ADVANCING DISASTER RISK FINANCE IN DOMINICA URBAN, DISASTER RISK MANAGEMENT, RESILIENCE AND LAND GLOBAL PRACTICE LATIN AMERICA AND THE CARIBBEAN UNIT © 2022 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org 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 on any map 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. Rights and Permissions The material in this work is subject to copyright. 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Publication Design: Blue Robin Designs, LLC Photo Credits: - Front Cover: World Bank - Back Cover: World Bank / Michael Fedak Table of Contents ACKNOWLEDGMENTS ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 4 ABBREVIATIONS AND ACRONYMS ��������������������������������������������������������������������������������������������������������������������������������������� 5 GLOSSARY ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 7 EXECUTIVE SUMMARY ��������������������������������������������������������������������������������������������������������������������������������������������������������������� 9 CHAPTER 1. INTRODUCTION����������������������������������������������������������������������������������������������������������������������������������������������������13 1.1. Brief Presentation of the Theoretical Framework of Disaster Risk Finance ����������������������������������������13 1.2. Brief Introduction of the Case for a DRF Strategy in Dominica������������������������������������������������������������� 15 CHAPTER 2. PUBLIC FINANCIAL MANAGEMENT OF DISASTER RISK �����������������������������������������������������������������������19 2.1. Summary of DRF Framework in Dominica ��������������������������������������������������������������������������������������������������� 19 2.2. The Legal, Institutional, and Regulatory Framework for PFM of Disaster Risk in Dominica�������� 20 2.3. The Legal, Institutional, and Regulatory Framework for Disaster Risk Management (DRM) in Dominica ������������������������������������������������������������������������������������������������������������������������������������������������������22 2.4. Budgetary Sources of Post-Disaster Financing ��������������������������������������������������������������������������������������� 24 2.5. Budgetary Analysis of Fiscal Impact of Disasters in Dominica����������������������������������������������������������� 25 2.6. External Aid Flows������������������������������������������������������������������������������������������������������������������������������������������������ 26 2.7. Public Asset Management�������������������������������������������������������������������������������������������������������������������������������� 28 CHAPTER 3. FISCAL DISASTER RISK ASSESSMENT ��������������������������������������������������������������������������������������������������������31 3.1. Fiscal Disaster Risk Modeling ���������������������������������������������������������������������������������������������������������������������������. 31 3.2. Fiscal Disaster Risk Profile��������������������������������������������������������������������������������������������������������������������������������� 32 3.3. Analysis of Historical Disasters in Dominica����������������������������������������������������������������������������������������������� 33 CHAPTER 4. REVIEW OF CATASTROPHE INSURANCE MARKET IN DOMINICA ������������������������������������������������� 35 4.1. Market Overview��������������������������������������������������������������������������������������������������������������������������������������������������� 35 4.2. Supervision ������������������������������������������������������������������������������������������������������������������������������������������������������������37 4.3. Innovation�������������������������������������������������������������������������������������������������������������������������������������������������������������� 40 4.4. Financing for Social Protection ��������������������������������������������������������������������������������������������������������������������� 43 CHAPTER 5. RECOMMENDATIONS FOR A NATIONAL DISASTER RISK FINANCING STRATEGY IN DOMINICA ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 45 5.1. Disaster Risk Financing Instruments in Dominica ������������������������������������������������������������������������������������ 45 5.2. Recommendations��������������������������������������������������������������������������������������������������������������������������������������������� 47 5.3. Discussion�������������������������������������������������������������������������������������������������������������������������������������������������������������� 48 ANNEX I. TRANSPARENCY AND DISCLOSURE OF BUDGET PROCESS ������������������������������������������������������������������� 56 ANNEX II. OPERATIONAL DISASTER RISK FINANCING AND INSURANCE FRAMEWORK ������������������������������ 58 ANNEX III. DOMINICA COUNTRY DISASTER RISK PROFILE ��������������������������������������������������������������������������������������� 60 ANNEX IV. DRFTA PROJECT METHODOLOGY OF QUANTIFYING CONTINGENT LIABILITY����������������������������62 ANNEX V. DRF INSTRUMENTS AND POLICY FRAMEWORK IN SELECT CARIBBEAN COUNTRIES���������������� 64 Dominica 3 ACKNOWLEDGMENTS This report was prepared in the framework of the Caribbean Disaster Risk Financing Technical Assistance Program by a team led by Mary Boyer (Disaster Risk Management Specialist) and Rashmin Gunasekera (Senior Disaster Risk Management Specialist) and included Sara Valero Freitag (Climate Change and Disaster Management Consultant), Julia Saenz Ortigosa (Disaster Risk Management Consultant), Sophia Whyte- Givans (Senior Public Financial Management Consultant), Bruce Stacey (Senior Public Financial Management Consultant), Peter Wrede (Senior Insurance Consultant), Ivelisse Justiniano (Disaster Management Consultant), Michael Fedack (Data Management Consultant), Kristal Peters (Urban Resilience Consultant), Sarah Bailey (Head of Program at World Food Programme), and Nicholas Grainger (Program Associate at World Food Programme). The team would like to express its gratitude to the authorities and private stakeholders for the support and collaboration it received during the report’s preparation. Special thanks to the Ministry of Finance and Investment in Dominica and the Climate Resilience Execution Agency for Dominica (CREAD) for their valuable assistance and inputs provided during the review. The report greatly benefitted from the data and information provided by these entities, as well as the Financial Services Unit, the Ministry of Blue and Green Economy, Agriculture and National Food Security, the Ministry of Economic Affairs, Planning, Resilience and Sustainable Development, Telecommunications and Broadcasting, the Ministry of Environment, Rural Modernization and Kalinago Upliftment, Ministry of Housing and Urban Development, Ministry of Public Works and The Digital Economy, Ministry Youth Development and Empowerment, Youth at Risk, Gender Affairs, Seniors’ Security and Dominicans With Disabilities, Dominica Air and Sea Ports Authority, Dominica Electricity Service (DOMLEC), Dominica Water and Sewerage Company Limited (DOWASCO), and the Office of Disaster Management (ODM). The team is grateful to peer reviewers Luis Alton (Senior Financial Sector Specialist), Evie Calcutt (Financial Sector Specialist), Urska Zrinski (Public Sector Specialist) and Oscar Ishizawa (Senior Disaster Risk Management Specialist). The report was prepared using the operational framework that was developed and promoted by the World Bank Disaster Risk Financing and Insurance Program (DRFIP). The team gratefully acknowledges funding support from United Kingdom Foreign, Commonwealth & Development Office (FCDO) . The team also gratefully acknowledges the contributions in data and information from the Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC). 4 Advancing Disaster Risk Finance ABBREVIATIONS AND ACRONYMS AAL Average Annual Loss DCSL Dominica Cooperative Societies League CARD MBA Center for Agriculture and Rural Development Mutual Benefit DEF Disaster Emergency Fund Association DEMO Dominica Emergency Management CARICOM Caribbean Community Organization CARIFORUM Caribbean Forum DOMLEC Dominica Electricity Services Cat DDO Catastrophe Deferred Drawdown DoWASCO Dominica Water and Sewerage Option Company CBI Citizen-by-Investment DRF Disaster Risk Finance CCENRM Climate Change Environment and DRFIP Disaster Risk Financing and Natural Resource Management Insurance Program CCRIF SPC Caribbean Catastrophe Risk DRFTA Disaster Risk Finance Technical Insurance Facility Segregated Assistance Portfolio Company DRM Disaster Risk Management CDB Caribbean Development Bank DRR Disaster Risk Reduction CDM Comprehensive Disaster DVRP Disaster Vulnerability Reduction Management Project CDMA Comprehensive Disaster EAF Emergency Assistance Facility Management Act ECCB Eastern Caribbean Central Bank CDEMA Caribbean Disaster Emergency Management Agency EM-DAT Emergency Events Database CDF Country Directed Fund ERF Emergency Response Fund CDRP Country Disaster Risk Profile FAA Financial (Administration) Act CFW Contingency Fund Warrant FR Fiscal Responsibility COA Chart of Accounts FRA Fiscal Responsibility Act COAST Caribbean Ocean and Aquaculture FRRF Fiscal Rules and Responsibility Sustainability Facility Framework CPFRB Caribbean Physical and Financial FONDEN Natural Disaster Fund Resilience Building FRF Fiscal Responsibility Framework CREAD Climate Resilience Execution Agency for Dominica FSU Financial Services Unit CRRP Climate Resilience and Recovery Plan GDP Gross Domestic Product DaLA Damage and Loss Assessment GFDRR Global Facility for Disaster Risk Reduction Dominica 5 GoCD Government of the Commonwealth PCCA Procurement and Contract of Dominica Administration Act HARITA Horn of Africa Risk Transfer for PD-PFM Post-Disaster Public Financial Adaptation Management IAIS International Association of PFM Public Financial Management Insurance Supervisors PML Probable Maximum Loss ICT Information and Communication PPA Public Procurement Act Technology PPP Public-Private Partnership IDP International Development Partner PSIP Public Sector Investment IMF International Monetary Fund Programme IRL Immediate Response Loan PSNP Productive Safety Net Programme JERC Japan Earthquake Reinsurance RCF Rapid Credit Facility Company R-FONDEN Sistema de Estimación de Pérdidas LiDAR Light Detection and Ranging para el Riesgo Federal (Loss LPP Livelihood Protection Policy Estimation for Federal Risk System) MAMDA Mutuelle Agricole Marocaine SIDS Small Island Developing States d’Assurances (Moroccan SOC Standard Object Code Agricultural Mutual Insurance) SRC Seismic Research Center MERMKU Ministry of Environment, Rural Modernization, and Kalinago TCIP Turkish Catastrophe Insurance Pool Upliftment TREIF The Residential Earthquake MiCRO Microinsurance Catastrophe Risk Insurance Fund Organization UNDP United Nations Development MoF Ministry of Finance Programme NDC National Disaster Committee UNICEF United Nations Children’s Fund NDF National Disaster Fund VRRF Vulnerability, Risk, and Resilience Fund NEPO National Emergency Planning Organization WFP World Food Programme NIS National Insurance Scheme NRDS National Resilience Development Strategy OAS Organization of American States ODM Office of Disaster Management OECS Organisation of Eastern Caribbean States PAP Public Assistance Programme PDNA Post-Disaster Needs Assessment 6 Advancing Disaster Risk Finance Glossary Contingent liabilities: Are obligations that may or may not come due, depending on whether particular events occur. The probability of their occurrence may be exogenous to government policies (for example, if they are related to disasters) or endogenous (for example, if government programs create moral hazard). Explicit contingent liabilities: Are specific obligations, created by law or contract, that governments must settle. Implicit contingent liabilities: Represent moral obligations or burdens that, although not legally binding, are likely to be borne by governments because of public expectations or political pressures. Damage: Total or partial destruction of physical assets existing in an affected area. Note: Damage occurs during and immediately after a disaster and is measured in replacement value of assets (based on, for example, percentage of housing damaged or kilometers of roads). Disaster risk financing (DRF) strategies: Strategies to protect governments, businesses, and households from the economic burden of disasters. Note: DRF strategies can include programs to increase the financial capacity of a state to respond to a disaster impact or an emergency, while protecting the fiscal balance. They can also promote the deepening of insurance markets at a sovereign and household level and social protection strategies for the poorest. For example, the Livelihood Protection Policy (LPP) in Jamaica insures low-income individuals from wind and excess rain and the Government of Grenada disburses National Insurance Scheme (NIS) funds in response to post-disaster short-term unemployment. Exceedance probability: Probability that a given loss from an event will be equaled or exceeded. Economic loss1: Total economic impact that consists of direct economic loss and indirect economic loss. Direct economic loss: The monetary value of disaster damages. For example, Hurricane Maria caused damages in Dominica’s tourism sector in 2017, with direct losses that amounted to US$20.1 million (EC$54 million). Indirect economic loss: Monetary value of the consequence of direct economic loss and/or human and environmental impacts. Indirect economic loss includes microeconomic impacts (for example, revenue declines from business interruption); mesoeconomic impacts (for example, revenue declines from supply chain impact or temporary unemployment); and macroeconomic impacts (for example, price increases or increases in government debt). Indirect economic losses can occur inside or outside the hazard area and often with a time lag. For example, the indirect losses to the tourism sector caused by Hurricane Maria in 2017 in Dominica were estimated at US$70.9 million (EC$191 million). Adding the direct economic losses of US$20.1 million (EC$54 million), Hurricane Maria accounted for US$91 million (EC$245 million) in economic loss for the tourism sector. 1. The direct and indirect economic losses used in the examples were extracted from Dominica’s Post-Disaster Needs Assessment (PDNA) for Hurricane Maria, September 18, 2017. https://www.gfdrr.org/en/publication/post-disaster-needs- assessment-dominica. Dominica 7 Fiscal risk: The possibility of deviations in fiscal variables from what was expected at the time of a budget or other forecast. Fiscal risks include macroeconomic shocks and contingent liabilities. For example, Dominica has high fiscal risks to disasters: losses modeled as part of the World Bank’s Country Disaster Risk Profile developed for Dominica, show that a major hurricane event with a return period of 100 years could cause losses in excess of US$1,189 million (EC$3,210 million) from both direct and indirect impacts, which equals about 204 percent of national gross domestic product (GDP). Mean return period/rate of occurrence: Estimate of the likelihood of the loss of a particular event to occur, such as a particular amount of loss from a hurricane or earthquake. It is also the inverse of the rate of occurrence of a loss. If the loss associated with a given hurricane wind speed has a 0.01 annual rate of occurrence, the return period is equal to 1 ÷ 0.01 = 100 years. This does not imply that the loss from a wind speed will be exceeded exactly once every 100 years, rather than the average time between exceedances is 100 years. Risk reduction: Measures taken in advance of a disaster aimed at decreasing or eliminating its impact on society and environment. Parametric insurance: Payout is made based on the occurrence of an event, not the magnitude of the resulting loss. As such, trigger mechanisms must be devised to determine whether such an event has occurred and if payment under a parametric insurance contract is required. Triggers may be based on the following: A pure parametric nature: Trigger is based solely on weather recordings such as wind speed or rainfall amount (for example, the LPP is a policy launched in Jamaica, St. Lucia, and Grenada that insures low-income individuals from wind and excess rain). A parametric index or model: Trigger is based on a formula, index, or model as a proxy for the actual event (for example, in the case of the Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company [CCRIF SPC], payouts are proportional to the estimated impact of an event on each country’s budget. The estimated impact is derived from a probabilistic catastrophe risk model developed specifically for the facility). 8 Advancing Disaster Risk Finance Executive Summary The objective of this report is to make recommendations for the Government of the Commonwealth of Dominica (GoCD) for the formulation of a country-specific comprehensive disaster risk financing (DRF) strategy, based on the assessment of the legislative, financial management, fiscal, and insurance market environment in Dominica. The key activities of the present review are twofold: (a) to review the existing data that would inform the quantification of Dominica’s contingent liabilities to natural hazards, as well as current practices in DRF and (b) to conduct a review of the existing public financial management (PFM) and insurance market with respect to DRF by reviewing laws, regulations, practices, existing protocols and systems, and macroeconomic conditions. This report is envisioned to be used as a planning tool for the potential development of a comprehensive DRF strategy that would equip the Ministry of Finance and Investment (MoF) with information and instruments to manage contingent liabilities posed by natural hazards. On average, in the long term, the GoCD would need to cover losses of approximately US$30 million (EC$81 million) annually—5.1 percent of Dominica’s 2019 gross domestic product (GDP)— to address its contingent liabilities related to floods and hurricanes (Table 1). Hurricane damage to public and private building infrastructure alone will amount to US$19.6 million (EC$24.3 million) on average each year over the long run. For any given year, Dominica has about a 1.0 percent probability of government losses exceeding US$455 million (EC$273 million), that is, 12.2 percent of GDP in realized contingent liabilities due to damages, which could take the form of relief expenditures, lost revenue, road and bridge reconstruction, public school and hospital reconstruction, or any other relief or reconstruction expenditure that the government is responsible for after a disaster. Table 1: Direct and Indirect Impacts, Direct Damages, and Total GoCD’s Contingent Liability for Natural Disasters with Different Return Periods Indicative Risk Metrics Total Direct and Total Direct Total Government Indirect Impact Damages Contingent Liability (US$, millions) (US$, millions) (US$, millions) Average annual loss (AAL) 80 60 30 10-year return period (10%) 154 116 68 100-year return period (1%) 1,189 884 455 250-year return period (0.4%) 2,151 1,591 722 Source: World Bank. Original figure for this publication. Given Dominica’s exposure to natural hazards, it is crucial that substantial DRF mechanisms are established to reduce the fiscal shocks from disasters and support fiscal sustainability. According to the latest Climate Risk Index report 2020, Dominica is the 10th most exposed and vulnerable country of the 181 countries analyzed, and it was the country with the highest losses per unit GDP to climate-related natural hazards during 1999–2018. Dominica was reminded of its vulnerability in 2017 with the passage of Hurricane Maria while it was still recovering from Tropical Storm Erika in 2015. According to Rapid Damage and Impact Assessments conducted by the World Bank, damages and losses from Tropical Storm Erika were estimated to be US$483 million or 90 percent of Dominica’s GDP, while Hurricane Maria resulted in total damages of US$931 million and losses of US$382 million, which amounts to 226 percent of 2016’s GDP. Dominica 9 In addition to relatively predictable losses related to hydrometeorological events and earthquakes, Dominica faces less-predictable catastrophic risks from volcanic impacts, tsunamis, health emergencies, and other exogenous shocks. This requires any financial response strategy to be flexible and responsive and build on existing robust data systems and financial processes. During the preparation of this report, Dominica was experiencing the COVID-19 pandemic. As of October 2021, COVID-19 had resulted in 28 deaths and 4,153 COVID-19 cases, which has put a strain on health care and social support. Impacts on tourism triggered a fall in government revenues and increased demand for income support. Meanwhile the eruption of the La Soufrière Volcano on St. Vincent and the Grenadines has reminded Dominica of its nine volcanoes. Dominica is still at an early stage of mainstreaming DRF into the national budget and development plans, and Dominica can adjust its approach to disaster financing to be more timely, flexible, equitable, and cost-effective. The GoCD has historically responded to disasters through the Consolidated Fund, which capitalizes the Contingencies Fund to be used in the event of an urgent and unforeseen need for expenditure for which no other provision exists. Dominica has also recently established the Vulnerability, Risk, and Resilience Fund (VRRF); however, critical operational guidelines for this fund are yet to be finalized. The Parliament of Dominica also appropriates monies toward disaster management within the annual budgetary allocations to the Ministry of National Security and Home Affairs, under which the Office of Disaster Management (ODM) falls, to fund necessary needs of the ODM. However, the systems supporting risk-based decision-making on asset management to strengthen risk reductions can be improved, as well as data coordination and management to strengthen disaster recovery and reconstruction. Dated disaster response and hazard risk management plans can delay the time it takes to make needs-based decisions on prioritizing recovery and reconstruction spending. The existing instruments for DRF are not optimized to address Dominica’s disaster risk profile, which is prone to both high- and low-frequency natural hazards. Given its high exposure to many hazards, consideration could be given for the inclusion of a specific provision in law on the amount or ratio to be allocated annually for disaster response within the VRRF. Further, consideration should be given whereby each ministry would include a disaster provision in their budget. A portion of the costs for medium to severe disasters are insured by modest parametric coverage through the Caribbean Catastrophe Risk Insurance Facility (CCRIF); however, coverage gaps due to a limited amount of risk being ceded though the CCRIF, as well as low capital levels in the VRRF point to significant short-term financing gaps. Additionally, ex ante insurance mechanisms for implicit contingent liabilities, such as vulnerable populations and sectors, as well as private assets is lacking. Critical utilities responsible for public goods, whether privately or publicly owned, have historically been limited in financial protection options due to cost and availability. This report presents recommendations for a cost-effective DRF strategy in Dominica, drawing heavily on international experience, country-specific information, and similar conditions in Small Island Developing States (SIDS) with limited fiscal space. These complementary resources for a national DRF strategy are based on a preliminary fiscal risk analysis and a review of the current budget management of disasters in Dominica. The report benefits from the international experience of the World Bank and the approach outlined in its operational DRF and insurance framework,2 which has assisted several countries worldwide, including in the Caribbean (Belize, Grenada, St. Vincent and the Grenadines, Jamaica, and so on) in the design and implementation of sovereign catastrophe risk financing strategies. This report tailors the approach to the institutional, social, and economic context of Dominica. 