes are caused by ground shaking
and tsunami inundation. After assessing the costof repairing or rebuilding the damaged assets dueto the impact of all the simulated potential future
events, it is possible to estimate in a probabilistic
sense the severity of losses for future catastrophes.
The simulations of possible next-year tropical
cyclone and earthquake activity show that someyears will see no storms or earthquakes affecting
Samoa, while other years may see one or more
events affecting the islands, similar to what has
happened historically. The annual losses averaged
over the many realizations of next-year activity
are shown in Figure 6 separately for tropical
cyclone and for earthquake and tsunami, while the

Figure 5 — Peak horizontal acceleration of the ground(Note: 1g is equal to the acceleration of gravity) that has about
a 40% chance to be exceeded at least once in the next 50
years.

PCRAFI

260

SAMOA

contributions to the average annual loss from the

Figure 7 — Contribution from the different villages to thedifferent districts are displayed in absolute terms inaverage annual loss for tropical cyclone and earthquake

Figure 7 and normalized by the total asset values(ground shaking and tsunami).

in each district in Figure 8. Figure 8 shows how the
relative risk varies by district across the country.
The same risk assessment carried out for Samoa
was also performed for the 14 other Pacific Island
Countries. The values of the average annual loss of
Samoa and of the other 14 countries are comparedin Figure 9.
In addition to estimating average risk per calendar
year, another way of assessing risk is to examine
large and rather infrequent but possible future
tropical cyclone and earthquake losses. Table 2
summarizes the risk profile for Samoa in termsof both direct losses and emergency losses. The

Figure 8 — Contribution from the different villages to theformer are the expenditures needed to repair or

tropical cyclone and earthquake (ground shaking and tsunami)

replace the damaged assets while the latter are

average annual loss divided by the replacement cost of thethe expenditures that the Samoan government

assets in each village.

may need to incur in the aftermath of a natural
catastrophe to provide necessary relief and conduct
activities such as debris removal, setting up shelters
for homeless or supplying medicine and food. The
emergency losses are estimated as a percentage ofthe direct losses.
Table 2 includes the losses that are expected to be
exceeded, on average, once every 50, 100, and
250 years. For example, a tropical cyclone loss
exceeding 134 million USD, which is equivalent
to about 24% of Samoa’s GDP, is to be expected
Figure 6 — Average annual loss due totropical cyclones and earthquakes (groundshaking and tsunami) and its contribution fromthe three types of assets.

PCRAFI

SAMOA

261

on average once every 100 years. In Samoa,

Figure 9 — Average annual loss for all the 15 Pacific Island

tropical cyclone

Countries considered in this study.

losses are expected to be substantially more
frequent and severe than losses due to earthquake
ground shaking and tsunami. The latter, however,remain potentially catastrophic events.
A more complete picture of the risk can be foundin Figure 10, which shows the mean return
period of direct losses in million USD generated
by earthquake, tsunami and tropical cyclones
combined. The 50, 100, and 250 year mean return
period losses in Table 2 can also be determinedfrom the curves in this figure. The direct losses are
expressed both in absolute terms and as a percentof the national GDP.
In addition to causing damage and losses to thebuilt environment and crops, future earthquakes
and tropical cyclones will also have an impact
on population. The same probabilistic proceduredescribed above for losses has been adopted toestimate the likelihood that different levels ofcasualties (i.e., fatalities and injuries) may result
from the future occurrence of these events.
As shown in Table 2, our model estimates, forexample, that there is a 40% chance in the next**

fifty years (100 year mean return period)that one or more events in a calendar year
will cause casualties exceeding 370 people
in Samoa. Events causing approximately 1,000**

casualties are also possible but have much lower
likelihood of occurring.

Figure 10 — Direct losses caused by either tropical storms
or earthquakes that are expected to be equaled or exceeded,on average, once in the time period indicated. Losses
represented in absolute terms and normalized by GDP.

262

PCRAFISAMOA

Table 2— Estimated Losses and Casualties Caused by
Natural Perils
Mean Return Period (years)

AAL

50

100

250

(Million USD)

6.9

78.6

134.1

267.8

(% GDP)

1.2%

13.9%

23.7%

45.6%

1.6

18.1

30.9

59.2

0.7%

8.1%

13.7%

26.4%

11

131

212

303

Risk Profile: Tropical Cyclone
Direct Losses

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profile: Earthquake, and Tsunami
Direct Losses(Million USD)(% GDP)

2.9

39.1

93.1

116.3

0.5%

6.9%

16.5%

26.6%

0.0

8.9

21.4

26.6

0.0%

3.9%

9.5%

11.9%

8

145

302

410

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profiles: Tropical Cyclone,, Earthquake, and Tsunami
Direct Losses(Million USD)

9.9

109.8

152.9

266.1

(% GDP)

