Caribbean Catastrophe Risk Insurance Facility excess rainfall product begins roll-out

Roll-out has begun for a long-awaited excess rainfall parametric insurance product from the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the catastrophe risk pooling facility who provide parametric based disaster insurance cover to Caribbean countries. The product has been in development for a number of years but the CCRIF is now in discussion with the donors who support the facility to help fund roll-out of the product.

The new excess rainfall product has been created with the assistance of reinsurer Swiss Re and has been designed to complement the existing CCRIF tropical storm and hurricane wind protection product, which protects against wind and storm surge losses. The excess rainfall will fill a gap in the protection that the tropical storm and hurricane product fails to fill, where a tropical depression does not feature strong enough wind speeds to trigger the insurance but the torrential rainfall creates a significant loss. Now Caribbean countries will be able to cover the risks of heavy rainfall and the related hazards of rainfall induced flooding and landslides from storms that do not have damaging winds.

The CCRIF hosted a strategic donor meeting at the offices of the Caribbean Development Bank just over a week ago, at which it brought together the organisations who help support the facility to discuss ways to support the roll-out of the new excess rainfall product. Discussion about the CCRIF/Swiss Re Excess Rainfall product, which is now being made available to all CARICOM countries, revolved around potential donor support to enable Caribbean countries to take advantage of the product.

The donors were reportedly impressed with the new excess rainfall product and its potential to help Caribbean countries, including those not at risk of hurricane such as Guyana and Suriname. The donors committed to examine how they could assist with the roll-out of the CCRIF/Swiss Re Excess Rainfall product.

The excess rainfall product has been specifically designed to protect against extreme high rainfall events with a short duration of up to a few days. The product is underpinned by parametric estimation of the impacts of heavy rainfall using rainfall data from satellites (historical to estimate probabilities/pricing and real-time to calculate estimated index losses and payouts), exposure data from the CCRIF Multi-Peril Risk Estimation System (MPRES) database and vulnerability data using empirical fitting of historical impact information.

The product faced a number of challenges due to the complexity of creating a rainfall model which the international reinsurance community would buy into enough to provide the backing. Due to the new structure being used it took the CCRIF some time to get reinsurers comfortable with the product as well.

The product utilises a trigger based on rainfall totals over an aggregate number of days, then using a vulnerability model the rainfall totals are mapped to loss percentages followed by the calculation of index values on both local and finally a national level to determine a loss amount. National losses are aggregated on an annual basis which means that the excess rainfall product can be structured to allow coverage to be offered on a per-event or on an annual aggregate basis at the national level. Rainfall risk profiles have also been created for each of the likely participating countries.

The CCRIF describes payout as being calculated thus:

A payout to a country depends on the peak 5-day rainfall for the event, the distribution of high rainfall relative to exposure, and the proportion of the country/exposure impacted. Once the index loss gets above the attachment point (either for a single event for event coverage or in the cumulative annual aggregate for the aggregate coverage) then the payout increases as the index loss increases, until the maximum payout (coverage limit) has been reached.

The premium a country will pay for the CCRIF/Swiss Re Excess Rainfall product will be determined based on the amount of coverage a country decides to take, the attachment and exhaustion points of that coverage, and the rainfall risk profile of the country. The frequency with which rainfall events breach the attachment point in a historical analysis will allow the pricing to be tweaked to suit different countries rainfall risk profiles.

We aren’t as yet aware whether any countries have bought into the excess rainfall policy yet but suspect that it will be adopted by a number of countries prior to the beginning of the 2013 Atlantic Hurricane Season.