With the rising cost of natural catastrophes around the world, public private solutions could provide a model for the future. Dr Simon Young explains how the Caribbean Catastrophe Risk Insurance Facility has set a precedent.

Caribbean nations have long been exposed to the worst that Mother Nature has to offer. In the first catastrophe pool of its kind, the World Bank teamed up with Munich Re, Benfield, Eqecat and others in 2007 to form the Caribbean Catastrophe Risk Insurance Facility (CCRIF). Only one catastrophe last year – an earthquake – triggered the fund to pay out to Dominica and St Lucia. The facility could prove a successful model for insuring catastrophes in other poor regions around the world.

One of the main hindrances to sustained economic development in the Caribbean is the region’s susceptibility to hurricanes and earthquakes. For hurricanes in particular, 2008 is already looking likely to be an active year. The United States’ National Oceanic and Atmospheric Administration (NOAA) 2008 hurricane outlook shows 12-16 named storms, between six to nine hurricanes and two to five major hurricanes. The support for a Caribbean hurricane and earthquake catastrophe pool therefore remains strong.

At the start of the 2008 Atlantic Hurricane season on 1 June, all 16 original member governments had signalled their continued support for the facility by renewing their CCRIF insurance coverage. Some, such as Trinidad and Tobago, increased their coverage limit substantially. Interest has also been shown by other Caribbean territories, which could in the future become members of the facility.

Model for other regions

These developments are welcomed by international development agencies and governments that have watched the CCRIF closely as a way of determining the potential success of a similar catastrophe pool in another comparable region. Talk of the development of other CCRIF-type facilities is not new. The World Bank recently launched a major risk modelling and data gathering initiative in Central America, which is considered a required precursor to the formation of a catastrophe risk pool for that region.

The Pacific Island states have also been singled out as a region that would benefit from a CCRIF-like solution. The islands are prone to cyclones and have limited capacity to mitigate against catastrophic natural disasters in the short term. The pooling of risks among the islands would seem like an ideal way to provide short-term liquidity after a catastrophe until international aid becomes available.

This debate has intensified, with discussions surrounding the development of a programme similar to the CCRIF for Pacific Islands broached at April’s United Nations Climate Change talks where the World Bank presented on the CCRIF. Still, those talks are in their early stages, and the CCRIF is a young facility, having launched only a year ago. So, the development of any catastrophe insurance solution for governments in the Pacific Islands or elsewhere would largely depend on the continued success of the CCRIF.

“The World Bank recently launched a major risk modelling and data gathering initiative in Central America

Driving force

Since the CCRIF was borne out of a partnership between Caribbean Community (CARICOM) heads of government and the World Bank, it has since inception had the backing of both a well regarded private entity and a highly respected public one.

The CCRIF was built on the impetus of CARICOM, after the catastrophic losses Grenada suffered at the hands of Hurricane Ivan in 2004. The facility managed to avoid the issues that may have developed had another route been chosen to develop the facility. Questions of who would pay what premium, where the facility would be domiciled and who would be consulted would be far more difficult to answer had Caribbean governments as a group not taken such a keen interest in the implementation of the facility.

The input of these governments meant that the facility was able to get first hand information on what were the greatest needs to be filled by the policy, and what exact issues its potential member governments faced economy-wise after a catastrophic hurricane or earthquake. That information was used to develop the facility and decide what form it would take (for example, parametric or traditional indemnity insurance), how much coverage it would provide and what premiums governments could afford to pay for the decided coverage.

This is not to say that the partnership has been trouble-free. Buy-in at the highest levels of government means that the CCRIF depended on a top-down structure for decision-making and a strong reliance on partnerships with elected officials. Changes in government and concerns raised by disaster officials who did not fully understand the concept have tested the strength and viability of the facility.

Those problems have been overcome by a concerted effort to re-engage all of the facility’s stakeholders, using and creating opportunities for discussion and willingness to reform and review the facility where necessary.

Tested by Dean

“The pooling of risks among the Pacific Islands would seem like an ideal way to provide short-term liquidity after a catastrophe until international aid becomes available

At no other time did the facility’s ability to remain dynamic and attune to the needs of its member governments prove more crucial than in August 2007 when Hurricane Dean affected member governments, including Jamaica, St Lucia and Dominica.

Fortunately, Dean’s impact on these countries was minimal. In Jamaica, losses were recorded on its southern coast while heavy rainfall and tropical storm force winds associated with the hurricane were recorded in Dominica and St Lucia. However none of the losses recorded were enough to trigger payout for any of the governments. What Hurricane Dean did, however, was to highlight the need and desirability among member governments to include rainfall cover for the CCRIF, jump-starting a flood/rain coverage feasibility effort by the CCRIF.

Using funds from the World Bank’s Global Fund for Disaster Risk Reduction, the CCRIF is working with the Caribbean Institute for Meteorology and Hydrology and the University of the West Indies to conduct on-the-ground analysis and data gathering to present a feasibility study. Those results are expected before the end of the year.

Other changes have been included for the 2008 renewal. This year, the CCRIF has reduced premiums, lowered the minimum attachment point on policies, increased the available policy coverage limit from $50m to $100m and made available real-time hurricane hazard and impact information for use by disaster management officials of its member governments. The CCRIF will also continue to lobby on behalf of Caribbean governments for the development of agricultural insurance. Although the CCRIF will not be directly driving this effort, the facility is more than willing to offer technical know-how and experience towards its success.

It has been a year since the launch of the CCRIF. In that year the CCRIF has proven itself as a viable and necessary insurance fund. More significantly perhaps, it has demonstrated a viable model for regional integration as a solution to disaster risk now and into the future.

Dr Simon Young is CEO of Caribbean Risk Managers, supervisors of the CCRIF.

The 16 members of the CCRIF

Anguilla
Antigua & Barbuda
Bahamas
Barbados
Belize
Bermuda
Cayman Islands
Dominica
Grenada
Haiti
Jamaica
St Kitts & Nevis
St Lucia
St Vincent & the Grenadines
Trinidad & Tobago
Turks & Caicos