1.7%

19.4%

27.0%

471.%

2.3

25.2

35.1

61.2

1.0%

11.2%

15.7%

27.3%

19

254

374

469

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

PCRAFI

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263

Risk Profile: Vanuatu
Population, Buildings, Infrastructure
and Crops Exposed to Natural Perils

Table 1— Summary of Exposure in Vanuatu (2010)

An extensive study has been conducted to

GENERAL INFORMATION:

assemble a comprehensive inventory of population

Total Population:

246,000

and properties at risk. Properties include residential,

GDP Per Capita (USD):

2,960

commercial, public and industrial buildings;

Total GDP (million USD):

729.0

infrastructure assets such as major ports, airports,

Asset Counts:

power plants, bridges, and roads; and major

Residential Buildings:

90,699crops, such as coconut, palm oil, taro, vanilla andPublic Buildings:

3,280

many others.

Commercial, Industrial, and Other Buildings:

6,767

All Buildings:

100,749of buildings, infrastructure assets, and major crops

Hectares of Major Crops:

78.434(or “exposure”) at risk as well as key economic

COST OF REPLACING ASSETS (MILLION USD):

values for Vanuatu. It is estimated that the

Buildings:

2,858

replacement value of all the assets in Vanuatu isInfrastructure:420

3.3 billion USD, of which about 86.5% represents

Crops:

25

buildings and 12.5% represents infrastructure.

Total:

3,303

Table 1 summarizes population and the inventory

Figures 1 and 2 illustrate the building exposure
location and replacement cost distribution,

GOVERNMENT REVENUE AND EXPENDITURE:

Total Government Revenue(Million USD):

173.7

the approximately 101,000 buildings shown(% GDP):

23.8%

in Figure 1 were digitized from high-resolution

Total Government Expendituresatellite imagery. More than 10,600 of such

(Million USD):

178.8

buildings, including about 7,500 near the nation’s(% GDP):

24.5%

respectively. The footprints of about 32,500 of

capital of Port Vila, were also field surveyed andphotographed by a team of inspectors deployed forthis purpose. Figure 3 displays the land cover/land
use map that includes the location of major crops.
The data utilized for these exhibits was assembled,organized and, when unavailable, produced inthis study.

1
Data assembled from various references including WB, ADB, IMF and The Secretariat of the PacificCommunity (SPC).
2
The projected 2010 population was trended from the 2006 census using estimated growth rates
provided by SPC.

PCRAFI

264

Tropical Cyclone and Earthquake
Hazards in Vanuatu

VA N UAT U

Figure 1 — Building Locations

The Pacific islands region is prone to natural
hazards. Vanuatu is located south of the equatorin an area known for the frequent occurrenceof tropical cyclones with damaging winds, rains
and storm surge between the months of Octoberand May. In the South Pacific region from theequator to New Zealand in latitude and fromIndonesia to east of Hawaii in longitude almost
1,000 tropical cyclones with hurricaneforce winds
spawned in the last 60 years, with an average ofabout 16 tropical storms per year. Vanuatu wasaffected by devastating cyclones several times in
the last few decades. For example, since 1990,

Figure 2 — Building replacement cost density by district.

Vanuatu has been subject to at least 20 damaging
tropical cyclones. The most significant cyclones inrecent years were Uma in 1987 and Ivy in 2004,
each affecting nearly 50,000 people and causing
destruction that amounted to losses in the tens tohundreds of million USD. Figure 4 shows the levelsof wind speed due to tropical cyclones that haveabout a 40% chance to be exceeded at least oncein the next 50 years (100-year mean return period).
These wind speeds, if they were to occur, arecapable of generating severe damage to buildings,
infrastructure and crops with consequent large
economic losses.
Vanuatu is situated along one segment of the
Pacific “ring of fire,” which aligns with theboundaries of the tectonic plates. These tectonic
plate boundaries are extremely active seismic zones
capable of generating large earthquakes and, insome cases, major tsunamis that can travel great
distances. Vanuatu was affected by devastating
earthquakes and tsunamis several times in the lastfew decades. In 1999, a magnitude 7.5 earthquake
caused extensive damage to Pentecost Island,leaving more than 10 dead, over 100 injured,and millions of USD in losses. The earthquake
generated a large tsunami, including a six meter

Figure 3 — Land Cover / Land Use Map

PCRAFI

VA N UAT U

265

wave that completely destroyed the village of Baie

Figure 4 — Maximum 1-minute sustained wind speed (inMartelli. In 2002, a magnitude 7.3 earthquake

miles per hour) with a 40% chance to be exceeded at least

struck near the national capital of Port Vila,once in the next 50 years.

causing millions of USD in damage to buildings andinfrastructure. Figure 5 shows that Vanuatu has a
40% chance in the next 50 years of experiencing,at least once, very strong to severe levels of groundshaking. These levels of shaking are expected tocause damage ranging from moderate to heavy
to well-engineered buildings and even moresignificant damage to structures built with lessstringent criteria.

