Innovative Use of Insurance Tools in Disaster Risk Management for Sustainable Development

The devastating effects of Hurricane Ivan in the summer of 2004, when it crossed the Caribbean Sea causing major damage in Grenada, Jamaica and the Cayman Islands, produced one good thing.

The Caribbean Community and Common Market (CARICOM) heads of government held an emergency meeting to discuss the growing impacts of natural disasters on the region. They requested assistance from the World Bank in developing the first multi-national risk pool in the world, the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which operates as a private, not-for-profit insurance company for the benefit of its 16 government members.

Governments from Canada, the United Kingdom, France, Eire and Bermuda, as well as the World Bank and the Caribbean Development Bank, pledged almost $50 million to the CCRIF reserve fund.

These contributions, later boosted by a further $15 million from the European Union and $20 million in participation fees from the 16 participating countries, enabled the CCRIF to become operational on June 1, 2007, supervised by Caribbean Risk Managers Ltd., part of the CGM Gallagher Group headquartered in Kingston, Jamaica.

Approximately two dozen catastrophe pooling funds exist in the world, but CCRIF is unique amongst them in that it is multi-national. It provides catastrophe coverage for governments for their short-term liquidity needs. It does not insure individual policyholders. And, it offers a parametric policy rather than the traditional indemnity coverage.

The CCRIF allows regional governments to purchase coverage akin to business interruption insurance that provides them with a rapid cash payment after the occurrence of a catastrophic earthquake or hurricane of sufficient magnitude to impact the entire national economy. As such, CCRIF has been blazing a much needed trail, given that the relationship between insurance and disaster risk reduction in the developing world has long been strained.

While the benefits of a vibrant private insurance market in developing and middle-income economies are clear, the potential role of insurance in sovereign risk management and as an aid to sustainable development has generally been overlooked.

Many development funding agencies regard indemnity insurance, and the moral hazard which accompanies it, as a barrier to rather than a catalyst for overall disaster risk reduction at the national level. But the advent of parametric insurance mechanisms and the increasing natural catastrophe losses in the developing world have combined to bring renewed attention to the benefits of ex-ante financing of disaster risk.

In particular, CCRIF has emerged as a shining example of what can be achieved in moving developing nations away from reliance on ex-post disaster assistance, both through the discussion of insurance mechanisms as part of climate change adaptation, and following the rapid payout by CCRIF to Haiti within two weeks of the massive January earthquake.

CCRIF writes annual parametric wind and earthquake policies (based on a specifically-designed index that approximates government losses during natural catastrophe events) which have a high deductible and an annual policy limit, both selected by each client country each year. Claims are settled after 14 days using parameters published in the public domain.

In terms of the portfolio risk of the CCRIF, a large portion (this year, above a $20 million retention) is transferred to the international reinsurance markets, with a smaller portion transferred to the capital markets via a private catastrophe swap transaction. CCRIF writes over $600 million of risk, and provides lowest-possible premium pricing to its client countries within a strong sustainability framework which sees CCRIF capitalized significantly above established national benchmarks for catastrophe insurers.

As disaster losses continue to mount, many nations face great challenges in meeting sustainable development goals. The CCRIF provides the model for a public-private partnership which finally brings the strengths of both sectors together.

Topics Catastrophe Risk Management