BOGOTA (Thomson Reuters Foundation) - Natural disaster-prone Caribbean countries can soften the economic impact of earthquakes and hurricanes with new disaster insurance coverage in the form of a catastrophe bond, according to the Caribbean Catastrophe Risk Insurance Facility (CCRIF).
The $30 million catastrophe bond or “cat bond” is the first ever issued by the World Bank offering earthquake and hurricane insurance coverage over the next three years to the group of 16 Caribbean countries that make up the CCRIF.
The CCRIF is a risk pooling scheme, operated and owned by Caribbean countries, in which island nations pool their premiums in a disaster fund.
“Cat bonds give us the opportunity to transfer risk as well as diversify risk that allows us to reduce price volatility on reinsurance premiums which is our biggest cost element,” Isaac Anthony, CCRIF’s chief executive told Thomson Reuters Foundation in a telephone interview from Saint Lucia.
“By passing on some of our members' risk to the capital markets, thereby achieving greater risk diversification, we are able to potentially reduce premium costs to our members,” he said.
Cat bonds make up to 25 percent of the total risk transfer worth $120 million for this year in CCRIF, he said.
The World Bank launched CCRIF, the first multi-country insurance scheme of its kind, in 2007, after Hurricane Ivan inflicted billions of dollars in losses on the region in 2004.
Since then, Caribbean governments have increasingly looked to new insurance products to buffer the economic losses natural disasters bring. Some countries in the region are still reeling from the effects of Hurricane Sandy that battered parts of the Caribbean in 2012.
“There’s a growing awareness of disaster risk transfer and the need to have insurance cover in the Caribbean but because of the fiscal conditions facing countries in the Caribbean it’s not always possible for these countries to pay for extra insurance,” Anthony said.
The cat bond is based on CCRIF’s existing parametric insurance scheme, which means that payments of claims are not based on actual losses or damage following hurricanes or earthquakes. Payouts are instead calculated according to pre-defined risk indexes based on the location of a disaster and on the intensity and period, for example, of rainfall and wind surge. Countries can buy coverage limited to specific events, areas, and for a specified amount of time.
As parametric insurance does not require the insurer to evaluate losses after an event, which can take months or even years, prompt payouts can be made to governments. This ensures cash flows vital for countries to start rebuilding, including fixing damaged roads and bridges and clearing debris after a disaster, Anthony said.
“We’re able to make very quick payment within 14 days, which makes the CCRIF model attractive to our members,” he said.
Since 2007, CCRIF has made eight payouts totalling $32.2 million to seven countries, including $7.7 million to Haiti following the massive earthquake in 2010.
A MODEL TO REPLICATE?
As scientists predict more extreme climate change-related weather, the Caribbean insurance plan is emerging as a model for other countries in other regions seeking to incorporate a financial safety net in their disaster risk management.
“In Africa, for example, in a region highly exposed to drought, the African Risk Capacity Initiative that was recently set up was modeled partly on the CCRIF,” Anthony said, adding that several Central American countries are poised to join CCRIF.
“There are countries in Central America, such as Nicaragua and possibly Guatemala, looking to become part of CCRIF very soon, as early as August. They would benefit from reasonably low premium cost by joining an existing facility while current CCRIF members would reap the benefit of reduced operational costs associated with increased economies of scale which would accrue with new members joining,” Anthony said.
CCRIF also expects Panama, Costa Rica, Honduras and El Salvador to “also eventually come on board,” he added.
United Nations climate talks could draw on the experience of Caribbean countries in disaster risk insurance schemes as the U.N. considers setting up a global climate loss and damage mechanism to buffer the economic impact of natural disasters.
“We’re already talking about the CCRIF model with experts at the United Nations to see how it can be used as a model for disaster risk transfer for other countries in the world prone to natural disasters,” Anthony said.