2. Mahul, Olivier, et al. 2014. Financial Protection against Natural Disasters: From Products to Comprehensive Strategies - An Operational Framework for Disaster Risk Financing and Insurance. Washington, DC: World Bank. http://documents. worldbank.org/curated/en/523011468129274796/Financial-protection-against-natural-disasters-from-products-to- comprehensive-strategies-an-operational-framework-for-disaster-risk-financing-and-insurance 10 Advancing Disaster Risk Finance This report outlines combinations of new, existing, and refurbished risk retention and risk transfer instruments that could help the GoCD increase its immediate financial response capacity against disasters and better protect its fiscal balance. Building on the risk layering approach promoted by the World Bank for events of varying frequency and severity, based on the existing instruments identified in the diagnostic analysis, Figure 1 presents the proposed options for a DRF strategy and more detailed recommendations are listed in Table 2. Figure 1: DRF Strategy Options for Dominica Source: World Bank Group 2021. Dominica 11 Table 2: Strategy Recommendations for DRF in Dominica Time Frame Instruments and Strategy Recommendations for DRF Sovereign Protection Short Term 1 Streamline and institutionalize loss and damage data collection and reporting (< 1 year) system for all severities of events. 2 Develop a system to track disaster expenditure through the budget and improve public disclosure of financial reporting documents. 3 Update and enact comprehensive DRM, PFM, and Fiscal Responsibility (FR) legislation to include DRF, climate change, and disaster risk considerations. 4 Develop clear guidelines to define usage of the VRRF. 5 Consider setting capitalization targets for the VRRF consistent with AAL of hydrometeorological events (US$30 million). 6 Seek access to a contingent line of credit that covers contingent liabilities of prominent events of at least a 10-year return period (US$68 million). 7 Optimize sovereign parametric insurance (CCRIF SPC) coverage to cover existing immediate liquidity gaps. 8 Implement capacity-building exercises to address knowledge and skills gaps in PFM, damage evaluation development, and post-disaster needs assessments (PDNAs). 9 Develop and adopt a National Strategy for DRF and subsequent implementation plan. 10 Develop and institutionalize disaster-responsive Post-Disaster Budget Execution Guidelines. 11 Develop a risk-based asset management system, based on a comprehensive inventory of public fixed assets. Medium Term 12 Implement a disaster-friendly classification system for COA. (1–3 years) 13 Develop a general operational framework or procurement policy for the procurement of insurance by the public sector. 14 Further develop financial protection products for vulnerable sectors including agriculture, tourism, and fisheries. 15 Develop risk finance instruments and define financing sources for scalable social protection systems. Commercial Insurance Short Term 16.1 Strengthen transparency and consumer protection: greater transparency (< 1 year) about providers. Medium Term 16.2 Strengthen transparency and consumer protection: key facts statements. (1–3 years) 16.3 Strengthen transparency and consumer protection: consumer protection diagnostic. 17 Government-supported campaigns to improve people’s understanding and appreciation of insurance 18 Assess compliance with the Insurance Core Principles (ICP). 19 Assess the barriers to—and potential of—inclusive and other sector-specific insurance. Note: COA= Chart of Accounts; DRM = Disaster Risk Management. 12 Advancing Disaster Risk Finance Chapter 1. Introduction 1.1. Brief Presentation of the Theoretical Framework of Disaster Risk Finance Financial management of disaster risk is an element of Priority 3 of the Sendai Framework (2015– 2030)3 and is part of the Strategic Framework for Comprehensive Risk Management of Disasters developed by the World Bank.4 This report defines the five pillars of a disaster risk management (DRM) strategy (Figure 2). It assumes that while a country cannot escape the risk of natural hazards, it can significantly and efficiently reduce its vulnerability and its exposure to risks. Thus, to reverse the current trend of increasing impacts from natural hazards, it is necessary to integrate risk management into development plans and into public and private investment, both locally and nationally. Figure 2: Strategic Pillars of DRM Developed by the World Bank Source: World Bank and Global Facility for Disaster Reduction and Recovery (GFDRR), Sendai Report. It is important to note that the Disaster Risk Finance Technical Assistance (DRFTA) Project, on which this report is based, focuses solely on the financial protection pillar. This does not mean that the other dimensions of integrated risk management are not important. In fact, in Dominica, the resilience and disaster preparedness agendas lay high in the development agenda of the Government of the GoCD, as is underscored by the government’s vision to transform Dominica into the world’s first climate resilient nation. The DRFTA Project is part of the broader partnership with the GoCD on DRM and climate change adaptation. Dominica is currently implementing a World Bank-funded Disaster Vulnerability Reduction Project (DVRP), which aims to reduce vulnerability to natural hazards and climate change impacts in Dominica through investments in resilient infrastructure and improved hazard data collection and monitoring systems. The primary objective of a DRF strategy is to reduce the economic and fiscal impact caused by disasters and develop a menu of instruments according to the different types of risks identified (Figure 3). An effective DRF strategy combines instruments for the retention and transfer of risk as well as regulatory and legal tools to ensure the sustainability of public finances. From a macroeconomic point of view, the role of the various instruments forming the strategy is to stabilize and help manage budgetary volatility caused by disasters. These tools comprise both ex ante instruments put in place by the GoCD before the disaster and the ex post measures operationalized after a disaster. 3. The Sendai Framework for Disaster Risk Reduction (2015–2030) was adopted by 187 states and international actors in March 2015 and establishes a road map and priorities for disaster risk reduction (DRR). 4. World Bank and GFDRR. 2012. The Sendai Report: Managing Disaster Risks for a Resilient Future. Washington, DC: World Bank. https://gfdrr.org/sites/default/files/publication/sendai-report.pdf. Dominica 13 Figure 3: Most Cost-Effective Financial Instruments for Different Types of Risk Source: World Bank.5 A temporal dimension is the second key factor to be considered in forming a cost-effective DRF strategy. Not always will a government use all the funds needed for recovery in the days following a disaster (Figure 4). Immediate resources are usually spent on emergency operations but ensuring that resources are readily available and that operations can be carried out quickly is crucial to manage the human, social, and/ or economic impact of a disaster. However, financial needs are usually maximized to address reconstruction works after months, sometimes even years. Figure 4: Temporal Dimension of Post-Disaster Finance Needs Source: World Bank.6 Funds and financing mechanisms must be put in place and payments must be made at the required times. This step is vital for the financial strategy to effectively meet the GoCD’s needs. In many cases, bureaucracy and administrative steps required for a responsible institution to secure resources and be able to execute action delay the effective and rapid response to a disaster. In other cases, oversight of the use of public resources is suspended and the lack of transparency often results in losses when resources are already low. Similarly, some governments take out parametric insurance without realizing that they will not have direct access to these resources right after a disaster given that the payments would be treated as nontax revenues and would therefore be transferred to the treasury, thus generating delays in the execution of emergency and recovery operations. 5. Ghesquiere, Francis, and Olivier Mahul. 2010. “Financial Protection of the State against Natural Disasters: A Primer.” Policy Research Working Paper 5429, World Bank, Washington, DC. 6. Ibid 14 Advancing Disaster Risk Finance To address these three key factors, the analysis captured in this report employs a country-specific operational framework informed by the experience of the World Bank in similar countries.7 This approach, to specifically address the needs of the GoCD related to disasters, focuses on three activities: quantifying the contingent liabilities of the GoCD to estimate the fiscal risk of natural hazards, reviewing the current public financial management (PFM) of disasters in Dominica and the legal environment for addressing shocks on public finances, and evaluating the domestic non-life insurance industry for its capacity to build a strong financial sector for public and private risk transfer. 1.2. Brief Introduction of the Case for a DRF Strategy in Dominica The GoCD has requested support from the World Bank in developing a comprehensive approach to reducing its vulnerability to disasters and improving its climate resilience that is also aligned with Dominica’s strategy to become the first climate resilient nation. In response to this request, the World Bank is engaging with the GoCD on the five pillars on DRM: (a) risk identification, (b) risk reduction, (c) preparedness, (d) financial protection, and (e) resilient recovery. In particular, the World Bank-funded Disaster Vulnerability Reduction Project (DVRP) is being implemented with a focus on risk identification and risk reduction. It is therefore timely that Dominica engages in strengthening financial protection based on the understanding of its contingent liabilities to disasters, complementing the above-referenced risk reduction activities. Evidence shows that when countries have a comprehensive DRM framework in place that includes a DRF component, the impact of direct damages and subsequent losses is better managed and can be reduced.8 Therefore, developing a DRF strategy would aid the GoCD in improving its financial resilience to natural hazards and its capacity to meet post-disaster funding needs without compromising its long-term fiscal balance. This World Bank-implemented Technical Assistance Program supports the GoCD in understanding and quantifying its financial vulnerability to natural hazards and in building capacity within the country to assess and reduce public sector financial vulnerability by developing a multilayered risk financing strategy. Dominica is highly vulnerable to different factors, including covariate risks, weather-related events and disasters, global crises such as the most recent COVID-19 pandemic and volcanic activity, which highlight the need for flexible DRF instruments and approaches. Like most of its Caribbean neighbors, Dominica is exposed to a high level of risk due to multiple hazards arising from meteorological (high wind, excess rainfall, sea-level rise, and hurricanes) and geophysical events (earthquakes, volcanoes, and tsunamis). Due to its location within the Atlantic hurricane belt, weather events such as high winds, excess rainfall, and hurricanes have strong negative impacts on the population and the economy, often of extreme magnitude with devastating effects. According to the latest Climate Risk Index report 2020, Dominica is the 10th most exposed and vulnerable country of the 181 countries analyzed and was also the country with the highest losses per unit of gross domestic product (GDP) to climate-related natural hazards during 1999– 2018.9 According to the Emergency Events Database (EM-DAT),10 tropical cyclones are the most frequently occurring natural hazards, and it shows that between 1900 and 2018, losses from hydro-meteorological disasters (mainly tropical storms) in Dominica were estimated to be over US$2.2 billion. The most recent catastrophic events have been Tropical Storm Erika in 2015 and Hurricane Maria in 2017. Total damages and losses from Tropical Storm Erika were estimated to be US$483 million, equivalent to 90 percent of Dominica’s 7. Mahul, Olivier, at al. 2014. Financial Protection against Natural Disasters: From Products to Comprehensive Strategies - An Operational Framework for Disaster Risk Financing and Insurance. Washington, DC: World Bank. http://documents. worldbank.org/curated/en/523011468129274796/Financial-protection-against-natural-disasters-from-products-to- comprehensive-strategies-an-operational-framework-for-disaster-risk-financing-and-insurance. 8. GFDRR. 2021.Global Partnership on Disaster Risk Financing Analytics: Results and Achievements. Washington, DC: World Bank. https://www.gfdrr.org/en/publication/global-partnership-disaster-risk-financing-analytics-results-and- achievements. 9. Eckstein, David, Vera Künzel, Laura Schäfer, and Maik Winges. 2019. “Global Climate Risk Index 2019.” Bonn: Germanwatch.. https://www.germanwatch.org/sites/germanwatch.org/files/Global%20Climate%20Risk%20Index%20 2019_2.pdf. 10. EM-DAT calculates damages as a function of the amount of damage to property, crops, and livestock. Dominica 15 GDP, with a majority of damages in the transport sector.11 The Post-Disaster Needs Assessment (PDNA) of Hurricane Maria concluded damages and losses US$1.3 billion or 226 percent of Dominica’s GDP. Figure 5: Losses from Disasters in Dominica since 1963 (US$, millions/percent of GDP) 1,600,000 253% of GDP 1,400,000 1,200,000 Total Loss (USD millions) 1,000,000 800,000 600,000 84% of GDP 400,000 42% of GDP 200,000 7.8 % of GDP 0.45% of GDP 0.35% of GDP 3.5% of GDP 10% of GDP 3% of GDP 0 1963 - TC Edith 1979 - TC David 1984 - TC Klaus 1989 - TC Hugo 1995 - HU Luis 2007 - HU Dean 2011 - Heavy 2015 - HU Erika 2017 - HU Maria and Frederick and Marylin Rain Sources: World Bank. Original figure and calculations for this publication based on EM-DAT, DesInventar, Dominica Rapid Damage and Impact Assessment of Tropical Storm Erika 2015, and Dominica PDNA 2017. Note: ** percent of GDP is calculated using latest World Bank data on Dominica’s 2019 national GDP estimated at US$574.61 million.**12 However, less severe weather-related events cause significant damage to Dominica. Torrential rains in 2020 caused landslides in Point Michel putting people in areas prone to flooding, landslides, and falling rocks in a vulnerable position.13 Similarly, in 2018, rains resulting from Hurricane Kirk and Tropical Storm Beryl caused extensive flooding and landslides around the airport and compromised critical bridges. These less severe events do not only affect communities and the population directly but also Dominica’s infrastructure. Dominica’s road network traverses unavoidably steep landslide-prone slopes and flood-prone river crossings to serve all communities. This places a substantial burden on the government in terms of general maintenance and repair following extreme and annual weather events. For example, in 2015, Tropical Storm Erika damaged or destroyed 40 percent of roads and 50 percent of bridges.14 11. GoCD. 2015. Rapid Damage and Impact Assessment Tropical Storm Erika. Dominica: GoCD.https://documents1. worldbank.org/curated/en/142861467995411564/pdf/104251-WP-PUBLIC-Rapid-Damage-and-Needs-Assessment- Final-Report-Oct5.pdf. 12. World Bank. “Dominica | Data.” https://data.worldbank.org/country/dominica. 13. Dominica Vibes News. 2020. “Landslide En Route to Soufriere.” November 1, 2020, https://www.dominicavibes.dm/ featured-267959/. 14. Barclay, Jenni, et al. 2019. “Historical Trajectories of Disaster Risk in Dominica.” International Journal of Disaster Risk Science 10 (2): 149–65. https://doi.org/10.1007/s13753-019-0215-z 16 Advancing Disaster Risk Finance Earthquakes have also proven to be a significant hazard for Dominica. In November 2004, an earthquake measuring 6.0 on the Richter Scale occurred, causing damage to buildings in the north section affecting 19,527 people. The Organisation of Eastern Caribbean States (OECS) estimated the damages to be approximately US$33,303,565. In November 2007, just after Hurricane Dean passed through Dominica, there was another earthquake measuring 7.3 on the Richter Scale, with its center on the coast of Martinique. Earthquakes seem to be a fairly common occurrence in Dominica, with the last ones registered as recently as January 2020, when two relatively significant earthquakes occurred near Dominica in just one week, according to the University of the West Indies’ Seismic Research Center (SRC). The first one was a magnitude 5.2 on the Richter Scale and the second one was a magnitude 4.6— fortunately there were no reports of injury or damage from any of these earthquakes.15 The potential risk of and vulnerability to volcanic activity remains at a relatively high level in Dominica, with the focus of risk on the south of the island where 20 percent of the population lives. One of the consequences of this volcanic activity is tsunamis, which is one of the most important threats for Dominica and many other Caribbean islands,16 given the volcanic nature of many of them. In fact, according to the 2020 report of the INFORM Global Risk Index led by the European Commission, tsunamis constitute the biggest risk to the island, ranking 8.5 on their scale, followed by tropical cyclones ranking 7.6 and earthquakes ranking 4.0.17 The GoCD has commenced its attempts to transform the island into the world’s first climate- resilient country. Steps have been taken to enhance public knowledge and involvement in resilience and formulate Dominica’s Climate Resilience and Recovery Plan (CRRP) and National Resilience Development Strategy (NRDS). It is estimated that the cost of Dominica becoming climate resilient by 2030 is EC$8.2–9.8 billion (US$3–3.6 billion),18 of which the country has already invested close to EC$1.7 billion (US$0.63 billion) on critical infrastructure and other projects since Hurricane Maria; hence, the remaining financing gap is estimated at about EC$7–8 billion (US$2.6–3 billion). However, the negative impacts of natural hazards and climate change-related phenomena will continue causing major damage to Dominica’s environment, economy, and population, highlighting the need for a strategic and cost-effective DRF approach to be considered and developed.19 The current COVID-19 situation has only worsened the existing economic and social challenges and Dominica’s overall financial context. Despite Dominica’s low COVID-19 reported cases and deaths, the pandemic still hit Dominica’s largely tourism-dependent economy hard. Tourism inflows essentially came to a halt in mid-March 2020, with ripple effects across other sectors, eroding fiscal revenues and creating an urgent balance of payments pressures. The closure of the borders, coupled with the commercial activity curtailment, has had a significantly debilitating impact on the economy. In April 2020, a survey was launched by Caribbean Community (CARICOM) and World Programme (WFP) among its member states to rapidly gather data on impacts to livelihoods, food security, and access to markets. 20 The survey showed that Dominica had the highest percentage of respondents reporting disruptions to livelihoods, the second highest for loss of jobs or reduced salaries, and the second most negative outlook on future livelihood impacts. 15. Gilbert, Ernice.2020. “Magnitudes 5.2 And 4.6 Earthquakes Strike Near Dominica In One Week.” The Virgin Islands Consortium, January 15, 2020, https://viconsortium.com/caribbean-disaster_preparedness/caribbean-magnitudes-5-2- and-4-6-earthquakes-strike-near-dominica-in-one-week- 16. Dominica News Online. 2015. “Dominica Told to Take Tsunami Warning Seriously.” March 17, 2015, https:// dominicanewsonline.com/news/homepage/news/environment/dominica-told-to-take-tsunami-warning-seriously/ 17. INFORM. 2020. INFORM Report 2020 Shared Evidence for Managing Crises and Disasters. https://drmkc.jrc.ec.europa. eu/inform-index/Portals/0/InfoRM/Publications/01%20Inform%202020%20ONLINE.pdf 18. GoCD. 2020. “Dominica’s Climate Resilience and Recovery Plan (CRRP).” http://www.dominica.gov.dm/images/ documents/CRRP-Final-042020.pdf. 19. GoCD. 2018. “National Resilient Development Strategy 2030.” http://extwprlegs1.fao.org/docs/pdf/dom188481.pdf 20. WFP, 2020, “Caribbean COVID-19 Food Security and Livelihood Impact Survey Report. https://docs.wfp.org/api/ documents/WFP-0000114475/download/?_ga=2.204515282.356028274.1634583046-1549580400.1588275385 Dominica 17 Disasters significantly undermine growth and development in Dominica. The 2019 United Nations Development Programme Human Development Index ranks Dominica 98 of 187 countries—currently 29 percent of the population remain below the poverty line.21 Dominica continues to work toward improving the social conditions of its citizens through infrastructure investments, economic diversification, and employment generation, yet its population and economy remain highly exposed to natural hazards and catastrophic risks. The Hurricane Maria PDNA estimated US$35 million in income and 3.1 million workdays were lost because of the disaster. Critical employment sectors such as agriculture and tourism can take up to 12 months to resume regular operations. As a result, a 25 percent reduction in overall consumption was projected, which would result in an increase in the poverty headcount from 28.8 to 42.8 percent, while the number of indigent individuals would double from 2,253 to 4,731. Furthermore, almost 2,800 individuals considered vulnerable before Hurricane Maria would fall below the poverty line.22 The quantification of fiscal risks linked to disasters is the first step in devising a cost-effective DRF strategy. Dominica’s Country Disaster Risk Profile (CDRP) developed by the World Bank presents country- and department-level earthquake and hurricane risk profiles by estimating the potential economic losses to public and private building infrastructure. According to the CDRP, hurricanes and earthquakes cause an average annual loss (AAL) of US$22.6 million (EC$61 million) over the long term, or 3.6 percent of GDP. The DRFTA Project was able to further validate these estimates and take the first steps in quantifying the GoCD’s explicit contingent liabilities by applying an actuarial approach to analyze the private and public sector losses from historical events, both severe and less severe, and modeling the occurrence of losses from future events. Results, discussed in Chapter 3, show that, on average, in the long term, AAL for the government’s contingent liabilities associated with hydrometeorological events is around US$30 million (EC$81 million), and, for any given year, Dominica has a 1 percent chance of experiencing losses in its contingent liabilities of greater than US$445 million (EC$1,200 million). This report contains the main findings and recommendations of this technical assistance, including how to use risk assessments such as AAL in a fiscal protection strategy. This report contains five chapters. After this introductory chapter, Chapter 2 presents an overview of the budgetary framework for disaster response and the legislation and policies that support it, before evaluating its effectiveness and cost-efficiency. Chapter 3 provides a preliminary financial disaster risk assessment for Dominica, focusing particularly on the fiscal impact of natural hazards. Chapter 4 presents an overview of the private catastrophe insurance market, and Chapter 5 reviews the recommendations for future financing of disaster recovery and reconstruction expenditures. The report is complemented by technical annexes that provide information on further analyses and results. 