Natural disasters like earthquakes and hurricanes can have a devastating affect on a developing country’s economy. But in recent years reinsurers have been working along side organisations, such as the World Bank, on innovative solutions that provide governments with much needed funding in the aftermath of a natural disaster.
This growing trend toward regional catastrophe pools gives reinsurers access to new business, but it also provides vital assistance to natural disaster afflicted developing countries.
In 2007 a group of Caribbean countries formed the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a regional catastrophe pool supported by reinsurers to provide cover in the event of a major hurricane or earthquake. The facility now looks set to be replicated in other regions, and could one day be extended to cover other insurances like agriculture.
Mutually beneficial
Regional catastrophe pools like CCRIF provide governments with rapid access to money after a devastating natural catastrophe, such as the recent earthquake in Indonesia, said Trevor Maynard, Manager of the Emerging Risks Team at Lloyd’s. But they also offer reinsurers with a new business opportunity, he added.
“Catastrophe reinsurance in emerging markets is still evolving, but regional pools are an effective way for reinsurers to access attractive business that would otherwise be unavailable to them.”
Facilities like CCRIF are also a stepping stone to the development of emerging insurance markets, Mr. Maynard said. “By fostering a culture of risk transfer and loss prevention, initiatives like CCRIF will help develop regional insurance markets, which are an important part of their wider economic development.”
Counting the cost
Natural catastrophes are costly for governments in terms of physical losses and the loss of revenues, said Reto Schnarwiler, Head of Public Sector at Swiss Re in Zurich. But options to raise desperately needed funds after a major disaster are limited, and so governments have been encouraged to consider alternative solutions, he added.
The Asian Tsunami in December 2004, which killed some 220,000 people and caused economic losses of $15 billion, was a wake-up call for developing countries. The disaster stimulated discussions between governments, development organisations, and reinsurers, he added.
Industry solutions
The first multi-regional facility to provide governments with post catastrophe funding was CCRIF, according to David Simmons at Aon Benfield, which placed the reinsurance cover for the pool.
CCRIF pools the natural catastrophe risks of 16 Caribbean countries into one facility, which buys reinsurance from a group of reinsurers including Hiscox, Partner Re, Munich Re and Swiss Re.
CCRIF, which was developed with funding and support from the World Bank and other donors, has been a real success, said Simmons. The facility has already paid $6.3m to the Turks and Caicos Islands after Hurricane Ike, and has expanded to provide greater coverage at each subsequent renewal, he added.
Beyond CCRIF
The success of CCRIF is expected to be followed in other catastrophe exposed regions, and several initiatives are already under way.
Swiss Re is working with the Inter-American Development Bank to create a natural catastrophe facility in Central America, said Schnarwiler. The deal is in the structuring and risk modelling phase but it is expected to go live early next year.
The deal is a ’next generation’ solution that combines the approaches of past transactions. Under the deal each country will buy its reinsurance through a centralised buying process from a pool of reinsurers, Schnarwiler said.
There are also plans to establish regional pools similar to CCRIF in Asia and Central America. Led by the Alliance of Small Island States (AOSIS) a catastrophe pool is being considered for a group of Pacific islands, and another pool is proposed by the Asian Development Bank to cover the natural catastrophe exposures of large cities in Asia, said Simmons.
Global climate debate
A group of reinsurers, under the Munich Climate Insurance Initiative, has proposed a Climate Insurance Pool for consideration at the December climate change negotiations in Copenhagen, Simmons said. The proposal calls for the creation of an insurance pool to cover some climate related risks, as well as technical and financial support for developing countries.
Pools could also be extended beyond providing governments with liquidity after a catastrophe, said Simmons. Hurricane Dean caused large agricultural losses when it swept across Jamaica in 2007, and although CCRIF was not originally intended to cover private losses, it could be extended to critical sectors such as agriculture or utilities, he said.
The model could also be extended to cover micro insurance schemes in the developing world, where the relative cost and challenges with distribution have limited insurance uptake to date, Simmons added.
Parametric triggers
An interesting feature of the Caribbean Catastrophe Risk Insurance Facility is its use of a parametric trigger. Most insurance and reinsurance contracts are triggered by the policyholder suffering a financial loss, such as damage caused to a building by a storm. With a parametric trigger, claims are triggered by the natural catastrophe itself, for example a certain magnitude earthquake.
Parametric triggers can be an attractive feature for reinsurers, and provide a fair method to evaluate claims without political interference.
