Parametric catastrophe insurance pilot launched for Pacific Islands

A new disaster insurance facility has been officially launched today to provide parametric insurance cover for tropical cyclone (typhoon) and earthquake, including tsunami, risks to a group of Pacific Islands. The pilot project, launched today by the World Bank and the Secretariat of the Pacific Community (SPC) Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) team, covers five Pacific island nations; Marshall Islands, Samoa, Solomon Islands, Tonga, and Vanuatu.

The pilot project has been in development for over a year, we wrote about it in late 2011 here. The pilot, which has been funded by the Government of Japan, will run for two years with the first period running from the 18th January to the 31st October 2013. During this time the five Pacific island nations will receive parametric catastrophe insurance coverage against major tropical cyclones and earthquakes, with the aggregate cover provided to the five islands amounting to around $45m.

“This program offers immediate emergency funding in the aftermath of a major disaster and will help stabilize the Pacific Islands’ economies so their efforts to respond to an emergency situation can be maximized,” said Japan’s Ministry of Finance. “Japan’s participation in this program is in line with our commitment in mainstreaming disaster risk management at the Sendai Dialogue.”

The idea of the project is to protect some of the world’s most natural catastrophe prone nations and enable their governments to recover more quickly when disaster strikes. The parametric nature of the insurance products, with payouts based on actual meteorological and geological factors, will ensure governments can receive a payout promptly after an event meaning the coverage can be directly put into disaster recovery.

The Pacific Catastrophe Risk Insurance Pilot, as it is being called, will test the feasibility of a risk transfer facility modelled on an insurance plan and whether that can help Pacific island nations recover from disaster.

“The Pacific Catastrophe Risk Insurance Pilot is the first of its kind in the Pacific. This is an excellent opportunity to see whether insurance might work for Pacific island countries and to explore options for financing disaster responses in the future,” said Dr. Russell Howorth, Director of the SPC Applied Geosciences and Technology Division.

This is the first Pacific catastrophe insurance scheme to use parametric triggers and link disaster insurance payouts to the occurrence of hazards of specified severity or magnitude. The joint coverage nature of the pilot allows Pacific island governments to access earthquake and tropical cyclone coverage from reinsurance companies at a more accessible price.

“We know all too well the financial impacts of natural disasters and are fortunate to have post-disaster assistance from donor  countries,” said Lisiate ‘Akolo, Minister for Finance and National Planning in Tonga. “This project will allow us to better respond immediately to phenomena like tropical cyclones, earthquakes and tsunamis.”

The portfolio of catastrophe risk has been successfully placed with four international re/insurance companies after a competitive bidding process, Sompo Japan Insurance, Mitsui Sumitomo Insurance, Tokio Marine & Nichido Fire Insurance and Swiss Re. AIR Worldwide have provided risk modelling for the pilot to facilitate the transaction, and we assume will have assisted with trigger design.

The consortium of reinsurers showed strong interest in the risk, according to a release, which demonstrates the appetite the reinsurance market has for this type of product and the underlying risk modelling. By approaching the reinsurance market as a group the premium for the cover is reduced significantly compared to each nation securing their own coverage. The Government of Japan has funded the cover for the first pilot period.

The launch of this facility is a good step forwards in providing predictable, disaster and catastrophe risk transfer for nations who really need it. The cover is not designed to transfer all of a governments disaster risk, rather it is designed as a way to provide disaster recovery funding quickly and efficiently.

“Governments’ access to emergency funding will help them quickly respond to the needs of their affected people,” said Franz Drees-Gross, World Bank Country Director for the Pacific. “It is especially important for vulnerable countries like those in the Pacific, which must frequently deal with natural disasters.”

The pilot is part of a broader project to increase the financial resilience of Pacific island countries against natural disasters. The World Bank has also been looking into a similar facility for southeast Asian nations.