21. Central Intelligence Agency, Dominica, in The World Factbook. September 1, 2021. https://www.cia.gov/the-world- factbook/countries/dominica/ 22. GoCD. 2017. “Post-Disaster Needs Assessment Hurricane Maria September 18, 2017.” https://www.gfdrr.org/sites/ default/files/publication/Dominica_mp_012418_web.pdf 18 Advancing Disaster Risk Finance Chapter 2. Public Financial Management of Disaster Risk 2.1. Summary of DRF Framework in Dominica There are no explicit provisions in the existing legislation to provide an overarching framework for DRF. The Emergency Powers (Disaster) Act, and more specifically the National Disaster Plan 2001, outline the governance mechanism and processes for operationalizing DRM in Dominica but do not specify sources of funding. The Public Procurement Act (PPA) of 2015 does not provide for either emergency procurement or public procurement of insurance but does provide for regulations to treat with both emergency and insurance procurement. The Finance (Administration) Act (FAA) of 1994 provides for the Consolidated Fund, which is to be used as the source of financing for unforeseen expenditure23 and for the minister to establish a Contingencies Fund effected through Contingencies Fund Warrants (CFWs), to be regularized through Supplementary appropriations within six months of the CFWs. The FAA provides other mechanisms for budget flexibility, using the Consolidated Fund, in the aftermath of a disaster.24 As such, the scope of the fiscal response to natural disasters in Dominica has been determined by the Consolidated Fund, and more specifically the fiscal budget. Currently, there are two disaster-related funds in Dominica: the Disaster Emergency Fund (DEF) at the Office of Disaster Management (ODM) and the Vulnerability, Risk, and Resilience Fund (VRRF). The DEF currently has US$75,000 available,25 which is to be used as petty cash for the ODM to make unexpected payments, but it is not meant to cover any substantial losses or costs associated with a disaster. The 2019 Draft DRM Bill proposes a third fund—a Disaster Management Fund—to be replenished using monies appropriated by Parliament; donations, grants, and loans approved by the Minister of Finance; and any resources raised by the Department of Disaster Management.26 The proposed Disaster Management Fund would be utilized for funding preventative, operational and response activities of DRM, including social protection. The VRRF was established in 2020 at the Eastern Caribbean Central Bank (ECCB) to cover emergency expenditure following disasters. Effective October 2020, US$185,000 (EC$500,000) is to be placed in the VRRF fund monthly, from revenue of the Citizen-by-Investment (CBI) program and other sources, including contributions from development partners, with a target capitalization of US$14.8 million (EC$40 million). The current monthly contributions, if maintained, will put the fund at US$2.77 million at the end of 2021. The VRRF is expected to fund activities focused on disaster response but could ultimately also be used for risk reduction and climate change adaptation once it is well capitalized. Guidelines are under development for the use, capitalization, and governance of this fund to clearly identify thresholds and how resources can be used and allocated, what the thresholds will be that trigger the ability to use the VRRF in a specific event, how will the fund be capitalized and to which amount, and so on. The threshold for accessing the VRRF should not be too high, so that it (a) is not too inflexible to allow response to disruptive events or (b) unduly replicates the Caribbean Catastrophe Risk Insurance Facility (CCRIF) coverage. The threshold should also not be too low, such that it is frequently depleted and does not provide some protection when needed. 23. GoCD FAA Regulations 1965: S.5 also states this. GoCD. 1965. “Finance and Audit Act.” http://www.dominica.gov.dm/ laws/chapters/chap63-01.pdf 24. See pages 21–23 of the Commonwealth of Dominica Post-Disaster Public Financial Management (PD-PFM) Review. 25. Information provided during the virtual mission held in March 2021. 26. The ODM and Department of Disaster Management are the same agency but because the DRM Act has not been ratified, the official name is the ODM. Dominica 19 2.2. The Legal, Institutional, and Regulatory Framework for PFM of Disaster Risk in Dominica Finance (Administration) Act The FAA establishes the operating framework for budgeting for disaster risk. The Consolidated Fund, historically the government’s only risk retention mechanism, is provided for in the Constitution of Commonwealth of Dominica and established inthe FAA.27 The FAA provides for main budgetary estimates, appropriations bills, supplementary estimates, and supplementary appropriations bills as part of prudent PFM. The main appropriation bill must apply to both recurrent and capital expenditure and must give the allocations to each head and references to authorities to spend amounts from the Consolidated Fund. Similarly, once the appropriated expenditure is not sufficient, a supplementary estimate with the details must be prepared and the Supplementary Appropriation Bill laid in Parliament. The FAA requires that variations within the resource envelope are authorized through supplementary appropriations.28 Supplementary estimates, therefore, provide details of changes to the originally approved budget, including when the amount appropriated is insufficient or any amount is needed for which there was no appropriation in law. For transparency and tracking of expenditure, it would be prudent for supplementary estimates to track variations in the budget by the type of variation, for example reallocations, virements, or other warrants.29 It would then be possible to track disaster responsive changes to the budget and capture them under disaster management response, if this kind of tracking is done in the supplementary estimates using Chart of Accounts (COA) Standard Object Codes (SOCs). Currently, there is still need for clarity on what is captured or reflected in the supplementary estimates to ensure that not only CFWs but also other mechanisms for budgetary changes are documented to accurately quantify GoCD’s fiscal response to disasters. Draft Fiscal Responsibility and Public Financial Management Bills The draft FR (2021) and PFM (2019) Bills contain guidelines for post-disaster expenditure within the bounds of fiscal rules. The FR Bill seeks to establish a transparent and accountable rules-based Fiscal Responsibility Framework (FRF) in Dominica, to guide fiscal policy during the budget process to ensure that government finances are sustainable over the short, medium, and long term, consistent with a sustainable level of debt. As the PFM Bill preceded the FR Bill, there are sections of the PFM Bill that have been incorporated into the FR Bill, namely the FRF provisions and the VRRF. It specifies the coverage of the act and fiscal rules, which is the central government and the covered public entities and the fiscal rules. The escape clause30 allows the government to deviate from fiscal rules in the event of a natural disaster, public health epidemic, civil unrest, or war, pursuant to the declaration of a state of emergency.31 Although the FR Bill articulates four main fiscal rules, it also provides exemptions for two categories: (a) grants made to the government for the financing of capital expenditures and (b) any capital expenditures made from the VRRF. 32 27. Special Funds (S.10 of the FAA) and Trust Funds (S.11 of the FAA) do not need to be included in Consolidated fund. 28. Supplementary appropriations are the legal mechanism to approve changes to the budget. The Supplementary Estimates are the actual budget that itemizes the supplementary appropriations. Detailed supplementary estimates are not publicly available. 29. Budget reallocation is used to a greater extent for disaster response than CFWs in Dominica. 30. This is contained in both S.10 of the FR Bill and S.15(1) of the PFM Bill, respectively. It is not defined in either act’s interpretations (S.2) but is the condition or trigger that would result in noncompliance with the fiscal rules. 31. FR Bill. S.15(1) and PFM Bill state that the deviation from the fiscal rules should only occur if the unforeseeable event cannot be accommodated through the Contingencies Fund, VRRF, or the use of other flexibilities allowed within the act. 32. See S.9 of the FR Bill. 20 Advancing Disaster Risk Finance The draft FR Bill proposes four quantitative fiscal rules. These are (a) Public debt-to-GDP ratio ceiling of 60 percent by 2035; (b) Deficit-free primary balance (0 percent of GDP) by 2023, 3.5 percent of GDP by 2026 and maintained thereafter; (c) Growth in real primary expenditure not to exceed 3.0 percent in 2022, to fall by 1.0 percent each FY2023/24, FY2024/25, and FY2025/26; and (d) Wages-to-GDP ratio ceiling of 11.25 percent. Capitalization of DRF instruments is a key step in building fiscal resilience to natural disasters and should be enshrined in law. The GoCD can enact the proposed FR Bill to establish the level of capitalization of the VRRF from the CBI and other sources. Currently, the proposal is for the Cabinet to decide annually. In the PFM Bill, it was proposed that the CCRIF SPC payments would go to the VRRF instead of the Consolidated Fund.33 In the current FR Bill, that condition is not included as a funding source for the VRRF. The GoCD has promulgated a Draft Fiscal Rules and Responsibility Framework (FRRF) inclusive of Operational Guidelines for the VRRF, separate from provisions in the FR Bill, which is to be enacted in 2021. The Draft PFM Bill includes a provision for a Contingencies Fund and Budget Reserve Fund This reserve may be included and cannot exceed 3 percent of the total appropriation for the fiscal year. This Reserve Fund is another potential instrument to be used for disaster response, though not immediately clear how this Reserve Fund is different from the Contingencies Fund. The same definition34 is used for contingency warrants to capitalize the Contingencies Fund. The FR Bill could be strengthened with a number of inclusions. While there are innovations in the definitions, there are some important omissions, including affirmative and negative resolutions, CBI, escape clause, nominal GDP separate from GDP, Public Sector Investment Programme (PSIP), public investment, and recovery plan memorandum, among other things. The Draft FRA is an innovation within the GoCD’s PFM landscape and because it has examples of other countries to learn from (Jamaica, Grenada, St. Vincent and the Grenadines, and even St Lucia which has a Draft PFM Bill), this is a real opportunity to develop robust fiscal rules, especially in the current time of fiscal and other crises brought on by COVID-19. The PFM Bill could also be strengthened with a number of inclusions. While there are innovations in the definitions, there are some important omissions, including public debt, natural disaster,35 emergency, fiscal risks, and public-private partnerships (PPPs). The PFM Bill is silent on public investment, which provides an opportunity to bring the public investment management framework into the act.36 Annual Procurement Plans are not required as part of the key budget documentation to be submitted. This would be an opportunity to synergize the PFM Bill with the Public Procurement Bill. Finally, S.66 (Public Accounts) requires an account of the financial position of the GoCD. A statement of insurance coverage against disaster risk, specifically, or in general would be useful for the GoCD to have at its disposal, especially in terms of disaster mitigation and the quantification of risk and exposure. 33. See S.101(1)(e) of the PFM Bill. 34. “ The Cabinet shall authorize the use of the budget reserve on the advice of the Minister and the Minister shall ensure that the budget reserve shall be used solely for urgent and unforeseeable expenditures arising from an emergency situation for which payments cannot be accommodated within the available flexibilities and cannot be postponed until the approval of the Supplementary Estimates and the passage of a Supplementary Appropriation Act or the next National Budget, without seriously affecting the public interest.” 35. This is one criterion for deviation from the fiscal management principles so it should be defined. 36. In contrast, there is inclusion of PPPs. What the account states is that a “Summary table showing the expenditure for new policies add projects distinguished form expenditure for on-going policies and projects” is part of budget documentation to be submitted (S.17(5)(q)). Dominica 21 Public Procurement Act (PPA) and Regulations of 2015 The PPA is relevant to DRF for two main reasons: (a) it can support emergency procurements and (b) it can support procurement of insurance as a risk management option. Procurement is defined in the PPA37 as all activities that pertain to the solicitation and entering into a procurement contract by or on the behalf of the Government for the supply of goods, services, including intellectual services, and/ or works. This act relates to any of the following public bodies: a ministry, department, statutory body, or municipal authority engaging in the procurement of goods, works, and services financed in whole or in part from public funds, among other things. the immediate aftermath of a disaster, the procurement of supplies and other necessities requires an agile procurement system, which not only facilitates expedience but also has clear rules of engagement. The proposed Public Procurement Regulations under the Public Procurement Bill provide guidance on proceeding with procurement during an emergency related to not automatically excluding competitive procurement, conditions for single source procurement, and limiting single source procurement quantities to those addressing the emergency. The Public Procurement Regulation also provides for the procurement of insurance in general but without disaggregating the types of insurance coverage. The coverage can apply to any person or matter, which does not exclude disaster insurance (Regulation 152). There are criteria under which insurance proposals are to be rejected, including if the broker is not pre-qualified by the Financial Services Unit (FSU). The regulations provide scope for the take-up of insurance by public bodies within the GoCD. The framework can be made more robust with regard to types of insurance (non-life versus life) or inclusion of considerations for and disaster and climate risks through amendments to the regulations or through introducing greater specificity or robustness if the regulations have not yet been enacted. 2.3. The Legal, Institutional, and Regulatory Framework for Disaster Risk Management (DRM) in Dominica Emergency Powers (Disaster) Act of 1951 Dominica’s legal framework for DRM is grounded in the Emergency Powers (Disaster) Act, established in 1951 and last revised in 1990. This act provides for the authority of the President through publication in the Gazette to declare a state of emergency if a disaster is pending or if the country has been affected by a disaster. When the proclamation of a disaster is in force, the President is authorized to secure the essentials of life for the community and for the preservation of health, welfare, and safety of the public. National Emergency Planning Organization and Office of Disaster Management DRM in Dominica includes various organizations and departments of Government. Currently, there are two main bodies responsible for DRM in Dominica: the National Emergency Planning Organization (NEPO)—a governmental organization with responsibility for the planning and organization of counter-disaster measures at central level—and the ODM, which is responsible for taking proactive and timely measures to prevent or reduce the impact of disasters on the Dominican people and economy through its staff and collaborative efforts with national, regional, and international agencies. Together, the ODM and NEPO coordinate overall disaster management based upon the principles of prevention, mitigation, preparedness, response, and recovery.38 NEPO also coordinates and operates a National Emergency Operations Centre and an Advisory Council and various DRM Committees and teams. 37. The Public Procurement Bill was to repeal the Procurement and Contract Administration Act (PCAA) of 2012 and amend relevant parts of the FAA. 38. GoCD, Office of Disaster Management (ODM), https://nationalsecurity.gov.dm/divisions/office-of-disaster- management-odm. 22 Advancing Disaster Risk Finance As a member of the Caribbean Disaster Emergency Management Agency (CDEMA), the GoCD has adopted the CDM approach with respect to the management of disasters.39 Resilience building, DRR, and the development and maintenance of sound response and recovery mechanisms are key components of this approach. Draft Comprehensive Disaster Management Bill and Regulations (2014) Through support from CDEMA, Dominica drafted the CDM Legislation; however, the absence of a Disaster Management Act to enforce and provide proper legislation to ensure that vulnerability is managed, and risks are prevented is a significant shortfall. 40 The draft legislation was prepared for presentation to Parliament with the objective of giving effect to the GoCD’s policy intentions in regard to the CDM in Dominica. In March 2017, the CDEMA, under the Country Directed Fund (CDF), which is financed by the European Union through the ACP EU Natural Disaster Risk Management (NDRM) in the Caribbean Forum (CARIFORUM) program awarded the ODM approximately US$10 million to facilitate a review, consultation, and update of their draft. The suite of proposed regulations for the better implementation and administration of the Comprehensive Disaster Management Bill of 2014, when enacted into law, comprised drafts of the following: the Comprehensive Disaster Management Regulations, 2014; the Comprehensive Disaster Management (voluntary) Regulations, 2014; the Early Warning Systems Regulations, 2014; the Emergency Shelters Regulations, 2014; the Comprehensive Disaster Management (Evacuation) Regulations, 2014; and the Disaster Relief and Assistance Regulations, 2014. Draft Comprehensive Disaster Management Act (2019), Dominica’s Emergency Management Organization, and Department of Disaster Management The 2019 Draft Comprehensive Disaster Management Act (CDMA) proposes a slight reorganization and reformulation of roles and responsibilities of NEPO and the ODM, which would be rebranded as the Dominica Emergency Management Organization (DEMO) and Department of Disaster Management, respectively. The draft act has been written but has not yet been ratified, and it outlines/ proposes the following:41 1. Policy making with respect to comprehensive DRM in Dominica will be the responsibility of DEMO, formally mandated by law. DEMO will comprise the following organs: (a) the Executive Committee of DEMO, (b) the Disaster Management Advisory Council, (c) 13 Task Forces, (d) the District Disaster Management Committees, and (e) the Community District Management Committees (CDMCs). 2. A department of the government, to be known as the Department of Disaster Management, will be established with the main task of giving effect to the general DRM policy of the government by facilitating and coordinating the development and implementation of integrated DRM systems in accordance with the DRM Act. Other Relevant Legislations, Strategies, Plans, and Institutions Other relevant legislation, plans, and regulations are those directly linked to Dominica’s climate resilience agenda such as the following: 39. GoCD. 2014. “Commonwealth of Dominica Disaster Risk Reduction Country Profile.”https://dipecholac.net/docs/ files/786-cd-dominica-web.pdf. 40. CDEMA. 2017. “CDEMA Approves Funds to Support Advancement of Disaster Legislation in Dominica.” Press Release, April 10, 2017. https://www.cdema.org/news-centre/press-releases/1659-cdema-approves-funds-to-support- advancement-of-disaster-legislation-in-dominica. 41. 2019 Draft Dominica CDMA (not yet ratified). Dominica 23 (a) The NRDS: Dominica 2030. This was prepared and released, in response to the destruction of Hurricane Maria, to guide Dominica’s recovery journey. It articulates the overall policy framework of the government and outlines 43 resilience goals aimed at ensuring that development is people centered. (b) Dominica’s CRRP. This operationalizes the NRDS by translating Dominica’s vision to ‘build the first climate-resilient nation in the world’ into a concrete set of actions, including initiatives related to community emergency readiness, resilient housing, resilient physical plan, and innovative insurance solutions.42 (c) The 2016 Climate Change, Environment and Natural Resource Management (CCENRM) Bill and the 2016 National Physical Development Plan. The CCENRM Bill is a key piece of legislation that has determined the creation of several committees, coordination bodies, and other initiatives critical for the implementation of the environmental and resilience agenda in Dominica. In December 2018, the GoCD established the Climate Resilience Execution Agency for Dominica (CREAD) in support of the new Climate Resilient National Plan to define resilience metrics, targets, and milestones and measure progress against them; identify gaps to achieving a resilient Dominica; and develop a road map to close them and implement a series of flagship Initiatives to propel the journey toward resilience. The agency is critical to building climate-resilient infrastructure, and it is tasked with coordinating and implementing selected capital projects. Figure 6: Time Line of legal and Regulatory Framework for DRF and DRM Source: World Bank. Original figure for this publication. 2.4. Budgetary Sources of Post-Disaster Financing The GoCD uses a standard menu of instruments, used by most Commonwealth Caribbean countries, to respond to disasters. The GoCD uses local revenues, local loans, and external facilities. Local revenues are predominantly derived from taxes or fees. Local loans are usually sourced from a domestic financial institution. External facilities are also available to bolster the GoCD’s post-disaster response. Regardless of the DRF source, the Consolidated Fund is the main conduit for resources to flow. Even if resources are coming from the Contingencies Fund, it must flow through the Consolidated Fund. 42. GoCD. 2020. “Dominica’s Climate Resilience and Recovery Plan (CRRP).”http://www.dominica.gov.dm/images/ documents/CRRP-Final-042020.pdf 24 Advancing Disaster Risk Finance The GoCD has access to external facilities that help manage the increased demands on the budget in the aftermath of a natural disaster. These external facilities include insurance products, contingent credit facilities, loans and grants. The GoCD has three parametric insurance policies with the Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC) for tropical cyclones, excess rainfall, and earthquakes. In addition to the central government, some public entities also purchase insurance policies. The GoCD has access to contingent credit facilities, including the World Bank-financed Contingent Emergency Response Component (CERC) through current, active investment projects. The Caribbean Development Bank (CDB) provides the Immediate Response Loan (IRL) and other loan facilities. The ECCB, The European Union and other bilateral partners also provide grants for disaster-specific response. In particular, the GoCD has access to the Emergency Assistance Facility (EAF) of CDEMA, the ECCB provides emergency assistance grants43 , and the CDB provides access to grant resources through its Emergency Relief Grant (ERF). 2.5. Budgetary Analysis of Fiscal Impact of Disasters in Dominica Between 2011 and 2020, four major weather-related events have resulted in total damage estimates of at least US$1.97 billion (Tropical Storm Ophelia in 2011, rains in December 2013, Tropical Storm Erika in 2015, and Hurricane Maria in 2017). Average damage estimates44 amounted to US$0.49 billion.45 This estimate does not include related recovery/reconstruction expenditures. Financial loss represented 21.3 percent (or an estimated US$420.4 million) of the total damage estimates. In addition, the impact of the four discrete events resulted in a decline in GDP46 of 19.9 percent in the event years, or on average a 5 percent decline in GDP per event. The data suggest that GDP fallout is lowest when the country is already undergoing a recession and is implementing a program of recovery. Recovery activities could serve as enablers to mitigate the impact of a natural disaster. The different starting points affect the severity of the GDP fallout and the financial loss. The pace of the recovery also affects both indicators. The budget has accommodated post-disaster financing of approximately US$88.4 million, or 16.5 percent of the 2020 estimated nominal GDP.47 In terms of financial loss, the budget has accommodated less than the total financial loss associated with the events: the US$88.4 million amounts to almost 21 percent of the total financial loss. A review of the recurrent, capital, and total expenditure for the four events during the period show that capital expenditure has been a significant part of the response (Figure 7, which gives expenditure for the entire period in disaster and non-disaster years, respectively). Disaster expenditure includes amounts captured in the recurrent and capital budgets which, through COA codes, indicate the expenditure is related to disaster events. In the recurrent budget, there is approximately US$0.23 million, which is operational expenditure for the ODM. Amounts in the recurrent budget that are in excess of the amount indicate the additional expenditure triggered by a disaster event. 