Caribbean could be hit harder if Sandy repeats

Still reeling from the effects of Hurricane Sandy, the Caribbean region has taken a number of steps recently to become increasingly proactive with its disaster management. It has had to act: estimates show that even storms of a similar size could be devastating to the region thanks to insufficient preparation in a number of areas.

One thing it has done to get a handle on the situation is to hire a full-time chief executive for the Caribbean Catastrophe Risk Insurance Facility (CCRIF)—the catastrophe risk pool that provides parametric-based disaster insurance cover to Caribbean countries.

CCRIF, which aims to limit the financial impact of catastrophic hurricanes and earthquakes to Caribbean governments by quickly providing short-term liquidity when a policy is triggered, now plays a vital role in tackling the region’s exposure to natural disasters.

According to Isaac Anthony, its first chief executive, who took on the role in January, cat exposure has increased in the region and must be handled better if risks are to be reduced.

“The increase in population and infrastructure in vulnerable areas, which is typical in the Caribbean, has led to an increase in cat exposure. There is also a heavy reliance on sectors that are particularly vulnerable to natural hazards such as tourism and agriculture,” he says.

“These areas employ large sectors of the Caribbean population and are particularly susceptible to tropical cyclones, yet suffer from an absence of cat insurance coverage.”

Learn from the past

Learning from previous mistakes such as Sandy—which, according to Anthony, should not have caused as much damage as it did—the CCRIF has become increasingly aware of the region’s vulnerability.
Sandy affected three areas in the Caribbean, with the Jamaican agricultural sector experiencing losses of more than $11 million.

“These comparatively small events—I say small because Sandy had an estimated return period of six years in Jamaica, while in the Bahamas it was a once in two years loss event—can have a significant impact on economy, infrastructure population and environment,” says Anthony.

Sandy produced very little wind, with most damage attributed to water. “These events can bring extreme rainfall which is not covered in our current products, which draws attention to the need for these products,” he says.

CCRIF has been working since 2008 to develop an excess rainfall product which will address the losses associated with heavy rainfall and will be available to all Caribbean countries. The product is being developed in partnership with global reinsurer Swiss Re.

Making progress

CCRIF was developed through funding from the Japanese government, and was capitalised via contributions to a multi-donor Trust Fund by the government of Canada, the European Union, the World Bank, the governments of the UK and France, the Caribbean Development Bank and the governments of Ireland and Bermuda, as well as through membership fees paid by participating governments.

"These areas employ large sectors of the Caribbean population and are particularly susceptible to tropical cyclones, yet suffer from an absence of cat insurance coverage."

Sixteen governments are currently members of 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 and the Turks & Caicos Islands.

“Since 2007 CCRIF has become more involved with its members from the Caribbean region, providing much-needed products,” says Anthony. “Prior to the existence of CCRIF, the government did not have access to risk transfer due to the prohibitive costs associated with accessing the market. With CCRIF, governments are able to add to their tool kit of financial instruments, which they can then use to support better preparation in the event of a catastrophe.

“Beyond provision of risk transfer, the existence of the CCRIF mechanism has changed the way that cat cover is managed in terms of raising awareness of the cat risks that governments have on their books and the process of developing an appropriate disaster management strategy.

“My goal is to continue to make CCRIF an integral partner in disaster management in the Caribbean, beyond just providing catastrophe insurance,” says Anthony. “I want to continue to improve the value of what we offer our clients, reducing the cost of insurance premiums over time.”

A unique approach

Anthony describes the parametric approach used by CCRIF as the bedrock of the facility and one that works well for the Caribbean.

“We’ve seen how countries can benefit from it,” he says. “By providing payouts within days, there is only cause to wait for the post-event disaster assessment, which in the commercial or traditional sector can take in excess of a year.”

Since its inception in 2007, CCRIF has paid out claims resulting from seven earthquakes and hurricanes amounting to $32 million, all within 14 days.

Anthony explains that heavy reliance on data can be restrictive, especially in an area that relies so heavily on accurate loss models.

“One constraint from using a parametric approach is the high reliance on data in some areas to support the development of the underlying loss and risk model,” he says. “This in turn has required specific technical and financial commitment by CCRIF which could be a problem in the development of the tool in other areas.
“Another limitation of parametric insurance is the limit of basic risk, but this becomes less of a concern the larger the event covered and the better the information available.”

Anthony says that once the data is available and the technical capacity exists to develop the appropriate model, the parametric approach can, and will, work for other regions.

An opportunity arises

“CCRIF is an opportunity for the re/insurance industry,” says Anthony. “It has led the way in opening new markets in terms of developing a middle income government and participating in catastrophe area risk transfer.”

He says CCRIF is also supporting the expansion of innovative micro insurance products, which again leads to growth of the marketplace for reinsurers. A challenge he sees is balancing the need for commercial returns with the significant benefit of supporting CCRIF programmes, in terms of visibility, corporate social responsibility and expansion in the marketplace.

As alternative capital such as insurance-linked securities (ILS) continues to flood into the market, he also has one eye on how this form of capacity might be put to good use in the region.

“CCRIF has been monitoring opportunities in the capital market and has utilised a capital market instrument for a portion of the reinsurance capacity every year so far,” explains Anthony. “We will continue to monitor it and see convergence in pricing which will make ILS more attractive both to the core earthquake and tropical cyclone products and new products which are currently being developed.”