The Pacific Catastrophe Risk Insurance Pilot, which provides parametric insurance cover for tropical cyclone (typhoon) and earthquake, including tsunami, risks to a group of Pacific Islands, has made its first payout to Tonga after cyclone Ian.
The World Bank announced today that Tonga will receive an immediate payout of US $1.27 million to aid its recovery from Category 5 Cyclone Ian, which hit Tonga’s Ha’apai island group on January 11th and 12th of 2014 Cyclone Ian caused one death, displaced thousands and caused significant damage to crops and infrastructure. Some reports suggest that as much as 75% of buildings in some parts of Ha’apai were damaged, as well as power and communication networks.
This is a great example of why parametric triggers are so useful within insurance and reinsurance, allowing for a rapid payout to the policyholder affected by the catastrophe event. Parametric triggers are widely used in developing economies to provide rapid financial assistance after events, this is also why parametric triggers are suitable as an additional source of coverage in any catastrophe or severe weather prone region of the world, providing a payout directly linked to the severity of an event.
“Cyclone Ian has affected hundreds of families in several communities, destroying people’s homes and critical infrastructure such as health centers and schools,” commented Franz Drees-Gross, World Bank Country Director for the Pacific Islands. “Funds received under the scheme will allow the government to meet some of those urgent needs as they look to repair and rebuild in the days and weeks ahead.”
“The cash received from the catastrophe risk insurance pilot makes an important financial contribution for carrying out the government strategy for mitigating natural disasters, to ensure that response efforts to help the people of Ha’apai recover and return to their normal everyday lives can continue without interruption or delay,” said Minister of Finance and National Planning in Tonga, Hon. Dr. ‘Aisake Valu Eke.
There are six Pacific island nations currently signed up to the Pacific Catastrophe Risk Insurance Pilot, Tonga, Marshall Islands, Samoa, Solomon Islands, Vanuatu and most recent member the Cook Islands.
The World Bank acts as an intermediary between Pacific island countries and a group of reinsurance firms who ultimately provide the protection, Sompo Japan Insurance, Mitsui Sumitomo Insurance, Tokio Marine & Nichido Fire Insurance and Swiss Re. The Government of Japan currently co-finances the insurance premiums of Tonga, Marshall Islands, Samoa, Solomon Islands and Vanuatu, while the Cook Islands fully fund their insurance premium themselves.
Disaster insurance coverage is much-needed by these nations, with some Pacific islands among the most exposed to natural catastrophes with average annual losses from disasters as high as 6.6% of GDP. Parametric triggers, which make payouts predictable and quick, provide a valuable risk financing mechanism.
The parametric Pacific Catastrophe Risk Insurance Pilot recently renewed its policies for the original five members and added the Cook Islands as a sixth.