Japan-World Bank Program for Mainstreaming Disaster Risk Management in Developing Countries The Global Facility for Disaster Reduction and Recovery (GFDRR) The World Bank Group DISASTER RISK FINANCE DIAGNOSTIC Albania DECEMBER 2020 ABBREVIATIONS AFSA ALBANIAN FINANCIAL SUPERVISORY AUTHORITY ALSE ALBANIAN SECURITIES EXCHANGE ASIG ALBANIAN STATE AUTHORITY FOR GEOSPATIAL INFORMATION CAT BOND CATASTROPHE BOND CAT DDO DEVELOPMENT POLICY LOAN WITH A CATASTROPHE DEFERRED DRAWDOWN OPTION CCP CENTRAL COUNTERPARTY CLEARINGHOUSE CERC CONTINGENT EMERGENCY RESPONSE COMPONENT DASK TURKISH CATASTROPHE INSURANCE POOL EC EUROPEAN COMMISSION EU EUROPEAN UNION GDP GROSS DOMESTIC PRODUCT GEM GLOBAL EARTHQUAKE MODEL GoA GOVERNMENT OF ALBANIA HSNP HUNGER SAFETY NET PROGRAM (KENYA) IMF INTERNATIONAL MONETARY FUND MOFE MINISTRY OF FINANCE AND ECONOMY MTPL MOTOR THIRD-PARTY LIABILITY INSURANCE NCPA NATIONAL CIVIL PROTECTION AGENCY NE NDIHMA EKONOMIKE PDNA POST-DISASTER NEEDS ASSESSMENT Currency: Albanian lek (ALL), United States dollar (US$) Relevant-year exchange rates are used throughout the diagnostic. For 2020, an average exchange rate as of November 2020 is used as provided by the Bank of Albania: US$1 = ALL 105. 2 DISASTER RISK FINANCE DIAGNOSTIC: ALBANIA TABLE OF CONTENTS ABBREVIATIONS ........................................................................................................... 2 ACKNOWLEDGEMENTS .............................................................................................. 4 EXECUTIVE SUMMARY ................................................................................................ 5 1. INTRODUCTION .................................................................................................... 9 1.1. HISTORICAL IMPACT OF DISASTERS ........................................................... 11 1.2. ASSESSMENT OF POTENTIAL DISASTER IMPACT IN ALBANIA .................. 18 1.3. AGGRAVATING IMPACT OF COVID-19 IN ALBANIA ...................................... 22 2. ASSESSMENT OF THE CURRENT APPROACH TO DISASTER RISK FINANCE .......... 24 2.1. LEGAL AND INSTITUTIONAL FRAMEWORKS ......................................... 24 2.2. PUBLIC FINANCIAL MANAGEMENT OF NATURAL DISASTERS ............ 28 3. FUNDING GAP ANALYSIS AND RISK FINANCING STRATEGIES ............................... 52 4. OPTIONS FOR CONSIDERATION ............................................................................... 59 ANNEX 1. OVERVIEW OF THE DOMESTIC INSURANCE MARKET ......................... 64 ANNEX 2: OVERVIEW OF THE LOCAL CAPITAL MARKETS .................................... 68 REFERENCES ............................................................................................................ 71 DISASTER RISK FINANCE DIAGNOSTIC: ALBANIA 3 ACKNOWLEDGEMENTS This diagnostic was prepared by a Team comprising Tatiana Skalon (Disaster Risk Finance Specialist, Consultant), Jelena Kostic (Disaster Risk Finance Consultant), Keler Gjika (Financial Sector Specialist), Johanna Jaeger (Senior Financial Sector Specialist), Daniel Kull (Senior Disaster Risk Management Specialist), and Oraz Sultanov (Operations Officer). The report was edited by Anne Himmelfarb and designed by Vladimir Mirzoyev. The Team gratefully acknowledges the data, information, and other invaluable contributions from representatives of the Government of Albania, in particular the Ministry of Finance and Economy, Ministry of Interior - Directorate of Local Affairs and Prefectures, National Agency for Civil Protection, Albanian Financial Supervisory Authority, State Committee on Reconstruction and State Authority for Geospatial Information. The Team is sincerely thankful to Maryam Salim (Country Manager for Albania) for the guidance and review, and for the sizable contributions provided by Evie Calcutt (Financial Sector Specialist), Lisa Yu (Consultant), and the peer reviewers: Enrique Blanco Armas (Lead Economist), Samantha Cook (Senior Financial Sector Specialist), Salih Bugra Erdurmus (Senior Disaster Risk Management Specialist), Barry Patrick Maher (Senior Financial Sector Specialist), John Luke Plevin (Financial Sector Specialist), Nicola Ann Ranger (Senior Financial Sector Consultant), Hilda Shijaku (Senior Economist), and Christoph Ungerer (Senior Economist). The contribution on the energy sector financial instrument was provided by a Team consisting of Luciano Canale (Senior Hydro-power Specialist), Rome Chavapricha (Senior Energy Specialist), Gazmend Daci (Senior Energy Specialist), and Tatyana