Risk Analysis Results
To estimate the risk profile for Vanuatu posed bytropical cyclones and earthquakes, a simulation
model of potential storms and earthquakesthat may affect the country in the future wasconstructed. This model, based on historical data,
simulates more than 400,000 tropical cyclones andabout 7.6 million earthquakes, grouped in 10,000
potential realizations of the next year’s activity inthe entire Pacific Basin. The catalog of simulated
earthquakes also includes large magnitude events
in South and North America, Japan and thePhilippines, which could generate tsunamis that
may affect Vanuatu’s shores.
The country’s earthquake and tropical cyclone
risk profiles are derived from an estimation of thedirect losses to buildings, infrastructure assets andmajor crops caused by all the simulated potential
future events. The direct losses include the cost of
repairing or replacing the damaged assets but do
not include other losses such as contents losses,
business interruption losses and losses to primaryindustries other than agriculture. The direct losses
for tropical cyclones are caused by wind andflooding due to rain and storm surge, while forearthquakes they are caused by ground shaking
and tsunami inundation. After assessing the costof repairing or rebuilding the damaged assets

Figure 5 — Peak horizontal acceleration of the ground(Note: 1g is equal to the acceleration of gravity) that has about
a 40% chance to be exceeded at least once in the next 50
years.

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VA N UAT U

due to the impact of all the simulated potential

Figure 7 — Contribution from the different villages to the

future events, it becomes possible to estimate

average annual loss for tropical cyclone and earthquake

in a probabilistic sense the severity of losses for(ground shaking and tsunami).

future catastrophes.
The simulations of possible next-year tropical
cyclone and earthquake activity show that someyears will see no storms or earthquakes affecting
Vanuatu, while other years may see one or more
events affecting the islands, similar to what has
happened historically. The annual losses averaged
over the many realizations of next-year activity
are shown in Figure 6 separately for tropical
cyclone and for earthquake and tsunami, while thecontributions to the average annual loss from thedifferent area councils are displayed in absoluteterms in Figure 7 and normalized by the total asset
values in each area council in Figure 8. Figure 8

Figure 8 — Contribution from the different villages to theshows how the relative risk varies by area council

tropical cyclone and earthquake (ground shaking and tsunami)

across the country.

average annual loss divided by the replacement cost of theassets in each village.

The same risk assessment carried out for Vanuatu
was also performed for the 14 other Pacific Island
Countries. The values of the average annual lossof Vanuatu and of the other 14 countries arecompared in Figure 9.
In addition to estimating average risk per calendar
year, another way of assessing risk is to examine
large and rather infrequent, but possible, future
tropical cyclone and earthquake losses. Table 2
summarizes the risk profile for Vanuatu in termsof both direct losses and emergency losses. The
Figure 6 — Average annual loss due totropical cyclones and earthquakes (groundshaking and tsunami) and its contribution fromthe three types of assets.

PCRAFI

VA N UAT U

267

former are the expenditures needed to repair or

Figure 9 — Average annual loss for all the 15 Pacific Island

replace the damaged assets while the latter are

Countries considered in this study.

the expenditures that the Vanuatuan government
may need to incur in the aftermath of a natural
catastrophe to provide necessary relief and conduct
activities such as debris removal, setting up shelters
for homeless or supplying medicine and food. The
emergency losses are estimated as a percentage ofthe direct losses.
Table 2 includes the losses that are expected to
be exceeded, on average, once every 50, 100,
and 250 years. For example, a tropical cyclone**

loss exceeding 312 million USD, which isequivalent to about 43% of Vanuatu’s GDP,
is to be expected, on average, once every
100 years. In Vanuatu, tropical cyclone losses are**

expected to be more frequent and severe thanlosses due to earthquake ground shaking andtsunami. The latter, however, remain potentiallycatastrophic events.

Figure 10 — Direct losses caused by either tropical storms
or earthquakes that are expected to be equaled or exceeded,on average, once in the time period indicated. Losses
represented in absolute terms and normalized by GDP.

A more complete picture of the risk can befound in Figure 10, which shows the mean
return period of direct losses in million USD
generated by earthquake, tsunami and tropical
cyclones combined. The 50-, 100-, and 250-year
mean return period losses in Table 2 can also be
determined from the curves in this figure. The
direct losses are expressed both in absolute terms
and as a percent of the national GDP.
In addition to causing damage and losses to thebuilt environment and crops, future earthquakes
and tropical cyclones will also have an impact
on population. The same probabilistic proceduredescribed above for losses has been adopted toestimate the likelihood that different levels ofcasualties (i.e., fatalities and injuries) may result
from the future occurrence of these events.
As shown in Table 2, our model estimates, forexample, that there is a 40% chance in the next**

fifty years (100-year mean return period)

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268

VA N UAT U

that one or more events in a calendar year

Table 2— Estimated Losses and Casualties Caused bywill cause casualties exceeding 900 people in

Natural Perils

Vanuatu. Events causing 2,000 or more casualties**

are also possible but have much lower likelihood of
occurring.

