Parametric sovereign risk pools to explore joint reinsurance facility, capital markets access

In what could turn out to be a ground-breaking development, parametric disaster insurance risk pools African Risk Capacity Limited (ARC), Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC), the Pacific Catastrophe Risk Insurance Company (PCRIC), and the Southeast Asia Disaster Risk Insurance Facility (SEADRIF), have signed an MOU and will explore a joint reinsurance facility to facilitate access to the capital markets.

The four organisations form the Sovereign Risk Pools, which were set up to serve the sovereign climate and disaster risk insurance objectives of nearly 100 nations globally.

At a recent summit jointly hosted by the Centre for Disaster Protection and Gallagher Re, the Sovereign Risk Pools, which all provide parametric disaster insurance to their members, signed a memorandum of understanding (MOU) to drive further collaboration among the group.

Under the MOU, ARC, CCRIF, PCRIC and SEADRIF agreed to:

• establish principles defining development insurance programmes;
• use pre-arranged finance to support SDG country development objectives, including protecting vulnerable populations;
• accelerate innovation;
• expand access to disaster risk finance for public benefit; and
• to seek the capital required to reach scale globally.

Those last two are the critical items, expanding the access to disaster insurance protection and securing the risk capital that can help to drive broader adoption and increase access to parametric risk transfer.

Of course, for these pools there is also a need for donor funding, to assist in helping member countries to pay premiums for risk transfer, at least at the start.

But just as, if not more, important, is the availability of efficient reinsurance risk capital and the fact any efforts to jointly access reinsurance and perhaps capital markets would provide greater risk diversification to the pool, allowing greater capital efficiencies to be realised.

At the summit, these parametric sovereign risk pools confirmed their shared interest in exploring how a joint reinsurance facility could help them, by providing global risk transfer access to global capital markets.

Accessing the capital markets is seen as a key in addition to the base capital required to enable the provision of expanded insurance offerings to countries buying parametric protection.

“We are pleased that the pools also agreed to collaborate more extensively to develop parametric models and to further explore meso- micro and replica schemes to complement sovereign-level risk transfer,” commented ARC Ltd. CEO Lesley Ndlovu. “This is our area of expertise, and where we can share knowledge and best practices.”

Of course, capital markets and insurance-linked securities (ILS) capacity has played a role for some of these risk pools reinsurance arrangements in the past.

The CCRIF, for example had benefited from a small private catastrophe bond with the support of the World Bank.

While, for ARC, at one stage ILS players such as Nephila Capital had provided reinsurance to support its growth.

A larger, more global risk pool, derived across these parametric sovereign pools, may be able to benefit from its scale and diversification to access capital markets more meaningfully, and perhaps with greater efficiency as well.

A global parametric catastrophe bond could be a compelling offer for the insurance-linked securities (ILS) investor community, however the cost of accessing the capital markets will remain a challenge for these risk pools, meaning the help of entities such as the World Bank will be vital.