43. McCaskie, Ariel. 2020. “OECS States Have Taken a Collaborative Approach to Respond to the Pandemic.” Inter- American Development Bank Caribbean Region Quarterly Bulletin (blog), 2020. https://flagships.iadb.org/es/node/38309 44. cumulative impact in GDP of all the events divided by the number of events over the reference period. 45. The data include mainly EM-DAT and DesInventar and give a side-by-side view. 46. Real GDP fallout is derived by subtracting pre-event/previous fiscal year real GDP from actual post-event/fiscal year of event real GDP. Financial loss is a form of economic loss that looks only at monetary loss. it is represented by the total estimated damage (both public and private) as a result of the event, divided by real GDP in the year of the event, minus the fallout in GDP which is anticipated to be a negative value. Both values are percentages. Planning Institute of Jamaica. 2012. “Socio-Economic and Environmental Impact Assessment for Jamaica.”https://www.climateinvestmentfunds.org/ sites/cif_enc/files/knowledge-documents/final_dala_handbook_jamaica_feb11_2013_0.pdf; 47. At the time of drafting this report, the World Bank’s nominal GDP projection for Dominica was EC$1.52 billion. The IMF figures have been used for 2018 to 2020.. Dominica 25 Figure 7: Recurrent, Capital, and Total Disaster Expenditure, Inclusive of Supplementary Expenditure, FY2014–FY202048 $100.00 $90.00 $80.00 $70.00 $60.00 US$ Millions $50.00 $40.00 $30.00 $20.00 $10.00 $- 2014 2015 (DYr) 2016 2017 (DYr) 2018 2019 2020 Recurrent $0.10 $2.61 $0.53 $32.85 $1.87 $0.31 $0.30 CAPEX $- $- $7.22 $52.97 $21.89 $- $- Total Exp $0.10 $2.61 $7.75 $85.82 $23.76 $0.31 $0.30 Recurrent CAPEX Total Exp Source: World Bank. Original figure and calculations for this publication using the GoCD estimates of expenditure, FY2016– FY2020, supplementaries for the FY2017/18–FY2020/21, and the CCRIF SPC online payout notifications/publications. The EM-DAT and DesInventar combined data show that there is a gap between damage estimates and the fiscal response.49 The damage estimates for the four events was US$1.97billion, while the budget only reveals a fiscal response of approximately US$88.4 million or 4.5 percent.50 Supplementary estimates amounting to US$235.5million were approved/appropriated for the three fiscal years 2016/17 through 2017/18. Of that amount, US$262.9 million or approximately 41 percent was disaster-related expenditure. About 37 percent had been appropriated after Tropical Storm Erika in 2016/17. Another 53 percent of that amount was appropriated after Hurricane Maria in 2017. The absence of detailed supplementary estimates51 underestimates the fiscal response and accommodation of disasters because disasters occur after the budget has been approved, requiring fiscal adjustments. 2.6. External Aid Flows Disaster management relies not only on Government revenues but also on capital expenditure in the form of loans. The main international development partners (IDPs) helping finance disaster management for the GoCD are the CDB and IDA. More recently, with the advent of COVID-19, the IMF has supported through its RCF. As of June 2020, the GoCD owed the CDB on 16 outstanding loans for disaster management. The portfolio of outstanding debt stood at US$18.2 million. This amount represents 33 percent of all total disbursed outstanding debt (US$55.3 million) owed to the CDB.52 In addition, there were seven outstanding loans to IDA in the amount of US$30.0 million. This amount represents 67.6 percent of all disbursed loans 48. Budgetary data for FY2011–FY2013 were not captured but EM-DAT; DesInventar data are available for 2011 and 2013 events. 49. The fiscal response uses official damage and loss estimates as the parameter for measuring the government’s response. 50. This includes supplementary estimates data related to the 2013 December rains, which were extracted from the 2014 supplementary estimates. 51. The supplementary estimates would accommodate relief and recovery expenditure mainly. The estimates are skewed toward reconstruction and, to a lesser extent, recovery. 52. The CCRIF SPC was among the loans with a principal of US$94,921.90 and interest of US$889.90 but no outstanding debt as of June 2020. 26 Advancing Disaster Risk Finance to the GoCD. Of the seven loans, three of the loans (equivalent to 78 percent of the total loan amount) were allocated for disaster mitigation and totaled US$23.5 million. Subsequent to the fiscal pressures brought on by COVID-19, the IMF provided an RCF in the amount of US$14.1 million, representing 59.6 percent of total disbursed outstanding debt to the IMF. The combined loan portfolios of the main IDPs in providing loan resources for disaster management represent 50 percent of the total outstanding debt of these three entities in June 2020. The three entities—CDB, IDA, and IMF—had disbursed disaster management loans totaling US$62.4 million, compared with total outstanding debt of US$123.3 million. The cost of disaster management ranged from 0 percent (IMF) to 0.75 percent or less53 (IDA) to a minimum of 2.0 percent and a maximum of 2.5 percent for the CDB. Figure 8: Composition of Total Disbursed Outstanding Disaster Management Debt as of June 30, 2020, as a Proportion of PSIP Disaster Management Budget, FY2017/18–FY2021/22 CDB 26% Other 42% IDA 21% IMF 11% Source: World Bank. Original figure and calculations for this publication using data from the estimates of debt service and GoCD loan portfolio 2020/21 in the estimates of expenditure. Expenditure related to DRM has increased in the PSIP, funded by government revenues, loans, and grants. The PSIP provides details of DRM-related capital expenditure at a total cost of US$210.8 million— including the GoCD revenue, loans, and grants. There are 28 projects across eight ministries.54 The 28 DRM projects that form part of the PSIP represent a significant increase since 2017/18 when there were only nine projects. This increase is consistent with the GoCD’s budget estimates for 2016–2021, which have been increasingly including DRM initiatives and considerations for DRM-related investments (more information is provided in Annex I). More information on the data show that between FY2019/20 and FY2020/21, DRM as part of the total PSIP increased from 6.0 to 25.4 percent. Additionally, amounts spent by the GoCD on disaster management have increased significantly since 2017/18 (Figure 8). 53. The IDA DVRP loan of US$4.15 million (EC$11.2 million) had an interest rate of 0.1 percent. 54. Ministry names change with every political administration in the Caribbean and, at times, even during a political administration’s tenure. The projects are captured by the names of current ministries (2021) only. Dominica 27 Figure 9: DRM Expenditure in PSIP, FY2017/18 to FY2021/22 60 $49.50 50 $40.19 40 US$ MILLIONS 30 20 $11.13 $10.76 10 $7.25 0 Actual Exp up to Actual Exp 2018/19 Revised Estimates Budget Estimates Budget Estimates 2017/18 2019/20 2020/21 2021/22 Source: World Bank. Original figure and calculations for this publication using data from the medium-term PSIP 2020/23 in the 2020/21 estimates of expenditure. The Ministry of Public Works and Digital Economy implements about 35 perecent; Ministry of Environment, Rural Modernization, and Kalinago Upliftment approximately 25 percent; and Ministry of National Security and Home Affairs approximately 6 percent. These three ministries have 20 projects totaling US$138.9 million or 66 percent of the total disaster management PSIP for FY2017/18 to FY2021/22. However, in terms of spending alone, it is three ministries—Public Works and Digital Economy, MERMKU, and Housing and Urban Development—that spend US$166.7 million or 79 percent of the entire DRM in PSIP. 2.7. Public Asset Management No plans, policies, or strategies are publicly available on public asset management in Dominica. Usually, the MoF or Ministry of Planning has institutional responsibility for public asset management. This responsibility may simply be the existence and updating of a public asset register or can extend to valuation of said assets and insurance of said assets against disaster and climate risk, especially where assets are highly exposed or vulnerable. Insurance of public assets tends to be underdeveloped in the Caribbean Small Island Developing States (SIDS) and, as a result, the government or the national budget is usually the insurer of last resort. High-value assets such as utilities and ports, for example, are usually insured but there is no centralized procurement of insurance. These entities are usually state-owned enterprises or parastatals that are outside the direct remit of the central government. Despite lack of information on public asset management in Dominica, the Finance and Audit Act 1994 (Chapter 63:01) provides for the promulgation of regulations. Regulation 16 can, among other things, provide for “(d) the purchase, safe custody, issue, sale or other disposal or writing off of public stores and other property of the Government of Dominica, and the proper accounting for, and stocktaking of, such stores and property.” Property can be equated to public assets, which are diverse in their nature and can be in both tangible and non-tangible assets. There is a need to define and distinguish between types of public assets as well as to assign institutional responsibility for public asset management in law. 28 Advancing Disaster Risk Finance The PFM Bill (2017) speaks specifically to public assets, while the FR Bill generally only applies to public expenditures and where public investment results in public assets. The PFM Bill has a specific part in public assets that assigns control, responsibility for assets, recording and reporting of assets, and application of government property. This would equate to a governance framework for public asset management in Dominica. Public assets or public property are defined as “property of any kind in the custody of or under the control of the Government.” In addition, the PFM Bill does not ring-fence any part of the government: it is applicable to central governments, state-owned enterprises, and local government, unless the act specifies otherwise. Similarly, the Minister of Finance’s powers and responsibilities extend to “the oversight of policies and practices to manage government property.” This would assign the MoF with institutional responsibility for public asset management. The PFM Bill delegates responsibility for public assets: either at the level of the Permanent Secretary, Chief Executive Officer, or managerial head of a covered entity, depending on whether the entity is central government, state-owned, or other. The responsible parties are required to keep and “maintain current asset registers for physical assets and financial assets.” Where there is any change in ownership or usage over the value of approximately US$7,400 (or EC$$200,000), this information must be reported as part of routine reports to the Financial Secretary (S.50(2)). As part of the governance and accountability framework, the Financial Secretary can bring any issue to the attention of the Attorney General (S.52(2)) or the Director of Audit (S.52(3)) for their further action.55 The proposed PFM Bill provides scope for better public asset management in the Commonwealth of Dominica. Just as how public property is defined, it is recommended that public assets should also be defined and distinguished. The PFM Bill is silent on valuations of public assets, disposal of public assets, and insurance of public assets. As the bill is not yet enacted, there is scope to strengthen it to ensure that it is more comprehensive in its scope and applicability. Given that the registers of both physical and financial assets will be required, it would be useful to provide such a register either in the act as a schedule or as a schedule to PFM Regulations. Lastly, links to public procurement of public assets; public procurement of insurance for public assets; and public investment management, especially where public investments result in public assets, should be reinforced in the relevant laws such as the PPA and the FR Bill given that public procurement of insurance has value for money implications with which FRFs are concerned. At present, there is a general lack of data regarding public asset management, in addition to data being largely excluded from relevant legislation. The issue of data management and coordination is therefore further explored and addressed in Box 1. 55. GoCD. 2019. “Public Financial Management Bill,” § 50 (2), 52 (2), 52 (3). Dominica 29 Box 1: Data Management and Coordination Dominica continues to make major investments in data systems and has received technical assistance in determining their vulnerability to both natural and man-made hazards. However, the GoCD has not yet been able to fully translate these efforts and assistance into improved resilience. Efforts have been made to centralize data holdings through platforms such as the Dominode.56 Systems created include a transportation asset management system57 and a mobile data collection platform based on KoBo Toolbox,58 which hosts forms and data on the assessment of collective shelters and rapid damage and loss assessments (DaLAs). Funds have also been invested toward the creation of a hydrometeorological monitoring network59 meant for improving climate data collection and early warning capability. Baseline data collection efforts have also produced data, such as a Light Detection and Ranging (LiDAR) topography and bathymetry survey and high resolution orthoimagery, which could be used to locate assets and map hazards and vulnerability. The lack of a national policy for the management of data holdings has led to a situation where agencies with limited resources are tasked with managing complex systems and data resources. The information and communication technology (ICT) Unit of the GoCD has attempted to centralize the management of these systems, but limited staffing and a wide variety of technologies used in the implementation of systems have made it difficult for the unit to perform this role. Major disasters such as Hurricane Maria have also significantly damaged the data management infrastructure of the GoCD. In addition to the infrastructural damage, asset inventories and condition assessments become outdated and data holdings need updating. These necessary data updates are not considered in the budget for these systems and plans for data updating, when they exist, are rarely operationalized due to a lack of capacity and budget. While the need for these systems and data is clear, without the proper foundation, the full benefits will continue to be unrealized. Policies that outline clear roles and responsibilities and allocate the necessary budget to maintain and update systems and baseline datasets must be adopted. When systems are implemented, they also need to consider the capacity that exists within the GoCD for maintaining the technology on which these systems are based and in case this capacity does not exist, provide the resources for building this capacity. Plans for data updating must also be considered in the design and implementation of new systems. 56. GoCD, DomiNode, Government of the Commonwealth of Dominica, https://dominode.dm/ 57. Oliver, David, Jodie Dublin-Dangleben, and Yohannes Kesete. 2021. “Understanding Risk | Integrating Climate Change into Roadway Asset Management - Applications in Developing Countries.” Accessed September 12, 2021. https://understandrisk.org/event-session/integrating-climate-change-into-roadway-asset-management-applications-in- developing-countries/ 58. KoBoToolbox | Data Collection Tools for Challenging Environments, https://kobotoolbox.org/. 59. GoCD, Hydromet Network for Dominica - GIS Dominica, http://news.gov.dm/news/2332-hydromet-network-for- dominica 30 Advancing Disaster Risk Finance CHAPTER 3. FISCAL DISASTER RISK ASSESSMENT60 The quantification of fiscal risks linked to disasters, including the government’s contingent liabilities, is the first step in devising a cost-effective DRF strategy. Ideally, such an assessment requires a merge between historical loss data analysis and modeled losses derived from natural catastrophe risk models. The objective of this chapter is to inform the GoCD of the levels of risk it faces and to facilitate discussions on how it can become more resilient to both current and future risk based on systematic collation and analysis of key baseline data. 61 An initial assessment of the government’s contingent liability associated with disasters indicates that it faces a major financing challenge arising from natural catastrophes. Hydrometeorological events—storms, hurricanes, and floods—are a major driver of risk, causing an estimated total annual economic impact of US$79.7 million (EC$215 million), equivalent to 13.68 percent of national GDP. However, simulations show that a major hurricane event with a return period of 100 years could cause losses in excess of US$1,189 million (EC$3,210 million) (from both direct and indirect impacts), which equals about 204 percent of national GDP.62 3.1. Fiscal Disaster Risk Modeling Dominica’s CDRP, developed by the World Bank in 2021, presents country- and province-level probabilistic disaster risk profiles to provide risk assessments and estimates of potential damage to buildings caused by hurricanes63 and earthquakes.64 Traditionally, sophisticated global building inventory exposure models for use in natural hazard risk assessments are held within the private sector, usually the reinsurance industry and catastrophe risk modeling agencies; these models, databases, and methods are proprietary and not freely or openly available to the public sector. They also concentrate on building stock and do not explicitly address the fiscal exposure of a government, which is important for the public sector to quantify its sovereign disaster risk. Figure 10: Building Exposure by Province A critical component of a CDRP is the development of a consistent and robust exposure model to complement the existing hazard and vulnerability models. Exposure is an integral part of any risk assessment model, capturing the attributes of all exposed elements grouped by classes Building Exposure of vulnerability to different hazards, and (in percentage of total) analyzed in terms of value, location, and n < 1.8 relative importance. n 1.8 - 3.3 n 3.4 - 7.2 n 7.3 - 15.6 n 15.7 - 41.1 Source: World Bank CDRP. 60. Additional information can be found in Annexes III and IV of this report. 61. Any modeled results provided are the expression of a view on possible loss experience, and they should not be taken as predictive of specific future losses or annual experience. 62. US dollar, EC dollar, and GDP figures are in 2019 values. 63. The losses associated with hurricanes account for wind damage only, not damage from flooding or storm surge. 64. The development of the CDRP corresponds to increased impacts of natural hazards in recent years and increasing demand from the public sector for openly available disaster risk profiles. These profiles are intended to outline a holistic view of financial risk due to natural hazards, assisting governments in long-term planning and preparedness. Dominica 31 The CDRP captures the spatial and construction attributes of the total building stock in Dominica, such as geographical location, urban/rural classification, type of occupancy, building typology (for example, wood, concrete, or masonry), and replacement value. The total modeled replacement value of the building stock in Dominica was estimated at US$2.4 billion or EC$6.4 billion (updated to 2019 values). When the final combined asset replacement and infrastructure density is integrated with existing hazard and vulnerability models, the main result is loss exceedance probability curves, which represent the likelihood that a specific economic loss will be exceeded. This was done for both earthquakes and hurricanes using building exposure. 3.2. Fiscal Disaster Risk Profile Combining the exposure model with hazard and vulnerability models indicates that the AAL to the building stock due to earthquake risks is approximately US$2.9 million (EC$7.8 million), or 0.5 percent of the national GDP. Additionally, there is a 1 percent chance in any given year that these losses are expected to exceed US$55 million (EC$149 million), or 9 percent of GDP. The loss exceedance curve shows the potential earthquake losses for key return periods. While Saint George parish has the highest absolute AAL for earthquake at US$1.0 million, Saint David parish has the highest relative AAL, with a greater percentage of their buildings affected by earthquake loss in any given year. Moreover, buildings with rendered walls and sheet metal roof cover are the type of buildings most vulnerable to earthquakes, accounting for 45 percent of AAL (See Annex 2 for more detailed results). Figure 11: Hurricane AAL by Parish Regarding hurricane risks, the most prominent hazard in Dominica, the AAL AAL (in millions US$) to the building stock is approximately 3.8-7.4 US$20.0 million (EC$53 million), or 3.5 1.1-3.7 0.4-1.0 percent of GDP. Additionally, there is a 1 percent chance in any given year (or 100-year return period) that these losses Provinces by ratio (AAL/Province Exposure) are expected to exceed US$299 million lowest ratio nnnnn highest ratio (EC$808 million), or 51 percent of GDP. The loss exceedance curve shows the potential hurricane losses for key return periods. The Absolute Risk: TThe larger the circle, the higher the Annual Average analysis also suggests that buildings with Losses that the province could potentially incur over the long term. timber plywood walls and sheet metal roof Relative Risk: The darker the are incurring the largest losses in the long color, the higher the ratio of AAL/ term, with 3.4 percent of these buildings Province Exposure. The darkest color represents the parish of experiencing losses from hurricanes each Saint Luke which has a higher year on average (see Annex 2 for more proportion of vulnerable structures due to construction types and/ detailed results.) However, the proportion or potentially higher hurricane of new resilient reinforced concrete intensity. construction built after Hurricane Maria is on the rise, which would reduce risk. Source: World Bank CDRP. 32 Advancing Disaster Risk Finance Regarding hurricane risks, the most prominent hazard in SVG, the AAL to the building stock is approximately US$9.0 million (EC$24.3 million), or 1.1 percent of GDP. Additionally, there is a 0.4  percent chance in any given year (or 250-year return period) that these losses are expected to exceed US$265 million (EC$716 million), or 33.4 percent of GDP. The loss exceedance curve shows the potential hurricane losses for key return periods. The analysis also suggests that single-family, concrete frame buildings with sheet metal roofs are incurring the largest losses in the long term, accounting for approximately 69.3 percent of AAL (see Annex 2 for more detailed results). Table 3: Building Exposure Losses from Hurricane Risk for Key Return Periods Return Period US$, millions AAL 20.0 10-year return period 17.7 50-year return period 300.3 100-year return period 534.1 250-year return period 819.4 500-year return period 964.4 Source: World Bank CDRP. 3.3. Analysis of Historical Disasters in Dominica Disaster risk modeling can assist Dominica’s MoF in identifying the fiscal impacts of major disasters. However, while probabilistic risk modeling techniques are efficient for low-frequency events and large losses, this approach tends to not accurately capture the most recurrent losses usually caused by small-scale floods or tropical storms. Recurrent small-scale losses must be taken into account because their accumulation can create significant additional losses and therefore pose a non-negligible risk for the government. Therefore, as a first step, a historical database of disasters affecting Dominica in the last four decades— from 1979 to 2019—was compiled. Due to data availability and because hydrometeorological events (floods, hurricanes, storms, and so on) constitute the major risk in Dominica, actuarial analysis on the historical losses was conducted for all hydrometeorological events combined and did not include earthquakes. Statistical analysis was performed to meet two objectives: to adjust the results of the estimated hurricane risk profile for recurrent losses, that is, low return periods and extrapolate the risks on the building stock of the country quantified in the CDRP to determine the public losses that the GoCD is facing. The annual public fiscal disaster losses from hydrometeorological events are approximately US$29.6 million (EC$80 million), that is, 5.07 percent of the national GDP. Additionally, there is a 1.0 percent probability in any given year that a loss exceeding US$455 million (EC$1,229 million) will occur, that is, 78.1 percent of GDP. This means that the GoCD will be facing US$455 million (EC$1,229 million) in realized contingent liabilities due to damages, which could take the form of relief expenditures, lost revenue, road reconstruction, public school and hospital reconstruction, or any other relief or reconstruction expenditure that the government is responsible for after a disaster. Dominica 33 Figure 12: Indicative loss exceedance curve for the estimated total economic losses, direct losses, and total government’s losses. 