Caribbean catastrophe risk facility seeks to expand to LatAm

by Artemis on March 4, 2014

The Caribbean Catastrophe Risk Insurance Facility (CCRIF), which was the world’s first multi-country catastrophe risk pooling mechanism, is seeking to expand to include Latin American countries and has approached the World Bank for support.

The CCRIF has initiated a project at the World Bank which if successful will see its member countries and the size of the insurance pool grow significantly to include the Dominican Republic and Central American countries. To achieve this goal the project requires $53m in financing.

The CCRIF provides parametric catastrophe insurance policies on a sovereign basis to Caribbean island nations at the moment. Coverage is available for tropical storms and hurricanes, earthquakes and also extreme rainfall. The CCRIF also offers a microinsurance policy direct to consumers which includes weather and disaster cover, again on a parametric trigger basis.

The policies offered by the CCRIF are only possible due to the pooling of country risks to achieve better pricing in the reinsurance market. Without the support of the international reinsurance market it would not be possible to underwrite the sovereign risks and by pooling the risks global reinsurers are able to price the parametric cover sufficiently cheap enough to make the whole facility viable.

THe CCRIF notes that in the Caribbean, damage and losses associated with large-scale catastrophic events like earthquakes and hurricanes between 1990 and 2008 are estimated to be at least US$23 billion. In the same period, the Central American region suffered close to US$21 billion in catastrophe related damages and losses.

Earthquakes are associated with the greatest probably maximum loss events to governments in the region, but extreme rainfall
has been known to cause the greatest accumulated losses to certain countries in the Caribbean basin. In fact the CCRIF says that hydro-meteorological disasters cause economic damages equivalent to more than one percent of national GDP per year for 14 countries in the area.

The idea of pooling catastrophe risk, to get better reinsurance pricing and thus be able to offer the sovereign insurance policies, is to give participating governments access to quick liquidity following a catastrophic event.The CCRIF helps participating governments to access this liquidity from the global reinsurance and capital markets, solving some of the immediate post-disaster cash-flow problems.

Hence the parametric nature of the insurance policy triggers, which do not require lengthy claims assessment or validation and enable the payouts to be made rapidly to help immediate disaster recovery.

By bringing new countries into the CCRIF risk pool and expanding the membership, the result will be a further diversification of the risk pool, which will improve the sustainability of the CCRIF while enabling all members existing and new to access cheaper cover due to the larger pool being reinsured.

The CCRIF also hopes that by adding more members to the pool it will be able to make its excess rainfall insurance product more affordable to its members and help to expand its uptake.

If the project goes ahead the CCRIF could become the Central America & Caribbean Catastrophe Risk Insurance Facility, with an increase in its membership from the 16 of today to 23, with the addition of COSEFIN countries Costa Rica, Guatemala, El Salvador, Honduras, Nicaragua, Panama and the Dominican Republic.

That would make the catastrophe risk pool significantly larger and more diverse. This could be very attractive to traditional reinsurers looking to grow premiums, especially under competition from alternative reinsurance capital, which might help to make the reinsurance costs lower as well. Of course, as the risk pool grows it will also become more attractive to the capital markets, with catastrophe bonds a possibility and to collateralized reinsurance players as well.

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