Further details on the Dominican Republic catastrophe insurance facility

by Artemis on February 23, 2011

We’ve followed up on our story from last Friday about the cooperative efforts between the Inter-American Development Bank (IDB) and reinsurer Swiss Re to create a catastrophe insurance facility for the Dominican Republic. We spoke with Guillermo Collich, a principal financial markets specialist at the IDB to get a better understanding of the proposed facility.

First we asked Guillermo how the transaction was going to be structured. He said “It is structured as a parametric insurance policy issued by the captive. The captive, in turn, is expected to retain only about 5% of the coverage, transferring the rest to the reinsurance/capital markets through, depending on the market conditions, classical reinsurance and/or an ISL product.” That suggests that decisions as to whether this facility will involve catastrophe bonds have yet to be taken and all options are being looked at to secure the most effective cover possible.

On the subject of the captive (or special purpose) insurer that this transaction will use, Guillermo commented “The name has not been fully defined yet but, almost certainly “Dominican Republic Insurance Facility” will be part of it. Domicile also to be formally defined, but it will be a very prestigious off-shore captive domicile in an IDB Member Country of the Caribbean Region.”

The information we have so far suggests that this facility will cover hurricane and earthquake risks. We asked Guillermo whether other risks that the Dominican Republic faces such as flooding and tropical storms which don’t reach hurricane status would be included. He responded “Eventually, after the first coverage is in place, other public risk coverages could be developed by and through the facility.”

On the subject of the trigger mechanism and risk models the facility will use he said that the parametric trigger would utilise a combination of the actual intensity of a hurricane or earthquake event and the percentage of the population who were affected. Commercial parametric disaster risk models will be used, the same as international carriers and reinsurers in the region use.

The IDB are willing to support any other borrowing member countries (BMC) who seek to protect themselves against natural disasters and for whom a similar facility may be appropriate. According to Guillermo the IDB are already considering requests from two other BMC in Central America.

Guillermo concluded “The facility is part of a five years Integrated Natural Disaster Risk Management Plan, being implemented by the Dominican Republic with IDB support. This Plan also includes policy activities and investments in disaster risk prevention and reduction, emergency preparedness, as well as domestic insurance markets development.”

As we said in our previous article the hope is that the facility will be ready and in place in time for the Atlantic hurricane season. It seems that a very sensible and pragmatic approach is being taken to ensure that the best methods of risk transfer are utilised and all options are considered. We look forward to being able to bring you updates as this deal progresses towards completion.

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