2500 2000 Losses in USD (in millions) 1500 1000 500 0 0 50 100 150 200 250 Return Period (in years) Total Direct and Indirect Impact Total Direct Damages Total Govt. Contingent Liability Source: World Bank. Original figure for this publication. Table 4: Key Return Periods for Windstorm and Flood Losses. Indicative Risk Metrics Total Direct and Total Direct Total Government Indirect Impact Damages Contingent Liability (US$, millions) (US$, millions) (US$, millions) AAL 80 60 30 10-year return period (10%) 154 116 68 100-year return period (1%) 1,189 884 455 250-year return period (0.4%) 2,151 1,591 722 Source: World Bank. Original figure for this publication. In summary, the fiscal disaster risk assessment presented in this chapter provides the GoCD with an order of magnitude estimate of its possible public spending needs for post-disaster operations. Due to the lack of historical recorded losses from earthquakes, it was not possible to perform an actuarial of the possible fiscal costs of this type of natural catastrophe. The results of this assessment are used as an input for a series of recommendations that the GoCD may wish to consider in the development of a national DRF strategy, further discussed in Chapter 5. 34 Advancing Disaster Risk Finance CHAPTER 4. REVIEW OF CATASTROPHE INSURANCE MARKET IN DOMINICA 4.1. Market Overview Non-life insurance in Dominica is provided by a considerable number of insurance companies, all domiciled abroad. According to the website of the FSU, the country’s insurance supervisor, there are 10 general insurance (that is, non-life) companies registered as of April 2021, and 5 long-term (that is, life) insurance companies.65 This list may not be up to date as it includes First Domestic Insurance Co. Ltd, which was placed under judicial management after becoming insolvent following Hurricane Maria. First Domestic was the only non-life insurance domiciled in Dominica until it was taken over by Jamaican insurer, the Insurance Company of the West Indies, in 2019. Since then, the only insurance company remaining in Dominican ownership is CORP-EFF Life Insurance. All others operate as a branch or agency. Table 5 shows that the ratio of insurance companies to population has fallen in Dominica but continues to be comparatively high. Table 5: Number of Insurance Companies in Comparison Number of insurance corporations per 100,000 adults 2009 2019 Antigua and Barbuda 39.88 22.43 Aruba, Kingdom of the Netherlands 29.92 23.98 Bahamas, The 66.04 52.72 Barbados 9.24 Belize 7.98 3.644 Dominica 34.08 27.42 Dominican Rep. 0.515 0.451 Grenada 30.18 29.26 Haiti 0.193 Jamaica 0.791 0.798 St. Kitts and Nevis 41.93 34.78 St. Lucia 19.88 17.39 St. Vincent and the Grenadines 28.89 26.73 Trinidad and Tobago 3.154 2.787 Source: IMF. No further information on the insurance market is published by the FSU nor been made available during the preparation of this report. Latest data available from AXCO Insurance Intelligence Services for 2014 show that Dominica was a small insurance market even for the Caribbean but with non-life insurance penetration of 3.00 percent (premium to GDP) that is typical for the region. This source shows US$15.87 million in total non-life premium for 2014 (premium shown for 2011 to 2013 is US$16.47 million in every year, and US$11.87 million is reported for 2010, 2009, and 2008, raising doubts about the accuracy of these 65. GoCD, Insurance Companies - Financial Services Unit, http://fsu.gov.dm/registered-entities/insurance/insurance- companies. Dominica 35 figures). About 47 percent of 2014 non-life premium was property insurance, 37 percent motor insurance, and various other lines accounted for the rest. Non-life insurance made up 68 percent of total premiums in 2014. Aggregated expense ratio (management expenses and net commissions against gross written premiums) of 22 percent were lower than elsewhere in the region (for example, St. Lucia: 38 percent), and that is good because it indicates that insurers were efficient and customers could expect good value for money. On the other hand, pretax profit in percentage of net earned premium in 2014 was an impressive 45 percent compared to 6 percent in Antigua and Barbuda and 20 percent in St. Lucia, which might indicate that the benefits of an efficient administration accrue to shareholders more than to customers. Between 2017 and 2018, annual gross premium is thought to have grown from EC$37.4 million to EC$67.6 million overall. Non-life premium grew even more, from EC$19 million to EC$35.6 million. This is not entirely good news as it reflects rate increases following Hurricane Maria rather than a strong growth in insurance coverage. With more recent and detailed information, it would be possible to assess numerous other indicators that help understand insurance market efficiency and stability, as well as demand and supply, such as • The recent development of insurance premium volumes by line of business or overall; • The current insurance penetration and density (premium per capita); • The composition of premium by line of business and how much insurance relates to protection against natural hazards; • Amounts of claims paid, how they relate to the corresponding premium (that is, the claims ratio),and what that implies for client value; • The market share of the different insurers and what that says about concentration or fragmentation of the market (both of which have various implications for market stability and development); • The financial stability of the insurance industry and of every insurance company; and • Potential sources of risk such as poorly diversified investments or weak reinsurance arrangements. Dominican regulation does not require insurers to publish the information that is customary elsewhere, such as annual audited financial statements, corporate governance frameworks, investment risk exposure, or technical provisions. The lack of transparency puts Dominican consumers at a disadvantage. The absence of reasonably granular and updated information would be worrisome in any country. But in Dominica, the recent failure of the market leader First Domestic adds to the concern. The FSU collects quarterly information from insurance companies and discusses statistics with the industry during annual meetings. But consumers have no way to evaluate insurers nor distinguish products with good value for money from others. In such circumstances, consumers often prefer not to buy any insurance that is not mandatory. According to the FSU, 86 percent of the damages caused by Hurricane Maria were not insured. Market observers estimate that 25 percent of property is insured, mostly when it is required for a loan. Of the approximately 26,000 houses surveyed in the Building Damage Assessment,66 about 14 percent were cited as being insured. Consumers have little guidance and that restrains demand. The role of insurance brokers centers around providing guidance to consumers about good insurance companies and products. But according to AXCO, only 10 percent of non-life business is intermediated by brokers in Dominica, and that is likely dominated by large and commercial accounts. The majority of Dominicans have to trust insurance company agents to have their best interests in mind. Such circumstances are known to suppress insurance demand, 66. Work led by the World Bank in cooperation with the Ministry of Housing between November 2017 and January 2018, supported by the United Nations Development Programme (UNDP). 36 Advancing Disaster Risk Finance which in turn increases the government’s contingent liabilities and the budgetary uncertainty that comes with it. Assessing to what extent that is also the case in Dominica, based on suitable data, would be advisable. The insurance protection gap is compounded by widespread ‘underinsurance’, the possibility that property is insured for less than its real current value. This may be intentional or unintentional, if the customer does not realize that the value of the property has increased over the years. In either case, customers are not insuring the real value of the property. As a consequence, insurers make payouts accordingly in case of claim, often to the surprise of the insured. Underinsurance can also add to indirect government contingent liabilities even where insurance penetration looks good, because people expect government help when their insurance payouts prove insufficient to rebuild. In the absence of large disasters, underinsurance can go unnoticed for a long time, but the succession of Tropical Storm Erika and Hurricane Maria in Dominica has sharply brought the issue to the awareness of insurers, the insured, and the supervisor. It has also brought to the attention of insurance clients the fact that their property insurance has a deductible of usually 2 percent of earthquake, volcano, and windstorm losses (subject to a minimum amount). Many policyholders have discovered that it eliminates most or all their insurance claims, and the resulting discontent reduces demand for insurance and increases the inclination for intentional underinsurance. Consumers should be helped to better understand the problem of underinsurance and the rationale for deductibles (see recommendation 16). Like elsewhere, government intervention can complicate demand for more insurance. For example, the GoCD responded to the considerable damage that Hurricane Maria caused to the housing stock by building a large number of subsidized housing units. Addressing implicit contingent liabilities efficiently is greatly appreciated by citizens everywhere but can often reduce their motivation to assume responsibility to manage their own risks, for example, with insurance that perpetuates the government’s contingent liabilities. Hence, many governments take proactive steps to increase the use of private insurance, for example, making insurance premium deducible from income tax or by subsidizing premiums for vulnerable populations or sectors. Such initiatives are nascent in Dominica, and there has been little policy dialogue between the government and the industry.67 Most notably, CREAD has taken the initiative to launch an innovative product aimed at making risk transfer part of the risk management toolkit of larger populations (described in more detail in the first paragraph in Section 4.3). 4.2. Supervision The FSU is not an independent authority but part of the MoF, but that does not explain the lack of market transparency. Dominica differs from most other countries in the Caribbean and elsewhere in that insurance supervision is not conducted by a separate authority. This does not, however, explain the dearth of information on the insurance market. The resources of the FSU may be scant, but its staff of six for insurance supervision is comparable to other countries in the region where more information about insurance is provided to the public. Consumers and the government have a generally positive opinion of the FSU’s performance, appreciating a principles-based flexible approach that has brought innovative insurance products to the country (albeit underwritten by insurers not licensed in Dominica). In addition to safeguarding the integrity of the financial services system, the FSU’s mission also includes facilitating the development of the financial services sector. While no past efforts for the development of the insurance market are known, this mandate should encourage future initiatives. Risk-based supervision aims to overcome limited resources, and it generates the information that could be shared with consumers. Risk-based supervision is the preferred approach to deploy the limited resources where they are most relevant to safeguard fair, safe, and stable markets. It consists of systematically monitoring and analyzing key performance indicators that feed early warning mechanisms, 67. That might also be explained by the fact that all property insurers are domiciled abroad. Dominica 37 which direct the supervisor to areas of concern at the earliest possible stage. There are examples of suitable indicators (such as the IMF’s CARAMELS68 ) and intervention levels from all over the world, many in use in the Eastern Caribbean. If regularly published, suitable subsets of these indicators can provide valuable guidance for consumers as much as for the supervisor. Greater market transparency not only increases consumer confidence and hence demand for insurance, it also rewards more efficient and client-centric insurers—who will see more demand—and puts pressure on poorly performing companies to improve. The insolvency of First Domestic Insurance Co. Ltd provides a cautionary tale. In 2018, the IMF reported69 that insurance claims in the order of 20 percent of GDP had already been paid in relation to Hurricane Maria, a substantial amount considering that only 30 percent of the housing stock was estimated to have been insured.70 But 33 percent of the claims, amounting to 15 percent of GDP, were still outstanding, and remain outstanding in 2021. First Domestic had a 28 percent non-life market share in 2014, 10 percentage points ahead of its closest rival. But its reinsurance program—EC$65 million in excess of EC$750,000— was tailored to protect 10 percent of total insured values and did not effectively shield such a large and undiversified portfolio against events of the magnitude of Hurricane Maria. None of this was known to consumers. On the other hand, the low use of reinsurance by the market leader may have contributed to the outstanding level of the industry’s profitability in the years up to 2014. Besides appropriate assumptions on natural hazards and correct assessment of portfolio exposures, reinsurance programs also reflect differing risk appetites. But assessing their robustness is a core task of insurance supervisors everywhere. In response to First Domestic’s insolvency, the FSU increased the minimum reinsurance requirement from 9 percent to 15 percent of total insured exposure, but this can only be a first step in strengthening the system. Reinsurance is particularly crucial for stable insurance markets in small countries that are highly exposed to covariate shocks. Reinsurance makes risks more predictable by pooling them in larger pools, typically on an international level. But the law of large numbers also requires that the pooled risks are independent, and that is not the case for natural hazards on small island states as one event causes a large number of losses simultaneously. For these and other reasons, even the largest insurance companies in the most developed insurance markets rely significantly on reinsurers to guarantee their liabilities to customers in a capital-efficient way. The FSU acknowledges the need to strengthen its expertise in reinsurance supervision and regulation. With all non-life insurance companies now domiciled abroad and supervised by other supervisors which are often better resourced, the need for the FSU to strengthen its technical capacities may seem less pressing than the need to strengthen communication protocols with these foreign supervisors, but the issue needs to be addressed. Capacity building of insurance supervisors is possible even when budgets are constrained71 and is increasingly available for remote learning. The need for reinsurance is closely related to an insurer’s capital resources, which Dominican regulation does not require to be high. Capital and solvency requirements in Dominica are comparatively low: the capital requirement of under US$75,000 in Dominica is one-tenth of that in Antigua and Barbuda. Solvency margin requirements in Dominica are 10 percent of net premium,72 compared to 20 percent in St. Vincent and the Grenadines or Grenada.73 These weak statutory requirements are yet another reason why it would be important to provide information to the public regarding the financial strength of the different insurance companies. A proposed Uniform Insurance Legislation across the Eastern Caribbean has been under review for a number of years. Championed by the ECCB, it is meant to replace the existing insurance legislation in the countries comprising the OECS. The proposed minimum capital requirements for non- life insurers are EC$2 million for a local insurer and EC$5 million for a foreign insurer, a stark difference to Dominica’s current requirements. 68. Das, Udaibir. S, Nigel Davies, and Richard Podpiera, 2003. “Insurance and Issues in Financial Soundness.” IMF Working Paper 138. https://www.imf.org/external/pubs/ft/wp/2003/wp03138.pdf. 69. IMF. 2018. Dominica: 2018 Article IV Consultation-Press Release and Staff Report. https://www.imf.org/en/Publications/ CR/Issues/2018/09/05/Dominica-2018-Article-IV-Consultation-Press-Release-and-Staff-Report-46204 70. According to the same IMF document. 71. Provided, for example, by the Financial Stability Institute (https://www.fsiconnect.org/Default.aspx) or the Toronto Centre (https://www.torontocentre.org/). 72. But not less than EC$200,000. 73. Where a minimum of EC$500,000 is required. 38 Advancing Disaster Risk Finance Not only is reinsurance vital for the financial health of insurance companies and markets, it also can be an important determinant of the cost of insurance to consumers. In that respect, Hurricane Maria provides another cautionary tale. Hurricane Maria damaged or destroyed an estimated 98 percent of buildings and led to around 6,500 insurance claims of at least US$75,000 on average. This led to subsequent increases in property reinsurance rates that varied for the different insurers and building structures but averaged around 85 percent. Insurability criteria have also become more restrictive: the Dominica Water and Sewerage Company (DoWASCO), for example, has been unable to insure water system assets after Hurricane Maria caused it EC$20 million losses, of which 9 million was covered by insurance. DoWASCO now has no choice but to retain the risk for everything but buildings and vehicles. Many homeowners also struggled to get insurance after Hurricane Maria. The risk of natural catastrophes in particular is impossible to diversify locally for insurers operating in Dominica or any other Caribbean country, and it is not unusual that over 80 percent of that is ceded abroad. In Dominica, where homeowners’ insurance rates are among the highest in the Caribbean, it is estimated that 50 percent to 70 percent of property insurance relates to the risk of natural hazards. Like insurance supervisors everywhere, the FSU can benefit from the guidance provided by the Insurance Core Principles (ICP).74 They were developed by the International Association of Insurance Supervisors (IAIS) to help supervisors make insurance markets fair, safe, and stable. The ICPs are designed to apply in all jurisdictions regardless of the level of development of insurance markets and the type of insurance products or services being supervised. They establish the minimum requirements for effective insurance supervision and are expected to be applied in a proportionate manner. Supervisors have the flexibility to tailor their implementation of supervisory requirements and their application of insurance supervision to achieve the outcomes stipulated in the principle statements and standards. IAIS membership is not required for supervisors to apply the ICPs (Caribbean members include Barbados, Jamaica, and Trinidad and Tobago). There are resources available to deepen the understanding and help address weaknesses, such as the Core Curriculum for Insurance Supervisors75 and an ICP self-assessment tool.76 But IAIS membership provides additional benefits, such as occasional peer reviews of self-assessments. Another particularity is the absence of an insurance association in Dominica. In other countries, these associations play important roles such as policy dialogue, consumer protection, dispute resolution, market statistics, campaigns for awareness, education, and financial inclusion. In the Eastern Caribbean, policy dialogue would include discussion of the Uniform Insurance Legislation. While it is true that all Dominican insurance companies but one are domiciled in other countries and represented in those countries’ insurance associations, most of these countries are not part of the OECS, and their insurance markets and associations may not take much interest in the harmonization of Eastern Caribbean insurance regulation, which can strengthen local insurance regulation. 74. IAIS, ICP On-Line Tool, https://www.iaisweb.org/page/supervisory-material/icp-on-line-tool. 75. IAIS, Implementation and Capacity Building, https://www.iaisweb.org/page/supervisory-material/implementation- and-capacity-building/core-%20curriculum/insurer-market-conduct/file/75834/641-information-disclosure-and- transparency. 76. IAIS, ICP Self-Assessment, https://icp-selfassessment.org/. Dominica 39 4.3. Innovation Dominica has nevertheless seen outstanding innovation related to insurance—even though these are yet to be scaled up, they can point to new solutions to DRF across the region. Confronted with the increased cost of property insurance after Hurricane Maria, Dominica’s national electricity company Dominica Electricity Services (DOMLEC) opted instead for a hybrid parametric insurance for its transmission and distribution assets, underwritten by a German insurer. Based on windspeed thresholds, the policy makes quick payouts without the need for prior loss assessment, but these payouts are subsequently adjusted based on proof of loss. Thus, the policy has the parametric advantage of quick payout without the basis risk, and DOMLEC found the FSU competent and supportive in authorizing it. Elsewhere in the Caribbean there are more formalized frameworks for the self-insurance of utility companies, for example, tax incentives such as the deductibility of payments into the self-insurance fund from corporation tax.77 This discussion is still ongoing in Dominica. It could point the government to a valuable tool to complement other instruments of DRF. Identifying insurance options for vulnerable sectors such as agriculture, fisheries, housing, and so on has been a recent trend. As part of the Dominica CRRP, CREAD has partnered with the Dominica Cooperative Societies League (DCSL) to develop the Flexible Hurricane Protection, a parametric windspeed cover for vulnerable populations. The product is underwritten by an international insurance company not licensed in Dominica and is remarkable in that it is blockchain based. Blockchain technology, a distributed, decentralized, tamper-proof public ledger has been hailed as a ‘replacement of trust’. Additionally, blockchain technology allows for self-executing ‘smart’ contracts that autonomously make payments to beneficiaries when the corresponding indexes, such as windspeed, trigger an insurance claim (a feature not used in this case). This not only contributes to reduce cost, it also increases the speed of claims settlement.78 The Flexible Hurricane Protection is remarkable in the interactive user interface that takes great caution and effort to help customers understand what they are buying. Smartphone geolocation services are used to identify the covered location. A further innovation lies in the fact that payment of premium and claims amounts was to be transacted through the DCSL’s digital wallet (which will be available for other insurers as well in the future). Some credit unions are considering pre-financing the annual up-front ‘premium’ through a loan. Considerable scaling up of this cover will be required, however, before it can be expected to noticeably reduce the government’s implicit contingent liabilities. 77. Government of Barbados. 1998. “Insurance (Barbados Light and Power Company Limited) (Self-Insurance Fund) Regulations, 1998.” The Barbados Parliament, 1998. http://104.238.85.55/en/showdoc/cr/1998_91/ se:6?splitmode=true#anchorse:6. 