Mean Return Period (years)

AAL

50

100

250

(Million USD)

36.8

240.6

311.8

398.8

(% GDP)

5.0%

33.0%

42.8%

54.7%

8.5

55.3

71.7

91.7

4.7%

30.9%

40.1%

51.3%

41

260

333

415

Risk Profile: Tropical Cyclone
Direct Losses

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profile: Earthquake, and Tsunami
Direct Losses(Million USD)

11.2

119.6

182.6

319.7

(% GDP)

1.5%

16.4%

25.0%

43.9%

0.0

19.2

29.3

51.7

0.0%

10.8%

16.4%

28.9%

45

471

877

1,627

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profiles: Tropical Cyclone, Earthquake, and Tsunami
Direct Losses(Million USD)

47.9

284.9

370.1

478.5

(% GDP)

6.6%

39.1%

50.8%

65.6%

10.3

61.4

77.9

97.5

5.7%

34.3%

43.6%

54.5%

86

577

901

1,675

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

PCRAFI

Tonga

269

Risk Profile: Tonga
Population, Buildings, Infrastructure
and Crops Exposed to Natural Perils
An extensive study has been conducted toassemble a comprehensive inventory of populationand properties at risk. Properties include residential,commercial, public and industrial buildings;
infrastructure assets such as major ports, airports,

Table 1— Summary of Exposure in Tonga (2010)

GENERAL INFORMATION:

Total Population:

103,000

GDP Per Capita (USD):

3,470

Total GDP (million USD):

358

Asset Counts:
Residential Buildings:

30,156

Public Buildings:

1,594

Commercial, Industrial, and Other Buildings:

3,001

All Buildings:

34,751

Table 1 summarizes population and the inventory

Hectares of Major Crops:

36,010of buildings, infrastructure assets, and major

COST OF REPLACING ASSETS (MILLION USD):

crops (or “exposure”) at risk as well as key

Buildings:

2,525

economic values for Tonga It is estimated that

Infrastructure:259

the replacement value of all the assets in Tonga

Crops:

32

is 2.8 billion USD of which about 90% represents

Total:

2,816

power plants, bridges, and roads; and major
crops, such as coconut, palm oil, taro, vanilla andmany others.

buildings and 9% represents infrastructure.

GOVERNMENT REVENUE AND EXPENDITURE:

Total Government Revenue(Million USD):

82(% GDP):

22.90%

Total Government Expenditure(Million USD):

99.2(% GDP):

27.70%

PCRAFI

270

Figures 1 and 2 illustrate the building exposure

Tonga

Figure 1 — Building Locations

location and replacement cost distribution,
respectively. The footprints of about 28,000 of theapproximately 35,000 buildings shown in Figure
1 were digitized from high-resolution satellite
imagery. More than 10,000 of such buildings, all inthe main island of Tongatapu, and most near thevicinity of the nation’s capital of Nuku’alofa, werealso field surveyed and photographed by a teamof inspectors deployed for this purpose. Figure 3
displays the land cover/land use map that includes
the location of major crops. The data utilized forthese exhibits was assembled, organized and,
when unavailable, produced in this study.

Tropical Cyclone and Earthquake
Hazards in Tonga

Figure 2 — Building Replacement cost Density by village

The Pacific islands region is prone to natural
hazards. Tonga is located south of the equatorin an area known for the frequent occurrence oftropical cyclones with damaging winds, rains andstorm surge between the months of October andMay. In the South Pacific region from the equator
to New Zealand in latitude and from Indonesia toeast of Hawaii in longitude almost 1,000 tropical
cyclones with hurricaneforce winds spawned in thelast 60 years, with an average of about 16 tropicalstorms per year. Tonga was affected by devastating
cyclones multiple times in the last few decades.
For example, tropical cyclones Isaac and Waka, in1982 and 2001, caused 7 fatalities, destroyed the
shelters of tens of thousands of people as well as
much of the nation’s agriculture crops and caused
about 75 million USD in losses that crippled the
local economy. Figure 4 shows the levels of windspeed due to tropical cyclones that have about a
40% chance to be exceeded at least once in thenext 50 years (100- year mean return period).
These wind speeds, if they were to occur, arecapable of generating severe damage to buildings,
infrastructure and crops with consequent large
economic losses.

