CCRIF SPC (formerly the Caribbean Catastrophe Risk Insurance Facility) has signed a memorandum of understanding with COSEFIN to allow Central American countries to join the sovereign catastrophe risk insurance pool. Nicaragua will be the first country to join.
The Council of Ministers of Finance of Central America, Panama and the Dominican Republic (COSEFIN) represents countries in the region which are not currently easily able to access catastrophe insurance or reinsurance capacity. With the help of CCRIF SPC these countries will be able to purchase high quality and lower cost sovereign catastrophe risk capacity.
By expanding to cover Central America as well as the Caribbean, CCRIF SPC will further grow and diversify its pool of sovereign catastrophe risks. This should enable the pool to further reduce its costs in terms of reinsurance protection, which should ultimately help to keep the overall cost lower to member nations.
Nicaragua has signed a Participation Agreement enabling it to become the first Central American country to formally join the catastrophe risk facility. Other members COSEFIN are expected to join CCRIF SPC later this year and in 2016.
“For Nicaragua, it is an honor to be the first member of COSEFIN countries to join the CCRIF. This insurance will allow us to strengthen financial resilience to natural disasters and continue our efforts to reduce poverty and respond to climate change challenges as part of our National Human Development Plan,” commented Ivan Acosta, Minister of Finance of Nicaragua.
Established back in 2007, there are now 16 Caribbean countries are members of CCRIF SPC, benefitting from parametric insurance products covering tropical storm and hurricane risks, earthquake risks or excess rainfall risks.
The risk pooling facility helps its members to access post-event risk financing, based on the actual event parameters, with a rapid payout and disbursement of as little as two weeks possible. This enables countries to access financing for recovery from natural catastrophes, while benefitting from cheaper premiums due to the risk pooling nature.
By pooling the catastrophe risks across the region, CCRIF SPC can access the reinsurance and insurance-linked securities (ILS) markets more cheaply. CCRIF SPC uses traditional reinsurance and capital markets backed fully-collateralized protection, becoming the first entity to use the World Bank’s new catastrophe bond facility last year with a $30m World Bank – CCRIF 2014-1 deal.
COSEFIN brings seven new potential members to CCRIF SPC, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, and the Dominican Republic. If all join it would take the total membership to 23, greatly enlarging the risk pool and providing enhanced access to sovereign catastrophe risk insurance for both existing and new members.
CCRIF SPC explains; “This new 23-nation partnership will benefit both existing and new CCRIF members, providing low prices due to more efficient use of capital and insurance market instruments. New members will be able to take advantage of CCRIF’s low premium costs and existing members could realize premium reductions due to the increased size of the CCRIF portfolio.”
“After exploring options for engaging in sovereign disaster risk financing, Central American countries concluded that joining the CCRIF SPC facility was the most efficient and cost-effective insurance mechanism to pool our risk,” said Martín Portillo, Executive Secretary of COSEFIN. “This will allow us to reduce our countries’ fiscal vulnerability to the adverse effects associated with earthquakes, tropical cyclones, excess rainfall and other events.”
Demonstrating the need for this catastrophe insurance, nine countries in Central America and the Caribbean have experienced at least one event that caused an economic impact of more than 50% of their annual gross domestic product (GDP) since 1980.
Climate change is also a significant concern, with average annual economic losses from weather-related disasters amounting to 1% or more of GDP in ten Caribbean countries and four Central American nations, including Nicaragua.
All three of CCRIF SPC’s products will be attractive to the COSEFIN countries, but particularly perhaps the excess rainfall as these nations suffer greatly from tropical storm impacts where the rainfall can often be the greatest cause of damage.
“We foresee a range of benefits to both regions emanating from this partnership,” said Milo Pearson, Chairman of CCRIF SPC, “including the creation of a strategic mechanism in which Caribbean and COSEFIN countries can share best practices in disaster risk management and learn lessons from each other in advancing collaborative approaches to reducing vulnerabilities to hazards, alleviating poverty, enhancing debt and financial sustainability and creating a framework for the sustainable prosperity of the countries of both regions.”
The World Bank supplied resources to finance entrance fees to CCRIF SPC for both Honduras and Nicaragua, as well as annual insurance premiums for four years.
“This a real example of a regional public good where collective action has clear financial benefits and can help countries tackle the adverse impacts of climate change,” commented Jorge Familiar, World Bank Vice President for Latin America and the Caribbean. “We look forward to deepening our engagement with COSEFIN, CARICOM and CCRIF as part of this ambitious regional initiative.”
The growth of CCRIF SPC will bring more diversifying catastrophe risk to the reinsurance and capital markets, perhaps in the future resulting in a larger catastrophe bond for the facility.