Proposed legislation in the U.S. state of Hawaii aims to establish a parametric disaster insurance pilot program to transfer its growing hurricane risk to the private insurance and reinsurance markets, which could include capital markets-backed capacity.
The bill explains that Hawaii is extremely exposed to natural disaster events such as hurricanes, of which its investment in post-disaster financing and disaster preparedness is disproportionate.
Currently, Hawaii relies on the U.S. National Flood Insurance Program (NFIP) and the Federal Emergency Management Agency (FEMA) for disaster recovery funding and assistance.
While valuable, limited federal disaster assistance contributes to a liquidity gap, says the legislature, which exacerbates the post-disaster economic disruption for the region. Furthermore, federal funding can take time to get to the people who need it the most following a large catastrophe event; something a parametric solution has the potential to reverse.
“The legislature finds that the establishment of a parametric disaster insurance pilot program could reduce Hawaii’s financial exposure and compensate the State based on the physical characteristics of a catastrophic natural disaster. The payment would not be subject to the limitations faced by federal disaster relief and can be used for any purpose, such as emergency response costs, replacing lost tax revenue, and funding of increased insurance costs,” states the bill.
Specifically, the bill proposes the establishment of a three-year parametric disaster insurance pilot program within the Department of Accounting and General Services (DAGS), and a parametric disaster insurance special fund.
The pilot program would explore parametric insurance policies for Hawaii, purchase parametric disaster insurance for the state, and receive and distribute moneys in the parametric disaster insurance special fund.
While the special fund shall have deposited into it interest earned from the principal in Hawaii’s hurricane reserve trust fund, moneys received from the payout of a parametric disaster insurance policy, and appropriations made by the legislature to the fund.
Essentially, Hawaii is looking to establish a parametric disaster insurance scheme similar to that of the CCRIF SPC, utilising global insurance and reinsurance capacity to protect Hawaiian islands’ from the increasing risk of hurricanes.
As with the CCRIF SPC and some other catastrophe risk insurance schemes, such as the Turkish Catastrophe Insurance pool (TCIP), there could be an opportunity for the insurance-linked securities (ILS) space, such as catastrophe bonds, to provide some of the capacity for such a residual market in Hawaii.
Underlining the potential impact and cost of a strong hurricane reaching the shores of the Hawaiian islands, the bill says that overall (economic and insured) losses from a landfalling storm near Waikiki as strong as hurricane Iniki (1992) would be between $20 billion and $40 billion.
Which, says the bill, is almost half of the state’s gross domestic product (GDP). Suggesting that Hawaii simply isn’t prepared for, or equipped to absorb billions of dollars worth of damages.
Parametric structured insurance solutions, which are common in the insurance-linked securities (ILS) space and utilised by a number of catastrophe risk insurance and reinsurance pools/schemes, such as ARC, and the aforementioned CCRIF SPC and TCIP, amongst others, enables rapid payout post-event.
This is of a particular benefit for poorer regions and those in need of fast, post-event financing. As the bill explains, parametric insurance triggers when a predetermined event, such as a hurricane, passes through a pre-set location at a certain intensity, for example.
“Unlike traditional insurance, parametric solutions do not require lengthy loss adjustment processes, and they enable rapid disbursements of payouts to maximize liquidity and allow for flexibility in the use of the proceeds,” says the bill.
The bill is still awaiting approval, and should this be achieved it would be repealed on June 30th, 2020, explains the legislature.
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