Artemis interview: Simon Young, CEO, Caribbean Risk Managers Ltd (CaribRM)

Our latest interview is with Simon Young, CEO of Caribbean Risk Managers Ltd. (CaribRM), a risk management consultancy firm who provide services such as hazard and risk modelling, business analytics, GIS-based data management systems, and risk surveying and control solutions. CaribRM are also facility supervisors for the Caribbean Catastrophe Risk Insurance Facility. As such we thought it would be interesting for our readers to hear more about this unique facility and the work of CaribRM.

Can you explain the structure of the CCRIF and how that has evolved to date to meet the covered countries needs?

CCRIF is a public-private partnership which operates on behalf of its member governments. It sits within the private sector, as a captive insurer domiciled in the Cayman Islands, but was capitalised by donor and member contributions. The company is owned by a Trust, whose Deed controls the broad parameters of the operations as well as dictating selection of a five-person board of directors, four of whom are from the Caribbean region. The ultimate beneficiaries of the Trust are the member countries. CCRIF is a virtual entity, which has a number of service provider companies providing the operational support. Caribbean Risk Managers, as Facility Supervisor, provide the core operational and risk management services and manage other service providers. The CCRIF set-up is low-cost, and the company’s aim is to maintain excellent security for its policyholders while minimising their premium costs.

The structure has been relatively stable since CCRIF began operations in 2007, although its Operations Manual has seen a number of changes to improve operational efficiencies. One key change has been in the form of the hurricane and earthquake policies sold to countries; CCRIF developed its own catastrophe modelling platform and now provides modelled-loss rather than index parametric products, with the aim of reducing basis risk to countries purchasing coverage.

Can you foresee any future evolutions in the structure?

CCRIF currently only serves sovereign governments. However, we envisage a diversification to sub-national public sector entities and also towards the private sector, particularly in areas where a key national interest is served and where current insurance markets are sub-optimal. An example is the work CCRIF is undertaking in partnership with the regional electrical utility association, CARILEC, to provide index-based wind coverage for overhead transmission and distribution systems. We are also seeking to expand the policy types on offer and also to bring new countries into CCRIF.

There have been a few instances where countries haven’t received payouts from the CCRIF due to the storm not meeting the set triggers. However these storms have caused significant damage to those countries (sometimes more so than if they did meet the trigger). How does the CCRIF intend to address these issues?

There are two issues at play, both of which are receiving substantial and ongoing attention from CCRIF. One is the fact that CCRIF coverage is designed to provide interim liquidity to countries after major events that impact the national economy. As such, CCRIF policies have a high deductible (chosen, above a minimum level set by CCRIF, by countries themselves) and are relatively modest in their coverage limit (again selected by each country individually) compared to the full national exposure. The challenge for CCRIF and for countries is the transition from reliance on post-disaster aid to self-financed pre-disaster insurance and risk reduction investment. CCRIF is working hard with other institutional partners to build capacity within governments regarding the need for holistic sovereign risk management, and also with donors in raising awareness of the financial efficiencies of ex-ante risk financing and also the great benefits that CCRIF’s rapid payouts provide when compared to sporadic and generally slow ex-post financing.

The second issue is that of basis risk, the difference between CCRIF’s model-based assessment of losses (against which CCRIF settles policy payments) and actual (or at least perceived) losses on the ground. CCRIF is again working hard to build understanding of how losses develop, how catastrophe risk models attempt to replicate loss generation, and how the rapid payments possible under parametric contracts benefit policyholders. The change, for the 2010-11 policy year, to a modelled loss approach has also reduced basis risk, and CCRIF continues to invest in research and development to improve the models and also to support regional institutions in gathering better hazard and impact data for large natural catastrophe events, which in turn will improve understanding and, ultimately, overall management of the risk.

You’re going to be launching a rainfall product soon which will help address some of the concerns above. When will it be available and can you tell us some more about its structure?

The excess rainfall product has been technically challenging to develop due to the insufficient ground-based data collection network at the regional level and the fact that remotely-sensed rainfall measures are not at sufficiently high resolution to underpin an index-based rainfall trigger across the Caribbean. We have therefore built a 6-hourly regional rainfall model at 4km resolution utilising existing weather models and with a 60-year climatology based on US National Climate Data Center data. The final stage of the process is to convert rainfall amounts into estimates of impact on government assets at the drainage basin level, with the final product offered being a rainfall index policy. We aim to start discussions with some key countries early in 2011 with a view to having some policies go into effect on 1 June 2011 and then to build out the product to serve the whole region by 2012. We also see the rainfall model underpinning other policy types, for instance to serve agricultural risk management needs at the national and sub-national level. The raw rainfall data from the model will also be made available to the region in real time so greatly enhancing the available rainfall data set.

Do you intend to expand the CCRIF model to other regions of the world?

There are several initiatives under way which use the core ideas developed and implemented by CCRIF as a basis for sovereign parametric risk pool development; Central America, the Pacific and Africa are all regions where work is under way. CCRIF and the experience of index-based insurance tools has also attained a high profile at the global climate change negotiations, with risk pools forming a useful tool for climate change adaptation when operated alongside risk reduction plans.

Do you think the CCRIF will expand to cover any other perils?

CCRIF is currently concentrating on completion of the rainfall model and policies, and we believe that these and our other policies will continue to require periodic revision to keep on meeting the needs of our clients and reinsurers. However, our R&D programme also covers work on other policy types, and new perils could potentially be covered in the future.

As well as looking after the CCRIF, do Caribbean Risk Managers have any other interests in the alternative and index-linked markets?

In addition to being the Facility Supervisor of CCRIF, CaribRM is involved in a number of other projects in the Caribbean and beyond, aimed at broadening the reach of index-based products. We are working on an index-based insurance programme to support microcredit in Haiti, on several national and regional projects to support development of index-based products for agriculture, and on some index-based products to serve particular needs in the private sector both at the retail and wholesale level. We have also advised the Caribbean region during the UN-FCCC negotiations on adaptation, and have helped to implement projects looking at the economics of climate adaptation.

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Our thanks go to Simon for taking the time to give us this insight into the CCRIF and the work of CaribRM.

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