Kramskaya (Senior Energy Specialist). The contribution on the impact of disasters on poverty was provided by Yann Kerblat (Disaster Risk Management Analyst), Brian James Walsh (Consultant) and Ali Arab (Consultant). The contribution on social protection was provided by Sarah Coll-Black (Senior Economist) and Vlad Alexandru Grigoras (Senior Social Protection Economist). The Team is grateful for financial support received from the Global Facility for Disaster Reduction and Recovery (GFDRR) and The Government of Japan through The Japan–World Bank Program for Mainstreaming Disaster Risk Management in Developing Countries, which enabled preparation of this country diagnostic. Disaster risk modeling was provided with support from the United Kingdom Foreign, Commonwealth and Development Office through the World Bank Disaster Protection Program. DISCLAIMER This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 4 DISASTER RISK FINANCE DIAGNOSTIC: ALBANIA EXECUTIVE SUMMARY Exposed to various natural hazards, in particular flooding and earthquakes, Albania has the highest level of disaster risk in Europe according to the World Risk Index 2019 (Bündnis Entwicklung Hilft and RUB 2019). Over the period 1995–2015, an average of 30,000 people were affected annually by natural disasters, and more than 95 percent of Albanian municipalities were affected by at least one disaster; in 2019, Albania was hit by a severe earthquake (detailed below). The economic cost of disasters could further increase as a result of the growing economy. Climate change may further increase the severity and/or frequency of weather-related disasters, such as floods and storms. By changing the patterns of such disasters, climate change also makes historical data on disasters less reliable guides to the future. Global risk modeling firm, AIR Worldwide, estimates the average future damages from earthquakes and flooding as US$147 million per year, with a catastrophic event—for example, a 1-in-100-year earthquake—causing damages of over US$2 billion (see FIGURE 1 and section 1.2). Major earthquakes are in general infrequent but can result in very large damages (such as the 2019 earthquake); they are estimated to cause on average almost US$99 million in damage per year. In contrast, floods often cause localized but more frequent damages with an estimated average damage of about US$48 million per year. These estimates cover private sector assets (primarily residential property), but not public assets. Evaluation of the recent 2019 earthquake suggested around 23 percent of the damages were in relation to public assets (Government of Albania (GoA) et al. 2020). Therefore it is possible to assume that damages to public assets would amount to 20-30 percent of the damages to private assets as shown in FIGURE 1. The current impact of the novel coronavirus (COVID-19) makes Albania more vulnerable to disasters that could cause deterioration of the country’s economy and fiscal position. The pandemic is causing health, economic, and financial impacts. Among its many effects, it is reducing government's fiscal capacities and the capacity of households and businesses to recover after disasters. FIGURE 1 Modeled risk profile from the combined risk of earthquakes and floods in Albania 2.500 2.000 1.500 EARTHQUAKE & FLOOD 1.000 MILLION US$ 500 ESTIMATED DAMAGE ESTIMATED 0 RETURN ANNUAL AVERAGE 1 IN 2 YEARS 1 IN 5 YEARS 1 IN 10 YEARS 1 IN 50 YEARS 1 IN 100 YEARS PERIOD DAMAGE Sources: Risk profile is from AIR Worldwide’s catastrophe models for Earthquake and Flood in Albania. Values were provided in ALL, converted to US$ using 1 to 102.5, US$ to ALL exchange rate. Index factors have been applied and all reported values reflect 2020 estimates. Note: The return period is the time period over which one should expect to see a loss of the same or greater magnitude. For example, a 1-in-10-year return period refers to losses that are expected to be exceeded once per 10 years—i.e., in any given year there is a 10 percent probability of such losses at least as great as this. The estimates do not mean these disasters will occur only once every 10 (or 20 or 50) years. DISASTER RISK FINANCE DIAGNOSTIC: ALBANIA 5 In 2019, a strong earthquake of magnitude 6.4 hit Albania, affecting over 200,000 people in 11 municipalities, including Tirana and Durrës, and causing a sizable economic impact. According to the Post-Disaster Needs Assessment (PDNA) carried out in its aftermath, the earthquake caused damages equal to 6.4 percent