Figure 3 — Land Cover / Land Use Map

PCRAFI

Tonga

271

Tonga is situated along one segment of the PacificFigure 4 — Maximum 1-minute sustained wind speed (in“ring of fire,” which aligns with the boundaries ofmiles per hour) with a 40% chance to be exceeded at least

the tectonic plates. These tectonic plate boundaries

once in the next 50 years (100-year mean return period).

are extremely active seismic zones capable ofgenerating large earthquakes and, in some cases,
major tsunamis that can travel great distances. In
1977, a magnitude 7.2 earthquake violently shook
the southern islands of Tonga caused considerable
damage to structures. A recent and tragic example
is the offshore magnitude 8.1 earthquake in 2009,
which generated a devastating tsunami that killed
9 people and destroyed over half of the housesin the Tongan island of Niuatoputapu before
hitting the shores of Samoa. Figure 5 shows that
Tonga has a 40% chance in the next 50 yearsof experiencing, at least once, moderate to verystrong levels of ground shaking. These levels of
shaking are expected to cause damage ranging
from moderate to heavy to well-engineeredbuildings and even more severe damage tostructures built with less stringent criteria.

Risk Analysis Results
To estimate the risk profile for Tonga posed bytropical cyclones and earthquakes, a simulation
model of potential storms and earthquakesthat may affect the country in the future wasconstructed. This model, based on historical data,
simulates more than 400,000 tropical cyclones andabout 7.6 million earthquakes, grouped in 10,000
potential realizations of the next year’s activity inthe entire Pacific Basin. The catalog of simulated
earthquakes also includes large magnitude events
in South and North America, Japan and thePhilippines, which could generate tsunamis that
may affect Tonga’s shores.

Figure 5 — Peak horizontal acceleration of the ground(Note: 1g is equal to the acceleration of gravity) that has about
a 40% chance to be exceeded at least once in the next 50
years (100-year mean return period).

PCRAFI

272

Tonga

The country’s earthquake and tropical cyclone

Figure 7 — Contribution from the different villages to therisk profiles are derived from an estimation of theaverage annual loss for tropical cyclone and earthquake

direct losses to buildings, infrastructure assets and(ground shaking and tsunami).

major crops caused by all the simulated potential
future events. The direct losses include the cost of
repairing or replacing the damaged assets, but do
not include other losses such as contents losses,
business interruption losses and losses to primaryindustries other than agriculture. The direct losses
for tropical cyclones are caused by wind andflooding due to rain and storm surge, while forearthquakes they are caused by ground shaking
and tsunami inundation. After assessing the costof repairing or rebuilding the damaged assets dueto the impact of all the simulated potential future
events, it is possible to estimate in a probabilistic
sense the severity of losses for future catastrophes.

Figure 8 — Contribution from the different villages to the

The simulations of possible next-year tropicaltropical cyclone and earthquake (ground shaking and tsunami)

cyclone and earthquake activity show that someaverage annual loss divided by the replacement cost of theyears will see no storms or earthquakes affecting

assets in each village.

Tonga, while other years may see one or more
events affecting the islands, similar to what has
happened historically. The annual losses averaged
over the many realizations of next-year activity
are shown in Figure 6 separately for tropical
cyclone and for earthquake and tsunami, while thecontributions to the average annual loss from thedifferent villages are displayed in absolute terms in
Figure 7 and normalized by the total asset values
in each village in Figure 8. Figure 8 shows how the
relative risk varies by village across the country.

Figure 6 — Average annual loss due totropical cyclones and earthquakes (groundshaking and tsunami) and its contribution fromthe three types of assets.

PCRAFI

Tonga

273

The same risk assessment carried out for Tonga

Figure 9 — Average annual loss for all the 15 Pacific Island

was also performed for the 14 other Pacific Island

Countries considered in this study.

Countries. The values of the average annual loss of
Tonga and of the other 14 countries are comparedin Figure 9.
In addition to estimating average risk per calendar
year, another way of assessing risk is to examine
large and rather infrequent, but possible, future
tropical cyclone and earthquake losses. Table 2
summarizes the risk profile for Tonga in termsof both direct losses and emergency losses. The
former are the expenditures needed to repair or
replace the damaged assets while the latter are
the expenditures that the Tongan government
may need to incur in the aftermath of a natural
catastrophe to provide necessary relief and conduct
activities such as debris removal, setting up shelters
for homeless or supplying medicine and food. The
emergency losses are estimated as a percentage ofthe direct losses.

Figure 10 — Direct losses caused by either tropical storms
or earthquakes that are expected to be equaled or exceeded,on average, once in the time period indicated. Losses
represented in absolute terms and normalized by GDP.