78. Blockchain—or Digital Ledged Technology as it is also known—plays a prominent role in insuretech, that is, fintech applied to insurance. Just one example out of the vast literature on the topic: Daley, Sam. 2021. “9 Companies Using Blockchain in Insurance to Revolutionize Possibilities.” Built In. https://builtin.com/blockchain/blockchain-insurance- companies. 40 Advancing Disaster Risk Finance Box 2: Insurance for Caribbean Housing Sector Resilience - Caribbean Physical and Financial Resilience Building (CPFRB) Technical Assistance Project The housing sector often bears the brunt of the damages from tropical cyclones, and the resulting damage and displacements have cascading effects, such as prolonged workforce disruptions and impacts on lower-income households and their livelihoods. Following Hurricane Maria in Dominica, approximately 90 percent of the housing stock was damaged and 15 percent was destroyed (approximately 4,500 houses).79 More than three years later, hundreds of affected householders remain displaced or living in unsafe conditions. In past years, projects have mainly focused on physical protection (for example, Dominica Housing Reconstruction Project) but there has been no real or specific focus on financial protection products and services despite the fact that tying financial protection to risk reduction is key to incentivize risk reduction investments and build resilience. The new housing sector insurance product developed for the GoCD under the CPFRB Technical Assistance Project is designed to increase financial resilience and incentivize greater physical resilience in the housing sector. By linking insurance to physical risk reduction projects, this product aims to reward housing sector resilience improvements that simultaneously reduce risks for residents and government and improve insurance affordability with lower premiums for reduced vulnerability. Insurance product: The idea of the financial product is for the GoCD to own the insurance policy and target beneficiaries by involving them as participating households in a risk reduction project, for example, a government housing reconstruction or upgrade program. As the said project is implemented, homeowners would be covered by one of two types of insurance coverage, a baseline coverage or an upgrade coverage. • The baseline coverage insures existing assets and reflects the high vulnerability of the current housing stock. Premiums associated with this coverage are higher because payouts are expected to occur more frequently and for lower intensity events. • The upgrade coverage insures improved or upgraded assets with lower risk exposure. In this coverage, premiums are lower because damages are less likely to occur from low-intensity storms, triggering fewer payouts. The anticipated result is that physical disaster risks will decrease in the portfolio of houses under the government program and the physical resilience of the housing sector will increase with time. The resultant reduction in the risk (that is, reduced future physical damage and economic losses due to the increased resilience of the housing stock) will also be reflected in lower insurance premiums as more homes transition from the baseline to upgraded coverage condition. Premium savings will be credited to a pre-specified government account to purchase additional insurance coverage or expand physical risk reduction projects. This insurance program will generate benefits at multiple levels: • Registered homeowners will receive access to rapid insurance payouts, greater physical protection over time, and more affordable insurance in the long term. • National governments and regional organizations will benefit from reduced need to provide post-event emergency housing; reduced physical vulnerability of the housing stock over time; greater insurance affordability and uptake; and greater institutional capacity for inspections, code enforcement, and data management. This project is financed with resources from the European Union in the framework of the Caribbean Regional Resilience Building Facility, managed by the GFDRR. 79. The Hurricane Maria PDNA on Dominica by the World Bank and UNDP identified housing as the most affected sector in the country after the hurricane. The assessment found that housing sector damages amounted to US$354 million (38 percent of the country’s total damage estimation), compared to US$55 million to agriculture, US$20 million to tourism, US$182 million to transportation, and US$48 million to telecommunication, respectively. The housing sector also recorded the highest recovery needs (US$520 million). Dominica 41 While these innovations are remarkable, it is regrettable that the local insurance industry is not underwriting them. Local insurers’ hesitance for innovation can be explained by the modest size of Dominica’s insurance market even under the most optimistic growth scenarios. Sufficient sales volumes are needed to amortize investment in intellectual property for innovative products and processes. Small risk pools require larger safety margins and reinsurance, both adding to cost and thus being detrimental to sales volumes. Another important reason why Dominican non-life insurers have not themselves proposed more innovation lies in the fact that they are all domiciled elsewhere, generally outside the OECS. The risks and needs in their core markets differ too much for solutions to be readily transferrable to Dominica. It is to be hoped that some insurers will draw inspiration from the recent market innovations and adopt, for example, visual user-friendly digital interfaces to support insurance understanding and sales and digital wallets to facilitate payments. The DCSL is an underappreciated champion on the insurance demand side. Dominica has an outstanding penetration of credit cooperative membership. Credit unions account for more than half of financial intermediation and hold assets worth 51 percent of GDP. They are increasingly leveraging that market power, for example, forcing insurers to reconsider zoning changes that would leave many of their customers uninsurable. While they partner with CREAD for the parametric product, they are not part of any other dialogue with the government regarding DRF, for example, about financial inclusion, insurance consumer protection, or possible premium subsidies for homeowners’ insurance. CREAD’s 2019 end-of- year report includes a broad strategic initiative to review the insurance industry, improve the functioning of insurance markets, and bring additional products, and the DCSL could be a competent mediator in dialogue with the insurance industry. The parametric blockchain partnership between CREAD and the DCSL will hopefully pave the way to more PPPs and policy dialogue. Agricultural activities are of great importance to Dominica, yet despite the sector’s vulnerability, agriculture insurance is largely absent. Agriculture (including farming, fishing, and forestry) features prominently in the CRRP and in CREAD’s plans for a resilient economy. Proposed measures have focused on the provision of inputs and expertise to restore the productive base and help with the recovery of agricultural livelihoods and on increasing the resilience of the sector that sustained the greatest losses from Hurricane Maria. Access to finance has been recognized as another constraint. Yet in a country as exposed to natural hazards as Dominica, occasional losses in agricultural activity will remain inevitable, and they can be considerable. This will continue to constrain access to finance. Therefore, measures to strengthen risk management in agriculture should also consider agriculture insurance, as should the DRF strategy of any country where agriculture plays a prominent role for employment, food security, and the economy. Parametric agriculture insurance may be particularly suited for Dominica. While insurance as such is a mature and well-developed instrument, agriculture insurance is one of the later lines to emerge, and it has not been available to small-scale farmers until recently. The principal obstacle that has excluded them is the cost of claims assessment, which traditionally requires farm visits of highly specialized experts, such as, for example, with the banana insurance provided by the Windward Islands Crop Insurance Ltd. Loss assessment is not financially viable when insuring small farmers in remote locations. And when many cases of crop losses occur at the same time, for example, due to large-scale disasters, shortage of claims assessment expertise can lead to long delays in agriculture insurance claims adjustments. The development of agriculture insurance requires suitable data; Dominica’s Global Centre for Agricultural Resilience could provide that. The Robust Economy Initiatives of the CRRP include a Global Centre for Agricultural Resilience whose objectives include improving the capacity for data and information management and risk profiles for main hazards affecting the agriculture sector and increasing expertise in agro-meteorology. Both are key success factors for agriculture insurance, parametric or traditional. 42 Advancing Disaster Risk Finance Dominica is familiar with sovereign parametric insurance from the CCRIF, but the CCRIF also offers a product designed to protect fisherfolk. The CCRIF’s COAST applies the principles of parametric insurance to help governments and fishing communities recover from the damage caused by storm events and return to fishing activities with minimal disturbance. It consists of (a) A Livelihood Protection Component that addresses losses caused to fisherfolk and fisheries cooperatives by adverse weather that prevents them from carrying out their usual activities, such as rough seas or strong rainfall and (b) A Tropical Cyclone Component that addresses damages to fishing vessels, fishing equipment, and infrastructure by the strong winds and storm surges caused by tropical cyclones. Unlike the sovereign CCRIF insurance, payouts under this cover specifically support men and women who work along the value chain of the fishing sector, possibly including fishing cooperatives or government entities’ support in the rehabilitation of fisheries infrastructure such as coolers, landing sites, or market stands. It aims to make economic relief immediately available to fisherfolk—provided the sector is sufficiently formalized for the government to know them and be able to reach them. 4.4. Financing for Social Protection The GoCD has experience using social protection programs (for example, Public Assistance Programme [PAP]) and their administrative systems to support emergency response. Dominica has more than 30 safety net programs in place, which range from school feeding programs and in-kind assistance to fee waivers, housing assistance, active labor market programs, and cash transfers through social assistance, supporting persons with disabilities, female-headed households, senior citizens, and low- income households.80 In 2017, with support from the United Nations World Food Programme (WFP) and United Nations Children’s Fund (UNICEF), the government implemented the Emergency Cash Transfer Program in the aftermath of Hurricane Maria and provided unconditional cash transfers to approximately 25,000 people. This was also followed up by a WFP-supported food security cash transfer that supported the same beneficiaries to meet continued food needs and prepare for the 2018 hurricane season. These successful experiences were the first times that a social protection program had been expanded in response to a large-scale shock in Dominica. Social protection can support the needs of vulnerable populations both in normal times and in response to a crisis, if financial and technical resources are available, even if routine social protection programs are not particularly mature or have significant coverage. In 2020 and 2021, the Ministry of Youth and WFP partnered to develop and implement the Social Cash Transfer Program, which provided a vertical expansion (that is, increase of benefits) to PAP recipients and targeted new persons and households affected by the COVID-19 pandemic, including senior citizens, persons with disabilities, fisherfolks, fish vendors, small craft producers, and craft vendors. The program commenced in September 2020, and to date more than 8,700 people have received cash transfers. 80. Valentina Barca, Madhumitha Hebbar, Marwah Malik, and Felicity Le Quesne, with Francesca Ciardi, 2018.“Shock- Responsive Social Protection in Latin America and the Caribbean, Dominica - Case Study.” World Food Programme. https://www.wfp.org/publications/shock-responsive-social-protection-latin-america-and-caribbean. Dominica 43 Financing is a cornerstone of enabling support through social protection when shocks occur, along with political willingness and flexibility to adapt systems. 81 Both the Emergency Cash Transfer and Social Cash Transfer Programs were financed by international donors, showing that if funding is available, social protection can provide the channels to reach those most in need. Investing in holistic DRF measures that are linked to social protection would enable more predictable and potentially more rapid responses if disbursement of funds is linked to clear triggers. In addition, a diversified portfolio of risk finance instruments tailored to address different risks can increase cost efficiency of emergency response and recovery by determining how to pay for loss events in the most effective way possible. Given the history of Dominica as it relates to using social protection systems in emergency responses, there is an opportunity to develop effective approaches, which explore the link between risk finance instruments and social protection systems to ensure a more rapid and adequate response to vulnerable populations in the event of a major shock. Continued building of strategic partnerships with key stakeholders across the DRF, social protection, and DRM spectrum will be critical to build more adaptive/shock responsive social protection systems. Engaging key stakeholders such as CCRIF SPC; CDEMA; regional and international financial institutions (World Bank, CDB, and so on); and other agencies/organizations has significant potential to improve and strengthen social protection systems, as evidenced by the Emergency Cash and Social Cash Transfer programs mentioned above. 81. Beazley, Rodolfo, Francesca Ciardi, and Sarah Bailey. 2020. “Shock-Responsive Social Protection in Latin America and the Caribbean - Synthesis Report.” World Food Programme. https://www.wfp.org/publications/shock-responsive-social- protection-latin-america-and-caribbean. 44 Advancing Disaster Risk Finance CHAPTER 5. RECOMMENDATIONS FOR A NATIONAL DISASTER RISK FINANCING STRATEGY IN DOMINICA 5.1. Disaster Risk Financing Instruments in Dominica Evidence shows that when countries have comprehensive DRF strategies in place that proactively enforce a holistic approach, the impact of direct damages and subsequent losses can be significantly reduced. 82 The fiscal impact associated with reconstruction efforts and the pressure to mobilize funds quickly after a disaster can be reduced through a combination of various and flexible financial protection and insurance instruments. The development of a comprehensive risk management framework focusing on risk reduction and mitigation is critical to building resilience and reducing the fiscal burden of costly disasters. Risk of natural hazards can be assessed and incorporated into the budget and debt management frameworks. Investing in risk maps, early warning systems, building codes, post-disaster decision-making process and ensuring the adequate capacity of the emergency services, together with targeted infrastructure projects, can build resilience to disaster damage. Self-insurance through fiscal buffers remains crucial to safeguard debt sustainability, given insufficient overall payouts from catastrophe risk insurance in the Caribbean. Contingent financing plans and risk transfer arrangements and encouraging private sector investment in risk mitigation are also essential. The overarching recommendation coming out of this diagnostic is the need for the GoCD to develop a strategy to strengthen financial protection to support the strategic, flexible, and cost- effective use of existing financial tools such as the CERC in World Bank investment projects, government reserve funds, and the CCRIF, as well as new instruments such as contingent lines of credit. A diversified or comprehensive financial protection strategy is expected to increase the capacity of national and local governments, homeowners, businesses, agricultural producers, and low-income populations to respond more quickly and resiliently to disasters. A comprehensive financial protection strategy aims at combining and optimizing a set of DRF instruments to meet the probable liquidity and funding needs that the government may face in the wake of a disaster. In this case, the World Bank recommends a layered approach to DRF that uses different instruments for disasters of varying frequency and severity. Figure 13 illustrates a strategy customized for Dominica.83 82. GFDRR. 2021. Global Partnership on Disaster Risk Financing Analytics: Results and Achievements. (Washington, DC: World Bank. https://www.gfdrr.org/en/publication/global-partnership-disaster-risk-financing-analytics-results-and- achievements. 83. Ibid. Dominica 45 Figure 13: DRF Strategy Options for Dominica Source: World Bank Group 2021. Currently, the GoCD can access liquidity in the wake of a disaster from the financial instruments (Table 6), in line with the proposed strategy. Table 6: Financial Instruments Status Instrument(s) Can be improved with Budgetary reallocation for high frequency, low to medium severity events. Budget data and planning reallocation is used to a greater extent than contingency warrants post disaster, and each ministry is responsible for looking at what can be reallocated from their own capital budgets. Nascent VRRF, for medium frequency, medium to high severity events. The VRRF is intended to be used for immediate/short-term response to natural hazards. Using the VRRF for DRR can potentially come in future once the fund is sufficiently capitalized and clear guidelines for its use have been defined. Not employed Contingent line of credit, for medium to high severity events, can complement the VRRF by not only providing space for financial resources to accumulate but also by supplementing gaps in financing where losses exceed the VRRF resources. The Cat-DDO can also complement the CCRIF SPC by allowing the GoCD to optimize the CCRIF SPC package and premiums. Can be strengthened Sovereign insurance from CCRIF SPC. The CCRIF SPC offers parametric insurance that relies on a payout disbursement contingent on the predefined loss threshold of an event. Dominica is currently modestly covered for tropical cyclones, earthquakes, and excess rainfall with maximum payout of US$25 million for qualifying wind and rain events. Can be strengthened Insurance for public assets Nascent Financial products or programs for vulnerable populations Note: Cat DDO = Catastrophe Deferred Drawdown Option. A comprehensive national DRF strategy for Dominica should be designed to improve the capacity of the government to access immediate financial resources in the event of a disaster and be flexible to allow for a proportional response based on magnitude of loss, while minimizing reallocations from existing programs and maintaining the fiscal balance. Table 7 summarizes the 19 recommendations for a comprehensive DRF strategy in Dominica, followed by a discussion of each of them. These recommendations follow the operational framework of first quantifying and assessing risk or the contingent liability of the government, preparing the environment for financial solutions to operate efficiently, and then arranging appropriate solutions. 46 Advancing Disaster Risk Finance 5.2. Recommendations Table 7: Strategy Recommendations for DRF in Dominica Time Frame Instruments and Strategy Recommendations for DRF Sovereign Protection Short Term 1 Streamline and institutionalize loss and damage data collection and reporting system (< 1 year) for all severities of events. 2 Develop a system to track disaster expenditure through the budget and improve public disclosure of financial reporting documents. 3 Update and enact comprehensive DRM, PFM, and Fiscal Responsibility (FR) legislation to include DRF, climate change, and disaster risk considerations. 4 Develop clear guidelines to define usage of the VRRF. 5 Consider setting capitalization targets for the VRRF consistent with AAL of hydrometeorological events (US$30 million). 6 Seek access to a contingent line of credit that covers contingent liabilities of prominent events of at least a 10-year return period (US$68 million). 7 Optimize sovereign parametric insurance (CCRIF SPC) coverage to cover existing immediate liquidity gaps. 8 Implement capacity-building exercises to address knowledge and skills gaps in PFM, damage evaluation development, and post-disaster needs assessments (PDNAs). 9 Develop and adopt a National Strategy for DRF and subsequent implementation plan. 10 Develop and institutionalize disaster-responsive Post-Disaster Budget Execution Guidelines. 11 Develop a risk-based asset management system, based on a comprehensive inventory of public fixed assets. Medium Term 12 Implement a disaster-friendly classification system for COA. (1–3 years) 13 Develop a general operational framework or procurement policy for the procurement of insurance by the public sector. 14 Further develop financial protection products for vulnerable sectors including agriculture, tourism, and fisheries. 15 Develop risk finance instruments and define financing sources for scalable social protection systems. Commercial Insurance Short Term 16.1 Strengthen transparency and consumer protection: greater transparency about (< 1 year) providers. Medium Term 16.2 Strengthen transparency and consumer protection: key facts statements. (1–3 years) 16.3 Strengthen transparency and consumer protection: consumer protection diagnostic. 17 Government-supported campaigns to improve people’s understanding and appreciation of insurance 18 Assess compliance with the Insurance Core Principles (ICP). 19 Assess the barriers to—and potential of—inclusive and other sector-specific insurance. Dominica 47 5.3. Discussion 1. Streamline and institutionalize loss and damage data collection and reporting system for all severities of events. Historical damage and loss data are crucial for accurate disaster risk analysis. Historical data are important components of disaster risk assessment and actuarial analysis, and thus play a significant role in the development of DRM strategies and financing instruments. Dominica has a rudimentary system of collecting and reporting information related to the damage and losses sustained by different sectors for low-frequency, high-intensity events. Information on damage and loss from high-frequency and low-intensity events is not reported in detail across ministries, especially when it comes to flooding, which is acute in certain parishes. NEPO, the ODM, and MoF have noted that there is room to improve on capturing data associated with low- intensity, high-frequency events and creating a database to house this information. A database in line with the standard DaLA methodology across ministries is recommended, along with guidelines on how and when to enter information. This would allow line agencies at national and subnational levels, as well as local authorities, to report damage and losses easily. It would also enable the MoF and other line ministries to access critical information for recovery planning and appeal to donors. Existing databases such as the Dominode could be used to inform the DaLA reporting exercise by providing baseline data. Although this initiative could be launched in the short term, it might take time to fully implement a comprehensive database. It is recommended to develop this database in consultation with NEPO, the ODM, and Ministry of Planning to see how it can be improved and how it can capture information on high-frequency disasters. If this database can be linked to budgetary expenditures, it has the potential to be a powerful tool. 2. Develop a system to track disaster expenditure through the budget and improve public disclosure of financial reporting documents. The importance of tracking disaster expenditure through the budget needs to be elevated to inform fiscal planning and management of disasters. Tracking of disaster expenditure through the supplementary budget can be improved to ensure that other mechanisms for post-disaster financing are included in the mix of fiscal response measures to result in a more accurate view of the government’s fiscal response, that is, expenditure dedicated to disaster management response, post disaster. Supplementary estimates are currently not public documents. There is a need to provide financial instructions or regulations on how the estimates are to be published to allow for proper tracking of not only disaster- related expenditure but all changes to expenditure allocations during a fiscal year. These instructions could include the reason for adjustments to allocations, the type of warrant that gives rise to that allocation or the movement of funds within the GoCD financial system, and the extent to which these changes are aligned with the account numbers set out in the 2019 COA. These details would facilitate a more rigorous analysis of how the GoCD budget responds, especially in the aftermath of a disaster. 