Lloyd’s Notes Success of Regional Catastrophe Pools, CCRIF

October 26, 2009

An article on the Lloyd’s of London web site (www.lloyds.com) discusses the success of an “innovative solution” which can make funding available to governments in the aftermath of a natural disaster.

Disasters such as earthquakes and hurricanes “can have a devastating affect on a developing country’s economy,” said Lloyd’s. “But in recent years reinsurers have been working alongside organizations, such as the World Bank, on innovative solutions.”

The article focuses on the growth of regional catastrophe pools, which, it points out, also “gives reinsurers access to new business,” as well as providing vital relief to poorer countries struck by natural disasters.

The prime example cited is the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which was established in 2007 by a group of Caribbean countries. Munich Re, in cooperation with the World Bank, headed the syndicate which funded the first coverage [See IJ Web site – https://www.insurancejournal.com/news/international/2007/06/01/80267.htm].

Lloyd’s notes that the “facility now looks set to be replicated in other regions, and could one day be extended to cover other insurances like agriculture.”

Trevor Maynard, Manager of the Emerging Risks Team at Lloyd’s. noted that such facilities provide both “rapid access to money,” following a disaster, “offer reinsurers with a new business opportunity.” He described the growth of regional catastrophe pools like CCRIF as “still evolving,” and as “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, Maynard added. “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.”

One of the few positive results to emerge from such disasters as the earthquake and tsunami in December 2004, which killed some 220,000 people and caused economic losses of $15 billion, is the recognition that cooperative solutions should be put in place to meet the challenges of future catastrophes.

Reto Schnarwiler, Head of Public Sector at Swiss Re in Zurich, noted that options to raise desperately needed funds after a major disaster are limited, and so governments have been encouraged to consider alternative solutions. He described the tsunami as a wake-up call for developing countries. The disaster stimulated discussions between governments, development organizations, and reinsurers, he added.

David Simmons at Aon Benfield, which placed the reinsurance cover for the CCRIF pool, pointed out that it was the first such multi-regional facility to provide governments with post catastrophe funding. The 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.

The CCRIFs success is expected to be followed in other catastrophe exposed regions, and several initiatives are already under way.

Schnarwiler cited Swiss Re’s “working with the Inter-American Development Bank to create a natural catastrophe facility in Central America. The deal is in the structuring and risk modeling phase but it is expected to go live early next year.

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, Simmons observed.

There are also proposals to develop a “Climate Insurance Pool,” which could be presented for consideration at the December climate change negotiations in Copenhagen, Simmons added. 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 continued.

Lloyd’s notes that, unlike classic reinsurance policies the CCRIF employs “a parametric trigger” to assess losses. Such an arrangement triggers claims by the force of the natural catastrophe itself, for example a certain magnitude earthquake. Their use “can be an attractive feature for reinsurers,” Lloyd’s indicated, “and provide a fair method to evaluate claims without political interference.”

Source: Lloyd’s

[IJ Ed. Note: More information on the CCRIF is available via the IJ web site “site search.”

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