Table 2 includes the losses that are expected to
be exceeded, on average, once every 50, 100,
and 250 years. For example, an earthquake and**tsunami loss exceeding 154 million USD, whichis equivalent to about 43% of Tonga’s GDP,
is to be expected, on average, once every
100 years. In Tonga, tropical cyclone losses are**comparable to losses due to earthquake groundshaking and tsunami. The latter, however, remain
potentially catastrophic events.
A more complete picture of the risk can befound in Figure 10, which shows the mean
return period of direct losses in million USD
generated by earthquake, tsunami and tropical
cyclones combined. The 50-, 100-, and 250-year
mean return period losses in Table 2 can also be
determined from the curves in this figure. The
direct losses are expressed both in absolute terms
and as a percent of the national GDP.

PCRAFI

274

Tonga

In addition to causing damage and losses to theTable 2— Estimated Losses and Casualties Caused bybuilt environment and crops, future earthquakes

Natural Perils

and tropical cyclones will also have an impact
on population. The same probabilistic proceduredescribed above for losses has been adopted toestimate the likelihood that different levels ofcasualties (i.e., fatalities and injuries) may result
from the future occurrence of these events.
As shown in Table 2, our model estimates, forexample, that there is a 40% chance in the next

Mean Return Period (years)

AAL

50

100

250

Risk Profile: Tropical Cyclone(Million USD)(% GDP)

9.5

78.7

126

212.6

2.70%

22.00%

35.20%

59.50%

2.2

18.1

28.9

48.9

2.20%

18.20%

29.10%

49.30%

10

87

134

209

Emergency Losses(Million USD)(% of total government
expenditures)

fifty years (100-year mean return period) that

Casualties

one or more events in a calendar year will cause

Risk Profile: Earthquake, and Tsunami

casualties exceeding about 600 people in Tonga.

(Million USD)

Events causing 2,000 or more casualties are(% GDP)

6

76.3

154.2

280.1

1.70%

21.40%

43.10%

78.40%

0

12.4

24.7

44.8

0.00%

12.50%

24.90%

45.20%

24

245

575

1,160

also possible but have much lower likelihood of
occurring.

(Million USD)(% of total government
expenditures)
Casualties

Risk Profiles: Tropical Cyclone,, Earthquake, and Tsunami
Direct Losses(Million USD)(% GDP)

15.5

140.2

225.3

345.6

4.30%

39.20%

63.00%

96.70%

3.2

28.1

41.8

63.6

3.20%

28.30%

42.10%

64.10%

34

299

600

1,174

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

MARSHALL ISLANDSPCRAFI

275

Risk Profile: Marshall Islands
Population, Buildings, Infrastructure
and Crops Exposed to Natural Perils
An extensive study has been conducted toassemble a comprehensive inventory of populationand properties at risk. Properties include residential,commercial, public and industrial buildings;
infrastructure assets such as major ports, airports,
power plants, bridges, and roads; and major
crops, such as coconut, palm oil, taro, vanilla andmany others.
Table 1 summarizes population and the inventoryof buildings, infrastructure assets, and major crops(or “exposure”) at risk as well as key economic
values for the Republic of the Marshall Islands. It
is estimated that the replacement value of all theassets in the Republic of the Marshall Islands is
1.7 billion USD of which about 83% represents
buildings and 17% represents infrastructure.
Figures 1 and 2 illustrate the building exposure
location and replacement cost distribution,
respectively. The footprints of about 7,700 of theapproximately 13,000 buildings shown in Figure
1 were digitized from high-resolution satellite
imagery. Figure 3 displays the land cover/land use
map that includes the location of major crops. The
data utilized for these exhibits was assembled,organized and, when unavailable, produced inthis study.

Table 1— Summary of Exposure in Marshall Islands (2010)

GENERAL INFORMATION:

Total Population:

54,800GDP Per Capita (USD):

2,840

Total GDP (million USD):

155.8

Asset Counts:
Residential Buildings:

11,407

Public Buildings:

608

Commercial, Industrial, and Other Buildings:

879

All Buildings:

12,894

Hectares of Major Crops:

8,601

COST OF REPLACING ASSETS (MILLION USD):

Buildings:

1,404

Infrastructure:286

Crops:

6

Total:

1,696

GOVERNMENT REVENUE AND EXPENDITURE:

Total Government Revenue(Million USD):

103.8(% GDP):

66.6%

Total Government Expenditure(Million USD):

104.1(% GDP):

66.8%

1
Data assembled from various references including WB, ADB, IMF and The Secretariat of the PacificCommunity (SPC).
2
The projected 2010 population was trended from the 2006 census using estimated growth rates
provided by SPC.

