Caribbean regional catastrophe bond back on the agenda

by Artemis on November 30, 2017

Following the devastating impacts of hurricanes Irma and Maria in the Caribbean discussion has once again turned to how to secure an increased amount of parametric disaster risk financing for the region, with a regional catastrophe bond issuance rising up the agenda once again.

Hurricanes Irma and Maria caused complete destruction to a number of Caribbean islands and widespread damage across much of the region, resulting in what is likely to be the largest Caribbean insurance and reinsurance industry loss in history.

The CCRIF SPC (or Caribbean Catastrophe Risk Insurance Facility) experienced the biggest year of payouts in its history, with a total of $61.5 million paid to Caribbean nations, including $30.8 million for Hurricane Irma and $23.6 million for Hurricane Maria.

This risk capital, which was all disbursed rapidly within 14 days of each catastrophe event, is still insufficient when countries face billions of dollars worth of economic damage.

Dominica was one of the worst hit Caribbean islands, where economic damages from hurricanes are thought to have reached as high as 200% of GDP, according to the World Bank, while Antigua & Barbuda are thought to have suffered an impact costing at least 20% of GDP.

Damage costs this high require much more capital to be made available for the immediate recovery, the area where parametric triggers can come into their own.

But the CCRIF’s coverage alone, while extremely beneficial, is in reality a drop in the ocean compared to what is required.

This is leading Caribbean nations to look to the capital markets and the example set by the experience of countries such as Mexico, which benefited from two payouts under catastrophe bonds in recent years. The first a $50 million payout from hurricane Patricia’s impacts in 2015, while the second and more recent $150 million payout was for the first major earthquake that struck the country in September.

There is a clear need for greater amounts of disaster risk capital to be mobilised to help Caribbean nations when hurricanes of this magnitude strike the region. With earthquake risk also an exposure with the potential to cause billions of damages, it seems that the catastrophe bond market could be an appropriate capital pool that has the appetite to support the regions disaster risk financing needs.

The Caribbean Community (CARICOM) has identified roughly $10 billion of hurricane damages across the region, a knock to GDP that will take the impacted nations years to recover from and this has led to discussions of how the capital markets could assist in taking on some of this risk in future, according to a report from Latinamerica Press.

A regional Caribbean catastrophe bond could at least provide a much larger injection of post-disaster liquidity, in a similar manner to the CCRIF, perhaps as a reinsurance backstop for the regional parametric insurer, or as a separate initiative.

The first Caribbean regional cat bond was issued as a supporting source of reinsurance capacity for the CCRIF in 2014 and we could see a similar issuance next year, we understand, depending on prices at reinsurance renewals and how the capital markets compares in terms of costs.

Governments in the region are beginning to discuss how a Caribbean regional cat bond could be issued and we understand that some discussions with the World Bank have taken place.

The Dominican Republic recently secured a $150 million Catastrophe Deferred Drawdown Option (Cat DDO) supported by the World Bank, while other countries have looked at the same. But a multi-country, regional catastrophe bond could provide a similarly efficient source of post-disaster risk financing liquidity.

Cost is of course a major factor, as the Caribbean nations do not have significant budgets to put to use as insurance or reinsurance premiums at the best of times and after such major economic losses the additional burden will be a challenge to meet.

Working with the World Bank could help the Caribbean to get a multi-country catastrophe bond off the ground, either as a standalone additional regional disaster risk coverage or as a reinsurance backstop to the CCRIF.

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