3. Update and enact comprehensive DRM, PFM, and FR legislation to include DRF provisions and climate change and disaster risk considerations, including providing for a statement of insurance coverage against disaster risk. Fiscal sustainability in Dominica is, among other things, concerned with the capacity to manage the impact— damage and financial loss—associated with disasters through an adequate budgetary response, while minimizing the risk of implicit contingent liabilities occurring. It is also about maintaining the integrity of fiscal accounts by complying with laws and regulations that support fiscal discipline, for example, the proposed PFM Bill. In addition to these structural measures to achieve fiscal sustainability, there are also knowledge gaps that the GoCD will need to address for overall PFM efficacy. 48 Advancing Disaster Risk Finance Medium-term fiscal sustainability is affected by both recovery and reconstruction efforts. The GoCD would be enabled by the FR Bill, PFM Bill, and CDM Bill, if enacted, because the former two include the FR principles and provide scope for suspension under specific circumstances. In the event that there is a disruption that requires a temporary suspension of FR provisions, there is the possibility to pursue this option through the escape clause. In the FRA and PFM Bill, there is room for exceptional circumstances. There are various funds in the existing and proposed legislation—the PFM Bill, for example, provides for various funds to respond to natural disasters including the Contingencies Fund and a Reserve Fund. To institutionalize a framework of cost-effective and strategic use of the funds for disaster response, their administration and governance should be well-articulated. 4. Develop clear guidelines to define usage of the VRRF, thresholds for accessing the fund, eligibility and prioritization criteria for DRM (response and preparedness/resilience), activities to be financed, and so on. Part of the long-term strategy must be to build up reserves to balance with debt accumulation. The VRRF has rules of capitalization and rules of investment and would be a good opportunity to further diversify DRF options. However, clear guidelines need to be developed to define usage of the fund, thresholds for accessing the fund, eligibility and prioritization criteria for DRM (response and preparedness/resilience) activities to be financed, and so on. The threshold for accessing the VRRF should not be too high, so that it (a) is not too inflexible to allow response to disruptive events or (b) unduly replicates the CCRIF coverage. The threshold should also not be too low, such that it is frequently depleted and does not provide some protection when needed. Potential thresholds include (a) use of a rapid damage and needs assessment, (b) executive decision, and (c) parametric triggers. These, together with other key aspects of the fund, should be further explored and developed. 5. Consider setting capitalization targets of the VRRF consistent with AAL of hydrometeorological events (US$30 million). If the prospective guidelines of the VRRF place it as the primary source of immediate liquidity held in reserve by the government, authorities must consider the ideal capitalization level so that (a) there is no opportunity cost in holding funds that could otherwise be used in risk reduction and (b) it is capitalized enough to meaningfully address projected costs. The estimate of US$30 million is based on the estimated AAL for public contingent liabilities described in Chapter 3. These funds should be safeguarded and be accessible for immediate post-disaster relief. Safeguards can prevent funds from being used for expenses other than disaster response. The GoCD can also present to donors and creditors a more welcoming environment for international assistance by showcasing a well-managed, transparent fund set aside specifically for disasters. 6. Seek access to a contingent line of credit that covers contingent liabilities of prominent events of at least a 10-year return period (US$68 million). Engaging IDPs to continue accessing contingent credit instruments addresses not only reconstruction but also relief and recovery at a time when liquidity constraints are usually highest. The GoCD has already demonstrated the usefulness of such a facility that allows rapid disbursement of funds with an adaptable soft trigger for medium- to high-intensity natural disasters, after the Contingencies Fund has been depleted. This estimate of a 10-year return period is based on a range of probable maximum losses (PML) for public contingent liabilities in a range of moderate to severe events, as described in Chapter 3. A percentage of this PML is extrapolated as ‘recovery’ funding, which such contingent financing arrangement would cover. While taking on contingent financing does increase public debt, there is an argument for increasing spending in times of a temporary economic shock such as a natural disaster. Basic economic theory notes that a country should adjust to a negative permanent shock and cut spending, but if the shock is temporary, it can be financed and paid back later. In practice, however, policy makers face the extraordinarily difficult situation of needing to assess permanency of a shock in real time. Dominica 49 7. Optimize sovereign parametric insurance (CCRIF SPC) coverage to cover existing immediate liquidity gaps. The CCRIF SPC offers parametric insurance that relies on a payout disbursement contingent on the predefined loss threshold of an event. Dominica is currently modestly covered for tropical cyclones, earthquakes, and excess rainfall with maximum payout of US$25 million for qualifying wind and rain events. Also, under the current subscription to the CCRIF SPC, the ceding percentage (that is, the amount of risk ceded to the international market) is low for the excess rainfall policy. This underscores the need to optimize the CCRIF coverage while also introducing new and flexible financial instruments such as those mentioned in some of the recommendations in this chapter so the GoCD can get better value for money. The three CCRIF SPC policies to which the GoCD subscribes are enablers of short- to medium-term fiscal sustainability because these policies, once triggered, provide budget support quickly. It is recommended that the CCRIF coverage be optimized to better serve the GoCD’s needs and realities, at least until the VRRF is efficiently capitalized and operationalized. 8. Implement capacity-building exercises to address knowledge and skills gaps in PFM, damage evaluation development, and PDNAs. Strengthening the capacity of government institutions, through the implementation of policies and enactment of laws and regulations, to guide administrative actions that improve the efficacy of budgeting, financial management, and procurement systems is critical. Along with the institutional capacity and enabling environment, it is critical to ensure that the skills and competencies of civil servants are built to mainstream these key DRF principles into government operations and lead further policy development and implementation. Equally important for this exercise is ensuring that the necessary capacity to undertake damage evaluation also exists within relevant government agencies and institutions given that these also inform budgetary decisions critical to ensuring fiscal sustainability and resilience. 9. Develop and adopt a National Strategy for DRF and subsequent implementation plan. The development of an ex-ante plan for managing the fiscal impacts of natural disasters is recommended, considering the potential contribution of budget reallocations, debt financing, contingency reserves, insurance, and capital market instruments and taking into account financial capacity and desired risk retention and transfer levels, as well as the cost, timing, and availability of the various financing options. The plan or appropriate portions of the plan should be publicly disclosed, where permissible, with the aim of building confidence in the government’s capacity to manage the financial impacts of disasters and should be tied to a time-bound implementation plan. 10. Develop and institutionalize disaster-responsive Post-Disaster Budget Execution Guidelines to establish an operational framework in which ex post budgeting and financial management can be executed and expedited in a transparent and accountable manner. The GoCD public officials have experienced a number of disasters in recent history, which has tested their capacity to respond. Over the years, public officials have built up knowledge, capacity, and expertise in various areas of post-disaster budgeting and financial management. As with other Caribbean islands, Dominica is faced with an aging public service. The competencies that have been built up have not necessarily been documented. This presents a challenge for sustainability and business continuity, especially in the aftermath of a disaster where public officers may be new to the responsibilities, not as experienced, or in a transitional stage as they move from other positions to fill more senior gaps in the public service. Such post-disaster budget execution guidelines should not only document the standard operation procedures currently practiced but also ensure that they are in line with key priorities in the proposed National Strategy for DRF to inform future budgetary planning and response. 50 Advancing Disaster Risk Finance 11. Develop a risk-based asset management system, based on a comprehensive inventory of public fixed assets. An improved asset registry and asset management system might be the answer to maximizing effectiveness of risk transfer instruments. Both the asset management system and the loss reporting system could inform efforts to prioritize the reconstruction of public works damaged by natural disasters. Rehabilitation and retrofitting of the existing and currently uninhabited buildings could reduce government costs by decreasing rental payments, building resiliency in a pool of government assets, and increasing insurance coverage for public assets. An inventory of public assets is also the first step in accounting for the GoCD’s contingent liabilities in budgetary planning. The insurance of key public infrastructure has to be part of a medium- to long-term risk transfer strategy to have a more reliable balance between risk retention and risk transfer. There is need to undertake a disaster risk inventory of public assets to identify those with risk transfer mechanisms to reduce implicit contingent liabilities arising from disasters and identify the key public infrastructure/assets that are vulnerable to natural hazards or climate change events. A georeferenced inventory of public assets at risk and their attributes (for example, exact location, construction type, and number of stories) is also a key component in building an exposure database, which is integrated with hazard and vulnerability models to establish a fiscal disaster risk profile.84 Generally, the more accurate the inventory is, the more accurate the fiscal risk assessment. Data to construct the inventory can be collected from various sources such as government agencies, universities, research centers, international organizations, and statistics institutions.85 As the exposure database identifies what assets need to be protected, the unit within the MoF responsible for purchasing insurance could be best suited to maintain the database in collaboration with agencies such as Public Works, Physical Planning, Statistics, and the ICT Unit. To better understand the collected information, the GoCD may choose to standardize and house the information in the Dominode, which already is an open source, web-based, and public platform that would easily make this information accessible to all stakeholders. While in large countries such detailed risk assessments of all public assets and covering the entire territory are costly and challenging—due to the number of assets and the shared responsibility between national and subnational entities—in SIDS, the number of assets is comparably small. Moreover, in most SIDS, including Dominica, all public assets are managed at the national level. In addition, for small islands it is crucial to have a full understanding of all public assets’ risks because a single event such as a hurricane threatens the entire infrastructure portfolio. Such an initiative would also necessitate structured and intensive capacity building to ensure that the system is used and well-maintained. 12. Implement a disaster-friendly classification system for COA. Any amendments to the COA should be used uniformly and consistently across the government to ensure that all post-disaster expenditures are coded and trackable. Improving the COA by integrating disaster management and climate change considerations will enable and improve tracking of disaster-related expenditure, including activity numbers that identify the disaster-related activity, which could be coded by the type of event (drought, earthquake, hurricane, tropical storm, or volcanic eruption). This also ensures that the various funds are traceable, using COA SOCs, so that going forward disaster financing expenditure can be better tracked and quantified. 84. Mahul, Olivier, Rubem Hofliger, and Hannah Yi. 2013. “Quantify Contingent Liabilities Associated with Natural Disasters.” GFDRR.https://documents1.worldbank.org/curated/en/672271467997574054/pdf/97977-BRI-Box391499B- PUBLIC-Short-Note-1-Risk-Assessment-04Nov2013.pdf. 85. Much of the geographic data required to locate and perform basic characterization of the structures (envelope dimensions, floor area, and construction type) already exist through the LiDAR/orthoimagery survey undertaken as part of the World Bank-led DVRP or could be collected using existing survey drones at Lands and Surveys, Public Works and Physical Planning Units. Dominica 51 13. Develop a general operational framework or procurement policy for the procurement of insurance by the public sector and reflect this in regulations under the Public Procurement Bill 2018. Most of the public assets, including critical ones such as utilities and ports have varying levels of financial protection. This recommendation would aim to offer technical assistance to public entities in the design of their catastrophe insurance coverage of public assets. Standardized terms and conditions for the property insurance policies would be developed, which would assist public managers in identifying their risk exposure and their insurance needs. It could also structure a national insurance portfolio of public assets that could be placed on the private (re)insurance market. A national property catastrophe insurance program for public assets would create economies of scale and diversification benefits and thus lower reinsurance premiums. The importance of a full inventory of public bodies, statutory authorities, or public enterprises, as well as assets that the GoCD is responsible for and the level of insurance against disaster risk, stems from the GoCD’s ability to develop a risk profile of how exposed these assets are (in addition to other critical public infrastructure within the general government) and proceed to quantify the implicit contingent liabilities or fiscal risks associated with these assets. There is an opportunity to make the Public Procurement Bill and Regulations more robust with regard to types of disaster and climate change-related risk through amendments to the regulations or by introducing greater specificity or robustness if the regulations have not yet been enacted. Putting all public assets under an umbrella insurance policy is also recommended given that, currently, insurance seems to be purchased and managed independently at the ministry level. 14. Further develop financial protection products for vulnerable sectors including agriculture, tourism, and fisheries. It is important that the government and the insurance industry together tackle the issues of expanding penetration of property insurance against natural disasters and making insurance accessible to vulnerable populations. Acting alone, the insurance industry may focus on short-term profitability and shield itself from hard-to-address risks in vulnerable populations. On the other hand, if the public sector worked alone, products might not be as efficient, and protection could be costly. The GoCD also faces the risk of implementing policies that compete with or reduce the incentives to purchase insurance. A partnership between the domestic insurance sector and the government can reduce and manage ex ante risks, adapt to the needs of different sectors of society, and lead to sound policy making and DRF decisions. 86 There is also potential to look more into livelihood protection insurance such as COAST (the Caribbean Oceans and Aquaculture Sustainability Facility) and other innovative insurance products such as the housing insurance product recently developed by the World Bank and presented in Chapter 4 of this report. 15. Develop risk finance instruments and define financing sources for scalable social protection systems to support affected populations and invest in the preparedness of social protection as a means to respond to shocks. Social protection systems can serve as a vehicle to translate funds for disaster response into cash transfers for those most affected. Examples of existing mechanisms range from the macro level (CCRIF SPC policies) to the micro level (Blockchain Hurricane Protection Policy87 ) and demonstrate Dominica’s appetite to embrace new and innovative products and provide opportunities for the piloting of approaches through existing risk finance instruments that facilitate the disbursement of cash assistance to affected populations. Emerging examples should be learned from and built upon to develop more predictable and sustainable links between risk financing instruments and social protection. 86. Ramm, G. 2011. “Public Private Partnerships in Microinsurance.” Discussion Paper No. 001, Microinsurance Network, Luxembourg. 87. Barnette, Brent. n.d. “Introducing Flexible Hurricane Protection for Dominica.” CREAD https://static1.squarespace. com/static/5cb79b0f9b8fe873d303393a/t/5fca81a18e8fba586e61af4b/1607106978260/insuranceREVISED2.pdf. 52 Advancing Disaster Risk Finance Flexible social protection systems that are disaster triggered and linked to DRM systems and contingent financing have the potential to reduce the administrative and financial burden of governments when responding to disasters. Post-disaster transfer mechanisms can be administratively and logistically cumbersome; identifying affected people is time-consuming and often inefficient, particularly in the aftermath of a disaster; and funds can take too long to reach those with immediate needs. Scalable programs with built-in risk mitigation and risk financing mechanisms can respond quickly to beneficiary needs within existing systems. These programs provide immediate assistance to poor people; protect development gains by preventing people from falling back into poverty after a disaster; and promote shared prosperity through better targeting by focusing on underlying factors affecting inequality, such as gender. The GoCD needs to continue strengthening its social protection systems and make these systems more responsive to shocks so that financial resources can quickly be channeled to those in need. Drawing on its recent experiences, the government should develop targeting mechanisms to identify those needing assistance in event of a disaster, determine preliminary financial values of assistance and delivery channels, and establish parameters around the activation of social protection systems to be used as part of the emergency response. Commercial Insurance 16. Strengthen transparency and consumer protection. Insurance is a credence good88 that defies the evaluation of even the most sophisticated buyer before a claim is settled. That explains why trust is the most important precondition for insurance demand and why the main task of insurance regulation and supervision is to safeguard that trust. With lack of regulation to mandate insurers to publish insurance information such as annual audited financial statements, corporate governance frameworks, investment risk exposure, or technical provisions, Dominican consumers are at a disadvantage. Transparency in respect of insurance products also offers room for improvement. There are tested systematic methodologies to diagnose the level of financial consumer protection to identify weaknesses to be addressed. Three activities are suggested: • 16.1. Help consumers buy insurance through greater transparency about providers. The FSU ought to consistently publish aggregated market statistics, as well as more detailed information, for example, on claims ratios by insurer. If brought to the attention of consumers, suitably accessible publication of such detailed data supports informed purchasing decisions that direct consumers toward better performing providers—rewarding their efforts—and away from insurers that perform poorly—motivating them to improve. Information published by supervisors in other jurisdictions include expense ratios, solvency indicators, insurance premium rates for standard products, or complaints statistics. Insurers’ quarterly returns already provide the FSU with a wealth of data in a standardized template, so the incremental effort to make it public to consumers in an appropriate way (and track utilization) seems justified. 88. Credence goods are goods whose qualities cannot be ascertained by consumers even after purchase. Dominica 53 • 16.2. Help consumers buy insurance by facilitating product comparisons with key facts statements. To stimulate demand from all those who cannot count on the guidance of a broker, more transparency about insurance products can come in the form of key facts statements.89 These are short, easy-to-read documents of typically two to four pages where all the facts that characterize and distinguish an insurance product are presented in a prescribed template and format. Key facts statements have to be provided to consumers before they buy insurance. They facilitate comparisons that help consumers choose which product is suitable for them and also point out what their obligations are, thus preventing unintentional underinsurance. • 16.3. Assess the effectiveness of insurance consumer protection in Dominica. The World Bank has developed a methodology for in-depth assessment of consumer protection in financial markets,90 discussing, for example, the role of independent consumer protection agencies. 17. Government-supported campaigns to improve people’s understanding and appreciation of insurance Campaigns that promote the understanding and awareness of insurance are costly, and their long-term impact can be disappointing. However, if the transparency enhancing measures suggested above are introduced, consumers will have to learn about them, and that will be a good opportunity to not only raise awareness of insurance, its benefits, its role in DRF for households and businesses but also improve understanding of underinsurance and deductibles. Any measure implemented by the FSU to strengthen insurance regulation and supervision is an opportunity to inform the public that Dominica has a strong and competent arbiter defending the justified interests both of consumers and insurers, while even the most ambitious measures to strengthen consumer protection will fail to impact demand if the public takes no notice. The same is true for policies regarding, for example, financial inclusion. Fully funded and well-designed insurance awareness campaigns are good but not always affordable. But there are other ways of keeping a positive connotation of insurance in the public’s mind, for example, by regularly working on the proper understanding of the media’s grasp of insurance. Some countries’ supervisors hold annual meetings with newspaper representatives to ensure that they know what they are writing about. 