PCRAFI

276

Tropical Cyclone and Earthquake
Hazards in Marshall Islands

MARSHALL ISLANDS

Figure 1 — Building Locations

The Pacific islands region is prone to natural
hazards. The Republic of the Marshall Islands islocated north of the equator in an area known for
the frequent occurrence of tropical cyclones withdamaging winds, rains and storm surge all year
round. In the North Pacific region from Taiwan tothe equator in latitude and from Indonesia to eastof Hawaii in longitude, more than 1,400 tropical
cyclones with hurricaneforce winds spawned in thelast 60 years, with an average of about 25 tropicalstorms per year. The Republic of the MarshallIslands was affected by devastating cyclones
several times in the last few decades. For example,

Figure 2 — Building replacement cost density by district.

typhoon Paka in 1997 caused severe damage tocrops and damaged 70% of houses on Ailinglaplap
Atoll, with total damages estimated at 80 million
USD for the entire nation. Typhoons Zelda, Axeland Gay each caused significant damage andlosses within a span of one year (1991-1992).
Figure 4 shows the levels of wind speed due totropical cyclones that have about a 40% chance
to be exceeded at least once in the next 50 years(100- year mean return period). These wind speeds,
if they were to occur, are capable of generating
moderate to severe damage to buildings,
infrastructure and crops with consequent large
economic losses.
The Republic of the Marshall Islands is situatedalong a relatively quiet seismic area but issurrounded by the Pacific “ring of fire,” whichaligns with the boundaries of the tectonic plates.
These boundaries are extremely active seismic
zones capable of generating large earthquakes
and, in some cases, major tsunamis that can
travel great distances. No significant earthquakes
have been observed in recent history. However,in 1899, a large earthquake off the eastern coastof New Ireland, Papua New Guinea generated atsunami that caused a considerable amount of

Figure 3 — Land Cover / Land Use Map

MARSHALL ISLANDSPCRAFI277

damage in the Republic of the Marshall Islands.

Figure 4 — Maximum 1-minute sustained wind speed (inFigure 5 shows that the Republic of the Marshallmiles per hour) with a 40% chance to be exceeded at least

Islands has a 40% chance in the next 50 years ofonce in the next 50 years.

experiencing, at least once, very weak levels ofground shaking. These levels of shaking are notexpected to cause any significant damage to wellengineered buildings.

Risk Analysis Results
To estimate the risk profile for The Republic of
the Marshall Islands posed by tropical cyclones
and earthquakes, a simulation model of potential
storms and earthquakes that may affect thecountry in the future was constructed. Thismodel, based on historical data, simulates morethan 400,000 tropical cyclones and about 7.6
million earthquakes, grouped in 10,000 potential
realizations of the next year’s activity in the entire
Pacific Basin. The catalog of simulated earthquakes
also includes large magnitude events in South andNorth America, Japan and the Philippines, which
could generate tsunamis that may affect MarshallIslands’ shores.
The country’s earthquake and tropical cyclone
risk profiles are derived from an estimation of thedirect losses to buildings, infrastructure assets andmajor crops caused by all the simulated potential
future events. The direct losses include the cost of
repairing or replacing the damaged assets, but do
not include other losses such as contents losses,
business interruption losses and losses to primaryindustries other than agriculture. The direct losses
for tropical cyclones are caused by wind andflooding due to rain and storm surge, while forearthquakes they are caused by ground shaking
and tsunami inundation. After assessing the costof repairing or rebuilding the damaged assets dueto the impact of all the simulated potential future
events, it is possible to estimate in a probabilistic
sense the severity of losses for future catastrophes.

Figure 5 — Peak horizontal acceleration of the ground(Note: 1g is equal to the acceleration of gravity) that has about
a 40% chance to be exceeded at least once in the next 50
years.

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278

MARSHALL ISLANDS

The simulations of possible next-year tropicalFigure 7 — Contribution from the different villages to thecyclone and earthquake activity show that someaverage annual loss for tropical cyclone and earthquake

years will see no storms or earthquakes affecting(ground shaking and tsunami).

the Republic of the Marshall Islands, while otheryears may see one or more events affecting theislands, similar to what has happened historically.
The annual losses averaged over the many
realizations of next-year activity are shown in
Figure 6 separately for tropical cyclone and forearthquake and tsunami, while the contributions
to the average annual loss from the different atolls
are displayed in absolute terms in Figure 7 andnormalized by the total asset values in each atoll in
Figure 8. Figure 8 shows how the relative risk varies
by atoll across the country.
The same risk assessment carried out for theRepublic of the Marshall Islands was also

Figure 8 — Contribution from the different villages to theperformed for the 14 other Pacific Island Countries.

tropical cyclone and earthquake (ground shaking and tsunami)

The values of the average annual loss of Republic

average annual loss divided by the replacement cost of theof the Marshall Islands and of the other 14

assets in each village.

countries are compared in Figure 9.
In addition to estimating average risk per calendar
year, another way of assessing risk is to examine
large and rather infrequent, but possible, future
tropical cyclone and earthquake losses. Table 2
summarizes the risk profile for the Republic of the
Marshall Islands in terms of both direct losses andemergency losses. The former are the expendituresneeded to repair or replace the damaged assets
while the latter are the expenditures that the

Figure 6 — Average annual loss due totropical cyclones and earthquakes (groundshaking and tsunami) and its contribution fromthe three types of assets.

