The Caribbean Catastrophe Risk Insurance Facility – a critical component

of regional comprehensive disaster management

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The Caribbean Catastrophe Risk Insurance Facility (CCRIF) was formed in May 2007 following Caribbean heads of government evaluating their countries’ exposures to catastrophe hazards, such as Hurricane Ivan in September 2004 which caused physical and socio-economic damage to Grenada, Jamaica and the Cayman Islands.

At a special meeting of CARICOM (the Caribbean Community, a group of 15 full and 5 associate members of the anglophone Caribbean plus Haiti and Surinam), called to consider actions after Ivan, a formal request was made to the World Bank to assist in development of a government insurance programme. The World Bank had previously led a project aimed at solving similar problems in the wake of high reinsurance pricing in the early 1990s, but the government insurance scheme element of that project was never implemented.

In response, the World Bank sought funding for a project to develop an insurance solution for Caribbean governments. The Japanese government agreed to provide the necessary funding (just under US$2 million), and the World Bank prepared the overall concept notes and initiated a tender process for consultants to execute the project during 2005. The Bank drew extensively on its experience in Grenada, where the major unfunded exposure was identified as being one to six months after Ivan’s impact, when immediate post-disaster aid had ceased and long-term redevelopment aid was yet to come.

During that time, Grenada’s treasury had great difficulty meeting its debt payments and paying its civil servants, income having dried to a trickle due to Ivan’s impact on business activity. The World Bank’s insurance solution for the CARICOM governments was thus designed to be able to pay quickly and to try to cover this current account shortfall at premium rates the governments could afford within already very tight budgetary constraints.

Coverage offered

Parametric insurance was selected as the vehicle for CCRIF’s catastrophe cover, the initial coverage being for hurricane and earthquake catastrophic events. Parametric insurance products were based on the creation of a Caribbean-specific risk model for hurricane and earthquake hazards, which could then be used to generate government-related losses for a large set of stochastic events. These losses could then be used to construct a loss profile for each country (in the form of a loss exceedance curve). In addition, losses, per-event, per country could be produced so that facility aggregate loss exceedance curves could also be generated.

The second part of the modelling process was to produce a parametric index for each country which could reasonably replicate the modelled loss exceedance curve based only on totally objective and publicly-available hazard data for a particular event. The key distinctions of parametric insurance as opposed to a traditional indemnity policy are as follows:

  • Payouts can be calculated and made very quickly because loss adjusters do not have to be relied on to estimate damage after the event which can take months or years;
  • Calculation of payouts is totally objective, based on a few simple input parameters published widely in the public domain from the globally-mandated body responsible for estimating those particular parameters and a set of formulae which form part of the policy; and
  • The risk, which drives policy pricing, is uniformly defined (ie there is no subjectivity in the definition of the risk.)

Reinsurance

In order to boost its claims-paying capacity above the value of its assets and underwriting income, CCRIF purchases reinsurance from the international reinsurance markets (primarily located in London, continental Europe, Bermuda and the United States).

Currently, CCRIF retains the first US$20 million of losses, with US$111 million of reinsurance sitting above that. Swiss Re has thus far taken the largest share of the traditional reinsurance programme, with Munich Re and Partner Re as substantial secondary supporters and Hannover Re and Hiscox, a Lloyd’s of London Syndicate, also supporting. US$18.5 million of the top layer of risk is placed into the capital markets via a risk swap between CCRIF and the World Bank Treasury, the first time such an instrument has been used to transfer risk from a national catastrophe pool. In addition to the reinsurance layer, CCRIF has access to a CCRIF-specific Multi-donor Trust Fund under an agreement which expires in 2012, held at the World Bank and into which a number of donors placed funds (totalling about US$50 million to date.)

Facility structure – ownership and governance

A trust was formed for the sole purpose of holding 100 per cent of the shares of the facility, with a trust deed defining the purposes of CCRIF. A trustee was appointed to ensure that the legal conditions of the trust deed are met, and an enforcer was also appointed to arbitrate between CCRIF and the trustee in case of any dispute.

