Reinsurance backs World Bank parametric Pacific catastrophe facility

The World Bank has announced that the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) has renewed for its fifth season and transitioned into phase II, with the establishment of its own captive insurer.

For its fifth season, the PCRAFI has secured Pacific Island Countries (PICs) with coverage of $38.2 million from a range of reinsurance companies, including Swiss Re, Munich Re, Tokio Marine & Nichido Fire Insurance, Sompo Japan Nipponkoa Insurance, and Mitsui Sumitomo Insurance.

The coverage protects member states against tropical cyclones, earthquakes and tsunamis, explains the World Bank, and has now entered its second phase, which has seen the establishment of the PCRAFI Facility, which acts as a captive insurance company that will deliver the parametric insurance solutions to individual countries.

The Facility was established in the Cook Islands in June 2016, receiving its captive insurance licence on September 22^nd 2016, and will deliver insurance policies to individual member states of the PCRAFI, similar to that seen with the CCRIF SPC in the Caribbean.

Essentially, the PCRAFI Facility is the schemes own captive insurer that we assume will enable the risks of member countries to be pooled together and for the initiative to then access the reinsurance marketplace more efficiently to secure the protection it needs.

This kind of approach makes sense, and is seen with the CCRIF SPC, and should allow individual countries to secure more specific and efficient coverage against tsunami, tropical cyclone, or earthquake risks, and even lead to product expansion in the future.

So far, the World Bank reveals that the PCRAFI Facility has issued its first insurance policies to the Cook Islands, Marshall Islands, Tonga, Samoa and Vanuatu, which will be supplemented by the $38.2 million of reinsurance protection, as noted earlier.

“The PCRAFI Facility forms part of Phase II of the PCRAFI program, which aims to increase the fiscal resilience of Pacific Island countries and their capacity to meet post-disaster funding needs without compromising domestic budgets.

“The Facility also affords Pacific Island countries greater ownership of disaster and climate risk financing – meaning more control and influence over the design of future disaster and climate risk solutions,” explained Michel Kerf, World Bank Country Director for Timor-Leste, Papua New Guinea and the Pacific Islands.

The effectiveness of the programme can be seen with payouts from Cyclone Ian in 2014 and Cyclone Pam in 2015. The former event resulted in member country Tonga receiving a payout of $1.27 million to aid its recovery, while Cyclone Pam resulted in a $1.9 million payout to Vanuatu after triggering the parametric risk pooling facility.

Certain Pacific Islands are some of the most exposed to natural catastrophe events throughout the globe, so disaster insurance coverage is vital in these regions. At the same time, income can be low for citizens and disposable income for governments limited, so it’s important that schemes such as the PCRAFI operate in the most efficient manner possible, something that will likely be supported by the transition to phase II of the scheme.

Cook Islands Minister of Finance and Economic Management Hon. Mark Brown, said; “We are pleased the PCRAFI Facility has been established to assist in providing Pacific Islands countries with insurance coverage against tropical cyclones and earthquakes.

“We look forward to the Facility growing and developing additional products to help us better meet our post-disaster financial needs in the Pacific region.”

According to the World Bank, during its first year of operations the PCRAFI Facility will receive $6 million in capital from the PCRAFI Multi-Donor Trust Fund, which will support a scheme of technical assistance to bolster the institutional capacity of the PCRAFI Facility.

The PCRAFI Multi-Donor Trust Fund sees the World Bank serve as trustee, and will also receive funding support from the U.S., UK, Germany, and Japan, “building on the more than US$40 million in grant funding the four donors have provided to Pacific Island countries under the G7 InsuResilience Initiative,” says the World Bank.

The announcement from the World Bank regarding both the renewal of the scheme for its fifth year and the launch of the PCRAFI Facility provides some insight into the second phase of the initiative. Noting that this phase is designed to “increase the fiscal resilience of Pacific Island countries and their capacity to meet post disaster funding needs without compromising domestic budgets.”

“The second phase of the program focuses only on disaster risk finance and is comprised of two pillars, (i) the PCRAFI Facility, and (ii) the PCRAFI Technical Assistance Program. Phase II of PCRAFI is a joint initiative of the World Bank, Pacific Islands Forum Secretariat and the Secretariat of the Pacific Community, with financial support from Germany, Japan, the United States and the United Kingdom,” explained the World Bank.

As the Pacific facility grows and the size of the parametric insurance policies increase, as was seen in the Caribbean with CCRIF, its use of reinsurance capital will increase and the alternative markets may find a chance to play a role.

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