Report No. Weathering the Storm: Options for Disaster Risk Financing in Vietnam March 2010 THE WORLD BANK Table of Contents Chapter 1: Introduction................................................................................................................... 6 Objectives of the Study ............................................................................................................ 7 Chapter 2: Financial Disaster Risk Assessment in Vietnam ........................................................... 9 Natural Hazard Risk Exposures in Vietnam ......................................................................... 9 Damage Assessment in Vietnam ........................................................................................... 13 Financial Analysis of the Costs of Natural Disasters in Vietnam ...................................... 17 Preliminary Catastrophe Risk Analysis ............................................................................... 23 Chapter 3: Financial Management of Natural Disasters ................................................................ 26 Review of Budget Process ...................................................................................................... 26 Natural Disaster Funding Gap: Preliminary Analysis ....................................................... 30 Chapter 4: Options for Disaster Risk Financing in Vietnam ......................................................... 44 Sovereign Risk Financing in Vietnam .................................................................................. 45 Promoting Private Property Catastrophe Insurance in Vietnam...................................... 51 Chapter 5: Conclusions and Options for Consideration ................................................................ 58 Key Findings and Challenges ................................................................................................ 59 Options for Consideration ..................................................................................................... 62 References ..................................................................................................................................... 64 Glossary ......................................................................................................................................... 65 Annex 1. Vietnam Natural Hazard Risk Assessment .................................................................... 74 Annex 2. Natural Disaster Damage Assessment System ............................................................. 89 Annex 3. Financial Costs of Natural Disasters in Vietnam 1989 to 2008 .................................. 104 Annex 4. Law on State Budget ................................................................................................... 120 Annex 5. Government Support for Social Protection Beneficiaries ........................................... 121 Annex 6. General Statistics of Vietnam ..................................................................................... 123 Annex 7. World Bank 2005 Natural Disaster Financial Resource Gap Analysis ...................... 125 Annex 8. Analysis of Typhoon Xangsane 2006, Post-Disaster Recovery and Reconstruction Expenditure ................................................................................................................................. 129 Annex 9. World Bank 2009 Analysis of Natural Disaster Financial Resource Gaps for Post- disaster Recovery and Reconstruction ......................................................................................... 130 Annex 10. Vietnam Non-Life Insurance Market Premium 2008 (VND Million) ...................... 135 Abbreviations and Acronyms ADB Asian Development Bank CAR Construction All Risk CAT DDO Catastrophe Risk Deferred Drawdown Option CCFSC Central Committee for Flood and Storm Control CCRIF Caribbean Catastrophe Risk Insurance Facility CRMG Commodity Risk Management Group of the World Bank DANA Damage Assessment and Needs Assessment (national system for natural disasters’ damage and loss assessment developed in 2006) DDMFSC Department of Dyke Management, Flood and Storm Control DMC Disaster Management Center DPL Development Policy Loan EACVF World Bank Office – Hanoi EAR Erection All Risk EASVS Vietnam Sustainable Development ECLAC Economic Commission for Latin America and the Caribbean FFSP Fund for Flood and Storm Protection FONDEN Fondo de Desastres Naturales (Mexico National Disaster Fund) GCMNB Global Capital Markets, Non-Bank Financial Institutions GDP Gross Domestic Product GFDRR Global Facility for Disaster Reduction and Recovery Division of the World Bank GIS Geographic Information System GoV Socialist Republic of Vietnam (Government of Vietnam) GSO General Statistical Office HMDC Hydro-Meteorological Data Centre of the NHMS INS Instituto Nacional de Seguro (Costa Rica public insurance and reinsurance company) MARD Ministry of Agriculture and Rural Development MoF Ministry of Finance MONRE Ministry of Natural Resources and Environment MOST Ministry of Science and Technology NCHMF National Centre for Hydro-Meteorological Forecasting NGO Non-Government Organization NHMS National Hydro-Meteorological Services NSNDPRM National Strategy for Natural Disaster Prevention, Response and Mitigation OECD Organization for Economic Co-operation and Development P&C Property and Casualty PML Probable Maximum Loss SOCCSFC Standing Office of the Central Committee for Storm and Flood Control SRF State Reserve Fund TCIP Turkish Catastrophe Insurance Pool TT Hue Thua Thien Hue province UNDP United Nation Development Project VIBARD Vietnam Bank for Agriculture and Rural Development VND Value of National Disaster - i - Acknowledgments The report was authored by Ms. Xiaolan Wang (EASVS, World Bank, co-task team leader), Mr. Olivier Mahul (Insurance for the Poor Program, GCMNB, World Bank, co-task team leader), and Mr. Charles Stutley (Disaster Risk Financing Specialist, Consultant), with contributions from Mr. Nguyen Hong Ninh (Insurance Specialist, Consultant) and Professor Bui Duong Nghieu (Public Sector Finance Specialist, Consultant). Ms Linh (EACVF) provided invaluable administrative support to the team. The report greatly benefited from the data and information provided by the Ministry of Finance, the Central Committee for Flood and Storm Control (CCFSC), and the National Hydro- Meteorological Services (NHMS). The team thanks the participants at the technical workshops held on September 14-15, 2009 in Hanoi for their useful comments and suggestions on the findings of this report. The report has been prepared under the overall guidance of Victoria Kwakwa (Country Director, EACVF) and Hoonae Kim (Sector Manager, EASVS). The team is grateful to Charlotte Benson (Consultant) for her comments on an earlier version of the report. We gratefully acknowledge funding support from the Global Facility for Disaster Reduction and Recovery (GFDRR). - ii - Executive Summary 1. In the context of the National Strategy for Natural Disaster Prevention, Response and Mitigation approved by the Government of Vietnam, in 2009 the Ministry of Finance requested the World Bank to conduct a study on the financial protection of the state against natural disasters . This study aims to build institutional capacity on catastrophe risk financing and to identify financial options which are affordable and effective to the Government of Vietnam, including both sovereign risk financing and private insurance instruments. The study relies on the following four components: (i) financial risk assessment; (ii) review of Government budgetary process for financing natural disasters; (iii) dynamic fiscal funding gap analysis; and (iv) options for the financial protection of the state against natural disasters. Key Findings and Challenges 2. The annual average value of natural disaster losses, as reported by the public authorities, are estimated at one percent of GDP over the last 20 years, or US$ 900 million in 2008 GDP, and could exceed US$3.8 billion for a major disaster. Excessive and extended inundation flooding and tropical storms represent about 95 percent of the reported value of losses. The analysis of selected events shows under a catastrophic typhoon event, approximately one third of all the value of damage is incurred by agriculture, a quarter by private housing and the rest by public-sector property. Preliminary catastrophe risk analysis indicates that a major disaster year in Vietnam, like one occurring every century, could cause losses in excess of US$3.8 billion at 2008 GDP values. 3. The official loss values may be under-estimated because the current post-disaster damage assessment and reporting system tends to under-report the financial value of the damages. The current damage assessment and needs assessment (DANA) system is mainly intended to record the direct costs of recovery and reconstruction of damaged property and infrastructure and does not report the value of secondary or business interruption losses: as such these estimates probably significantly under-estimate the true value of losses to the Vietnamese economy. The report highlights the need for more standardized damage data, especially estimated financial values for each category of damage, to be collected through a comprehensive damage and needs assessment system. In addition, the current disaster damage assessment system may under-estimate the damage to private sector property and commercial business and industry. 4. The Contingency