89. Government of Australia. 2012. “Explanatory Statement.” https://treasury.gov.au/sites/default/files/2019-03/ Consultation_Explanantoy_Statement_-KFS_Regulation.rtf; Middle East Insurance Review. 2019. Zambia: Key Fact Statements to Be Mandatory for Insurers. Middle East Insurance Review, September 23, 2019. https://www. meinsurancereview.com/News/View-NewsLetter-Article?id=48472&Type=Africa; IAZ (Insurers Association of Zambia). 2020. “Enhancing the Role of Insurance for Economic Growth.” Zambian Insurance Journal12. http://www.iaz.org.zm/wp- content/uploads/Insurance-Journal-Vol-12.pdf. 90. World Bank Group. 2017. Good Practices for Financial Consumer Protection, 2017 Edition. Washington, DC: World Bank. https://www.worldbank.org/en/topic/financialinclusion/brief/2017-good-practices-for-financial-consumer- protection; Chien, Jennifer, and Ligia Lopes. “Financial Consumer Protection.” Presented at the Developing and Operationalizing National Financial Inclusion Strategies for the Digital Economy, Washington, DC, December 10–12, 2018. https://docplayer.net/141236752-Session-10-financial-consumer-protection.html. 54 Advancing Disaster Risk Finance 18. Assess compliance with the ICP. If a harmonized regional insurance regulation remains a distant outlook, formal assessment of Dominica’s compliance with ICP91 should be sought. In larger and systemically important markets, this is usually done by teams of the World Bank and IMF during a Financial Sector Assessment. That may not happen anytime soon in Dominica. The IAIS has been working on alternatives. In the past, they included several rounds of expert-reviewed self-assessments, for example. To benefit from such support and expertise, Dominica may consider becoming a member of the IAIS; 2018 annual member fees were below CHF 20,000 for the smallest markets. Some supervisors have had excellent results with systematic and candid internal self-assessments, even without any review or other direct support of the IAIS. That is also an exercise in capacity building for the staff conducting the assessments, familiarizing them with international best practices. An assessment of ICP compliance that considers the particularities of Dominica in respect of market size and sophistication as well as supervisory resources will uncover possible weaknesses of the current regime that could translate into insurance failures or other events detrimental to insurance demand and market stability. 19. Assess the barriers to—and potential of—inclusive and other sector-specific insurance. Over the last 15 years, an impressive body of evidence has been accumulated on microinsurance and inclusive insurance. It includes some tools to help regulators identify regulatory obstacles, for example, a self-assessment92 that can identify issues even without the peer review that the IAIS sometimes offers its members. Other preliminary steps on the way to thriving inclusive insurance markets include the assessment of supply, and especially of demand, which tends to require more resources and time, so there is also guidance on how do it.93 The International Conference for Inclusive Insurance94 provides a unique opportunity for the Caribbean countries to meet the experts in the field, exchange experiences with peers, and learn about the latest developments in the region and the world. This year’s motto ‘Reaching scale in small countries’ is highly relevant to Dominica. Likewise, there is considerably documented knowledge of agriculture insurance for a wide range of geographies, crops, production models, and hazards. The same is true for livestock insurance or for the protection of fisheries.95 Many products have been developed for these and other insurable interests, some specific to the Caribbean, such as a hurricane insurance covering damages to coral reefs that translate into losses for the tourism sector. 91. IAIS, Supervisory Material, https://www.iaisweb.org/page/supervisory-material/insurance-core-principles/file/77910/ all-adopted-icps-updated-november-2018. 92. Access to Insurance Initiative, 2013. “Technical Note 3: Self-Assessment and Peer Review on Regulation and Supervision Supporting Inclusive Insurance Markets” 93. Access to Insurance Initiative. 2014. “Toolkit 1: Country Diagnostic Studies: Analytical Framework and Methodology | Access to Insurance Initiative.” 94. Munich Re Foundation. 2021. “International Conference on Inclusive Insurance 2021 - Digital Edition.” 95. For example, CCRIF. 2019. The Caribbean Oceans and Aquaculture Sustainability Facility (COAST). Making the Fisheries Sector in the Caribbean Resilient to Climate Events. https://www.ccrif.org/sites/default/files/publications/CCRIFSPC_ COAST_Brochure_July2019.pdf Dominica 55 ANNEX I. TRANSPARENCY AND DISCLOSURE OF BUDGET PROCESS Dominica’s budget estimates include investments in several DRF-related areas/projects. Table 8 summarizes relevant DRM-related activities and expenditures as shown in the national budget estimates between 2016 and 2021. Table 8: DRM-Related Activities and Expenditures Risk Strategy Budget 2016–2017 Budget 2017–2018 2018–2019 Budget 2019-2020 Budget 2020–2021 Budget Estimates96 Budget Estimates98 Estimates99 Estimates100 Estimates 97 Pre-disaster (risk EC$548,276 EC$100,000 EC$2,781,373 for EC$2,821,151 for EC$3,027,609 for reduction/risk for Disaster (GoCD estimates) Policy Formulation policy formulation and policy formulation management) Preparedness/ for Natural and Administration administration and administration Management Disaster Hazard EC$167,377 for under MERMKU activities under the Reduction under Environmental EC$167,377 for Ministry of Justice, the Ministry of Coordination and environmental EC$182,588 for Immigration, and Youth, Sports, Policy coordination and environmental National Security Culture, and policy coordination and Constituency EC$833,525 policy under MERMKU EC$891,868 Empowerment for disaster EC$833,525 (GoCD estimates), management for disaster EC$806,217 for EC$5,839,468 (loan activities preparedness/ disaster management estimates), and management activities activities under the EC$6,092,322 (grant EC$1,000,000 Ministry of National estimates) for the (GoCD estimates), EC$2,480,578 Security and Home Pilot Project Climate EC$6,460,961 (loan (GoCD estimates), Affairs Resilience - Disaster estimates), and EC$20,203,339 (loan Vulnerability (GoCD/ EC$8,152,514 (grant estimates), and EC$5,460,732 IDA/CIF) under the estimates) for the EC$10,063,631 (grant (GoCD estimates), Ministry of Health Pilot Project Climate estimates) for the 14,203,658 (loan and Environment Resilience - Disaster Pilot Project Climate estimates), and Vulnerability (GoCD/ Resilience - Disaster EC$12,335,610 (grant IDA/CIF) Vulnerability (GoCD/ estimates) for the IDA/CIF) Pilot Project Climate EC$300,000 Resilience - Disaster (GoCD estimates) EC$328,166 (grant Vulnerability (GoCD/ for emergency estimates) for the IDA/CIF) under communication/ Disaster Resource MERMKU early warning Center system EC$500,000 (grant EC$54,140 (grant estimates) for a EC$550,000 (grant estimates) for the Kalinago Multi- estimates) for the Establishment purpose Centre/ Disaster Resource of Community Emergency Centre Center Emergency Centre 96. GoCD, 2016–2017 Estimates of the Commonwealth of Dominica, 2016, http://finance.gov.dm/budget/estimates/20- 2016-2017-estimates. 97. GoCD, 2017–2018 Estimates of the Commonwealth of Dominica, 2017, http://finance.gov.dm/budget/estimates/21- 2017-2018-estimates. 98. GoCD, 2018–2019 Estimates of the Commonwealth of Dominica, 2018, http://finance.gov.dm/budget/estimates/25- 2018-2019-estimates. 99. GoCD, 2019–2020 Estimates of the Commonwealth of Dominica, 2019, http://finance.gov.dm/budget/estimates/26- 2019-2020-draft-estimates. 100. GoCD, 2020–2021 Estimates of the Commonwealth of Dominica, 2020, http://finance.gov.dm/budget/estimates/32- 2020-2021-estimates. 56 Advancing Disaster Risk Finance Post-disaster EC$687,925 (GoCD EC$750,000 EC$1,000,000 EC$3,000,000 EC$700,000 (GoCD (risk mitigation) estimates) and (GoCD (GoCD estimates) (GoCD estimates) for estimates) for EC$4,652,831 estimates) and for strengthening enhanced natural enhanced natural (grant estimates) EC$5,000,000 of national forest environment (post environment (post for natural disaster (grant estimates) resources and Hurricane Maria debris Hurricane Maria remediation and for natural watersheds removal) debris removal) mitigation measures disaster remedial resilience post under the Ministry and mitigation Hurricane Maria EC$500,000 (GoCD EC$500,000 (GoCD of Public Works and measures (Bois estimates) and estimates) and Ports. Diable to White EC$3,927,253 EC$1,362,482 EC$1,362,482 River) under the (GoCD estimates) (grant estimates) (grant estimates) Ministry of Public for enhanced for strengthening for strengthening Works and Ports natural of national forest of national forest environment (post resources and resources and EC$290,330 Hurricane Maria watersheds resilience watersheds resilience (GoCD estimates) debris removal) post Hurricane Maria post Hurricane Maria and EC$242,040 under MERMKU (grant estimates) EC$935,545 (GoCD for engagement estimates) and of engineers – EC$2,290,471 (grant Tropical Storm estimates) for natural Erika post- disaster remedial and disaster recovery mitigation measures efforts under the Ministry of Public Works and Ports Dominica 57 ANNEX II. OPERATIONAL DISASTER RISK FINANCING AND INSURANCE FRAMEWORK Table 9: Actions Taken by Governments for Financial Protection Beneficiaries Government - National and Homeowners and Small Agricultural Producers Low-Income Population (Social Subnational (Sovereign DRFI) and Medium Enterprises and Herders (Agricultural Protection) (Property Catastrophe Risk Insurance) Insurance) Assess Risks The Government of Colombia included In Chinese Taipei, the India has developed India has developed detailed the assessment of contingent liabilities Residential Earthquake detailed agricultural risk agricultural risk assessment from disasters in the government’s Insurance Fund (TREIF) has assessment tools to help tools to help policy makers fiscal risk management strategy. developed an earthquake policy makers better understand the economic risk model to strengthen better understand the consequences of drought, In Mexico, the Sistema de Estimación the independence economic consequences quantify such impacts, and de Pérdidas para el Riesgo (Federal and professionalism of drought, quantify such investigate the impacts of risk the Loss Estimation for Federal Risk of its earthquake risk impacts, and investigate coping strategies, at both the farm System or R‐FONDEN), a probabilistic assessments. the impacts of risk coping and state levels. catastrophe risk modeling tool, creates strategies, at both the farm probabilistic simulations of potential The preparation of the and state levels. material and human losses from Southeast disasters. Europe and Caucasus In Mongolia, livestock Regional Catastrophe Risk census/surveys are used Morocco has developed a probabilistic Insurance Facility includes to inform the government catastrophe risk modeling tool to extensive multi-hazard about the economic and assist the government in prioritizing country risk assessments fiscal impact of adverse their risk mitigation investments. for climate and geological weather events and in the hazards. design and pricing of index- The Philippines is developing a based livestock insurance catastrophe risk model to evaluate policies. options for risk transfers and insurance to reduce the fiscal burden of disasters. The Pacific Risk Information System, under the Pacific Catastrophe Risk Assessment and Financing Initiative, includes a database of over 3.5 million georeferenced buildings and infrastructure in 15 Pacific Island Countries. It was used to develop the Pacific catastrophe risk insurance pilot. Arrange Contingent lines of credit provide The Turkish Catastrophe The Index‐Based Livestock The Productive Safety Net Financial developing countries with funds Insurance Pool (TCIP), a Insurance Pilot in Mongolia Programme (PSNP) in Ethiopia is Solutions immediately following disasters. PPP with the domestic protects the livelihoods of aimed at enabling the rural poor Products are offered by the World insurance industry, provides 11,000 herders or 22 percent facing chronic food insecurity to Bank, Interamerican Development compulsory, affordable in piloted provinces in 2012. resist shocks, create assets, and Bank and Japan International earthquake insurance to become food self‐sufficient. Cooperation Agency. homeowners, increasing India’s weather-based catastrophe insurance crop insurance has been In 2011, reinsurance company The first multi‐country risk pool, the coverage from less than 3 in place since 2007 for 11 Microinsurance Catastrophe CCRIF, established in 2007, offers 16 percent to over 40 percent growing seasons, with 11.6 Risk Organization (MiCRO) was small island states countries over of residential buildings in million farmers and US$370 established to provide insurance US$150 million in hurricane and urban areas. million covered in the most coverage to women‐owned earthquake coverage. recent season, while the microenterprises in Haiti. The Japanese public‐ national crop insurance In 2006, Mexico transferred US$450 private earthquake program since 2010 offers Insurance products of the million of earthquake risk to financial insurance program for more than 1.1 million Center for Agriculture and Rural markets by combining the world’s homeowners relies on farmers a total of US$67 Development Mutual Benefit first government catastrophe (cat) the Japan Earthquake million coverage in yield Association (CARD MBA) in bond (Cat MEX - US$160 million) and Reinsurance Company crop insurance. the Philippines are mandatory parametric reinsurance (US$290 (JERC), an earthquake for members of a network of million). reinsurance pool backed by In Morocco, the government institutions including CARD NGO the government. and the agricultural mutual and CARD Bank, providing scale In Colombia, the government uses insurance company and preventing adverse standardized terms and conditions have established a crop selection. informed by international best insurance program for practices to purchase catastrophe cereals which currently insurance for its public buildings. covers 700,000 ha and will soon be extended to fruit trees. 58 Advancing Disaster Risk Finance Beneficiaries Government - National and Homeowners and Small Agricultural Producers Low-Income Population (Social Subnational (Sovereign DRFI) and Medium Enterprises and Herders (Agricultural Protection) (Property Catastrophe Risk Insurance) Insurance) Deliver Funds to The Government of Mexico established As a PPP, the TCIP relies on Distribution in the Moroccan The Horn of Africa Risk Transfer Beneficiaries a post‐disaster loss reporting the domestic insurance multi‐peril crop insurance for Adaptation (HARITA) was mechanism managed by the Fondo de market for the distribution program takes place either launched in Ethiopia in 2007 as Desastres Naturales (Natural Disaster and settlement of claims. by linking to loans made a pilot program to address the Fund or FONDEN). Affected states can by Crédit Agricole or by needs of small‐scale farmers therefore access timely payments direct marketing of Mutuelle through drought insurance, from FONDEN, reducing time‐ Agricole Marocaine credit, and risk reduction, allowing consuming coordination problems. d’Assurances (Moroccan farmers to pay for insurance Agricultural Mutual through labor, an idea based on In the Cook Islands, the establishment Insurance or MAMDA), the ‘food‐for‐work’ programs. of the Disaster Emergency Trust sole provider of agriculture Fund has served to reduce delays in insurance in the country, MiCRO’s coverage in Haiti is emergency response. structured as a mutual bundled with loans from Fonkoze, insurance company. the country’s largest microfinance institution. The national crop insurance program in India uses GPS- enabled mobile phones and video recording technology to enhance crop cutting experiments, improving the accuracy of claims assessments while reducing fraudulent claims. Claims settlement takes place through direct payment to bank accounts. Dominica 59 ANNEX III. DOMINICA COUNTRY DISASTER RISK PROFILE DOMINICA Hurricanes and Earthquakes RISK PROFILE Photo credit: World Bank / Kristal Peters What is a country disaster risk profile? Snapshot An estimation of the potential economic losses to property caused by adverse natural hazards. Inform disaster risk financing The hurricane risk Country Disaster Develop key baseline data Risk Profile in Dominica is more Evaluate impact of disasters Applications significant than the Promote and inform risk reduction earthquake risk. Country At-A-Glance Annual Average Loss Gross Capital Stock (AAL) from hurricanes is GDP US$ (2019): 611 million Non-Residential 46% Residential 54% US$ 20.0M (3.3% Population (2019): 71,428 of GDP) and from Replacement Value of Total Building earthquakes is US$ Exposure US$ (2020): 2.4 billion 2.9M (0.5% of GDP). The Probable Maximum Loss for hurricanes Two representations of hurricane risk (250 year return period) is US$ 819M (134.0% AAL (in millions US$) 3.8-7.4 of GDP) and for 1.1-3.7 0.4-1.0 earthquakes (250 year return period) is US$ Provinces by ratio (AAL/Province Exposure) 110M (17.9% of lowest ratio nnnnn highest ratio GDP). Absolute Risk: TThe larger the circle, the higher the Annual Average Losses that the province could potentially incur over the long term. Relative Risk: The darker the color, the higher the ratio of AAL/ Province Exposure. The darkest color represents the parish of Saint Luke which has a higher proportion of vulnerable structures due to construction types and/or potentially higher hurricane intensity. 60 Advancing Disaster Risk Finance DOMINICA What is at risk? Economic assets such as residential and non-residential buildings are at risk. These assets that are exposed to natural hazards are referred to as a country’s Building Exposure. Building Exposure The map provides the value of residential (in percentage of total) and non-residential buildings in each n < 1.8 n 1.8 - 3.3 census division at risk from hurricanes and n 3.4 - 7.2 earthquakes. n 7.3 - 15.6 n 15.7 - 41.1 What are the potential future losses? These charts show the estimated potential future losses to Dominica that could be caused by hurricanes and earthquakes that could occur within a given return period. This is the first step needed to quantify contingent liability. Next steps include determining its impact on budgetary appropriation, which would directly inform the development of the disaster risk financing strategy. Estimated Losses Due to Earthquakes Estimated Losses Due to Hurricanes $350 $1,400 $300 $1,200 $250 $1,000 Millions (US$) Millions (US$) $200 $800 $150 $600 $100 $400 $50 $200 $0 $0 10 50 100 250 500 1000 10 50 100 250 500 1000 Return Period in Years Return Period in Years How can hurricane risk be reduced? Structures with Rendered Concrete 50% 0.03 Block Walls and Sheet Metal Roof are AAL (% of its Exposed Value) 45% 0.025 the most prevalent residential building AAL (% of Total AAL) 40% 35% types in Dominica. However, the 30% 0.02 proportion of New Resilient Reinforced 25% 0.015 20% Concrete construction built after 15% 0.01 hurricane Maria is on the rise, which 10% 0.005 5% would reduce risk. 0% 0 Rendered/Reinforced Concrete New Resilient Construction - Rendered-Other-Mixed Walls Rendered-Other-Mixed Walls Walls with Sheet Metal Roof mostly Reinforced Concrete with Reinforced Concrete Roof with Sheet Metal Roof Sum of AAL (% of total) Sum of AAL (% of exposed value) Dominica 61 ANNEX IV. DRFTA PROJECT METHODOLOGY OF QUANTIFYING CONTINGENT LIABILITY Box 3: Probabilistic Catastrophe Risk Modeling Fiscal disaster risk assessments for governments can be developed using inputs from probabilistic catastrophe risk models. Catastrophe modeling techniques were originally developed by the international (re)insurance industry to assess the risk on portfolios of underwritten assets (for example, buildings) and are increasingly being used by govern- ments to analyze their exposure to adverse natural events. Typically, catastrophe risk models comprise the following components: • Exposure module. This is a georeferenced database of assets at risk, capturing important attributes such as geographical location, type of occupancy (for example, residential, commercial, industrial, and agricultural) and construction (for example, wood, steel, and masonry), age, and number of stories. • Hazard module. This module contains a catalog of thousands of potential natural catastrophe events that could occur in a region, each one defined by a specific frequency and severity of occurrence. Analyses are performed on the historical occurrence of catastrophic events to capture the extent of possible events, based on expert opinions. • Vulnerability module. This is a series of relationships which relate the damage to an asset to the level of intensity of a peril (for example, ground shaking for earthquakes and wind speed for tropical cyclones). The relationships will vary by peril and by the characteristics of each asset; for example, a small wooden house and a tall concrete building will respond in different ways to a ground shaking caused by an earthquake and, as such, they will be damaged in different ways and to different extents. On a larger scale, for instance, when analyzing an entire neighborhood or city, proxies may be used to capture the overall vulnerability of an area. • Loss module. This module combines the information in the other three components to calculate the overall losses expected for selected perils affecting a portfolio of assets of interest. Typically, there are two kinds of risk metrics produced: AALs and PMLs. The AAL is the expected loss, on average, every year for the risks being analyzed, while the PMLs describe the largest losses that might be expected to occur for a given return period (within a given time period), such as a 1‐in‐50-year loss or a 1‐in‐250-year loss. Risk metrics produced by probabilistic catastrophe risk models can be used to complement historical analyses and are particularly useful for policy makers in assessing the probability of losses and the maximum loss that could be gener- ated by major events (for example, an earthquake affecting a major city or a cyclone affecting a major port). 62 Advancing Disaster Risk Finance Box 4: Loss Risk Estimation Data, Methodology, and Key Assumptions The technical results derive from an actuarial analysis of past floods and wind-related events in Dominica. This analysis is based on empirical analysis of past losses and not on a probabilistic catastrophe model. Although basic cross-validation of the data was completed, any material errors in the underlying data could affect the results of this technical analysis. Methodology The methodology followed these steps: • Historical losses were compiled into a single table by event. Whenever the data were available, sectorial losses were recorded. • Proxies to extract direct economic losses and public losses out of the total losses were determined by sector and more globally by event. • Losses were then updated to 2019 US dollar values. • Theoretical and statistical analysis validated the use of the Extreme Value Theory, and Generalized Pareto Distributions are fitted for each of the three categories of evaluated historical losses: direct losses, public losses, and total economic losses. Occurrences of losses above an upstream defined threshold are simulated through a Poisson distribution. Assumptions The analysis uses the following key assumptions: • There are no material errors or omissions in the data underlying the disaster damage report. • The developed proxies to estimate the portions of direct losses and public losses are based on historical sec- torial losses information drawn from DaLA reports and other sources of historical and sectorial losses. They are reasonable approximations. • The use of the GDP ratios to update the historical losses to 2019 US dollar value is legitimate. • The use of the Poisson distribution and the Extreme Value Theory is legitimate and the fitted statistical distri- butions are reasonable approximations of the occurrence and loss impact of natural disasters. Source: World Bank DRFTA Project. Dominica 63 ANNEX V. DRF INSTRUMENTS AND POLICY FRAMEWORK IN SELECT CARIBBEAN COUNTRIES