Currently, CCRIF has a board of five directors. Initially three were appointed, but it was expanded to five in January 2008 after appointment of nominees from CARICOM to broadly represent the insured participants and the Caribbean Development Bank, to represent the donor community. The key other service providers are the facility supervisor – Caribbean Risk Managers Ltd, an affiliate of the CGM Gallagher Group of Companies headquartered in St Lucia, the Insurance Manager – Sagicor Insurance Managers Ltd, a member of the Sagicor Group of Companies headquartered in Barbados.

Due to the growth of assets being managed CCRIF has two asset managers, London & Capital Asset Management Ltd and EFG Bank (Cayman) Ltd. The former, due to the size of CCRIF’s portfolio has created a specific segregated portfolio for CCRIF within the London & Capital Satellites SPC. CCRIF retains Aon Benfield in London for reinsurance placement and consultancy and PricewaterhouseCoopers, who perform not only the annual audit but also specific verification procedures on each claim calculation further adding value to the transparency of the claim handling process. In addition to these roles, CCRIF has retained a communications firm, Sustainability Managers from Jamaica, who also manage CCRIF’s website www.ccrif.org.

The organisational chart (See Figure 1) depicts the current operations of CCRIF.

Since inception CCRIF has paid out four claims, almost US$1 million to Dominica and St Lucia after the November 2007 earthquake in the region, US$6.3 million to Turks & Caicos in September 2008 arising from Hurricane Ike and US$7.8 million to Haiti for the January 2010 earthquake. Unlike traditional indemnity insurance which often necessitates several weeks adjusting a claim before payment, for the Haiti Earthquake, the loss model calculated the payment and settlement was made 14 days after the claim event occurred. CCRIF is expected to make a payout of over US$4 million to Anguilla due to Hurricane Earl which struck the Island on 31 August 2010.

Recent developments

The success of CCRIF has attracted interest elsewhere. Work is underway with the Caribbean Electric Utilities Services Corporation, a trade association founded in 1989 comprising 33 Caribbean electrical utility companies to establish a similar facility for key electrical utility infrastructure exposures in partnership with CCRIF. CCRIF was featured at the November 2008 Tokyo Conference co-hosted by the Asian Development Bank and the Japanese Ministry of Finance, addressing natural catastrophe risk insurance mechanisms for Asia and the Pacific.

In fact, according to Simon Young, CEO of Caribbean Risk Managers Ltd, “significant progress has already been made in developing a model similar to CCRIF in the South Pacific and discussions are close to finalising the risk modelling work for that region”. In response to demand within the region, CCRIF will be offering parametric excess rainfall coverage to countries by the end of 2010. CCRIF has entered into strategic partnerships with a number of Caribbean entities, for example, with the Caribbean Institute for Meteorology and Hydrology (CIMH) regarding feasibility of new parametric products for the agriculture sectors and the United Nations Economic Commission for Latin America (UN-ECLAC) regarding adaptation to changing climate risk in the Caribbean region. In addition the CCRIF board committed US$1.3 million for the provision of technical assistance to the region.

This included US$500,000 allocated towards the Economics of Climate Adaptation Project – a joint project implemented by CCRIF, the Caribbean Community Climate Change Centre and UN-ECLAC with analytical support from Swiss Reinsurance Company Ltd and McKinsey & Company, Inc. The Technical Assistance Programme also includes the provision of scholarships at the University of West Indies, as well as assistance in studies outside the Region for a number of Caribbean nationals.

CCRIF organisational chart

OrgChart

Future outlook of CCRIF

CCRIF was named Reinsurance Initiative of the Year at The Review Worldwide Reinsurance Awards, held at the Dorchester Hotel in London in September 2008, voted by a panel of reinsurance experts to be “a reinsurance initiative that has generated the most promising change to a significant area of business by showing innovation through a particular transaction, deal or partnership, education or development of a new market or product area by developing a new product, utilising capital markets, a capital-raising initiative or industry lobbying”.
With CCRIF’s excellent start affirmed by such a ringing endorsement, all signs are looking bright for the future.

llyods

Lloyds of London