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279

Marshallese government may need to incur inFigure 9 — Average annual loss for all the 15 Pacific Island

the aftermath of a natural catastrophe to provide

Countries considered in this study.

necessary relief and conduct activities such asdebris removal, setting up shelters for homelessor supplying medicine and food. The emergency
losses are estimated as a percentage of thedirect losses.
Table 2 includes the losses that are expected to be
exceeded, on average, once every 50, 100, and
250 years. For example, a tropical cyclone loss**

exceeding 66 million USD, which is equivalent
to about 42% of Marshall Islands’ GDP, is to be
expected, on average, once every 100 years.

**

In the Republic of the Marshall Islands, tropical
cyclone losses are expected to be substantially more
frequent and severe than losses due to earthquake
ground shaking and tsunami. The latter, however,remain potentially catastrophic events.

Figure 10 — Direct losses caused by either tropical storms

A more complete picture of the risk can beon average, once in the time period indicated. Losses

found in Figure 10, which shows the mean

represented in absolute terms and normalized by GDP.

return period of direct losses in million USD
generated by earthquake, tsunami and tropical
cyclones combined. The 50-, 100-, and 250-year
mean return period losses in Table 2 can also be
determined from the curves in this figure. The
direct losses are expressed both in absolute terms
and as a percent of the national GDP.
In addition to causing damage and losses to thebuilt environment and crops, future earthquakes
and tropical cyclones will also have an impact
on population. The same probabilistic proceduredescribed above for losses has been adopted toestimate the likelihood that different levels ofcasualties (i.e., fatalities and injuries) may result
from the future occurrence of these events.
As shown in Table 2, our model estimates, forexample, that there is a 40% chance in the next**

fifty years (100-year mean return period) that
one or more events in a calendar year willcause casualties exceeding 70 people in theor earthquakes that are expected to be equaled or exceeded,

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MARSHALL ISLANDS

Republic of the Marshall Islands. Events causing

Table 2— Estimated Losses and Casualties Caused by

200 or more casualties are also possible but have

Natural Perils**

much lower likelihood of occurring.

Mean Return Period (years)

AAL

50

100

250

3.0

32.8

66.2

123.0

1.9%

21.1%

42.5%

78.9%

0.7

7.6

15.2

28.3

0.7%

7.3%

14.6%

27.2%

3

36

69

118

Risk Profile: Tropical Cyclone
Direct Losses(Million USD)(% GDP)
Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profile: Earthquake, and Tsunami
Direct Losses(Million USD)(% GDP)

0.1

0.3

2.3

5.9

0.1%

0.2%

1.5%

3.8%

0.0

0.1

0.5

1.4

0.0%

0.1%

0.5%

1.3%

0

0

1

3

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

Risk Profiles: Tropical Cyclone, Earthquake, and Tsunami
Direct Losses(Million USD)(% GDP)

3.1

34.1

67.4

123.0

2.0%

21.9%

43.3%

78.9%

0.7

7.8

15.5

28.3

0.7%

7.5%

14.9%

27.2%

3

38

76

128v

Emergency Losses(Million USD)(% of total government
expenditures)
Casualties

PCRAFI 2015

Regional Summary Note & Options for
Consideration
This regional note on Tonga, Samoa, the Cook Islands, Vanuatu, Fiji, the Marshall Islands and, the Solomon Islands
forms part of a series of country Disaster Risk Finance and Insurance (DRFI) notes that were developed to build
understanding of the existing DRFI tools in use in each country and to identify gaps future engagements in DRFI that
could further improve financial resilience. These notes were developed as part of the technical assistance provided tocountries under the Pacific DRFI program jointly implemented by the World Bank and the Secretariat of the PacificCommunity financed by the Government of Japan. The technical assistance builds on the underlying principles of thethree-tiered disaster risk financing strategy and focuses on three core aspects: (i) the development of a public financial
management strategy for natural disasters, recognizing the need for ex-ante and ex-post financial tools; (ii) the postdisaster budget execution process, to ensure that funds can be accessed and disbursed easily post-disaster; and (iii)
the insurance of key public assets, to resource the much larger funding requirements of recovery and reconstructionneeds. The Pacific DRFI Program is one of the many applications of PCRAFI. It is designed to increase the financial
resilience of PICs by improving their capacity to meet post-disaster financing needs without compromising their fiscal
balance.

The Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) is a joint initiative of SOPAC/SPC, World Bank, and the AsianDevelopment Bank with the financial support of the Government of Japan, the Global Facility for Disaster Reduction and Recovery(GFDRR) and the ACP-EU Natural Disaster Risk Reduction Programme, and technical support from AIR Worldwide, New Zealand GNS
Science, Geoscience Australia, Pacific Disaster Center (PDC), OpenGeo and GFDRR Labs.