World Bank to expand parametric risk transfer for Pacific Islands

In supporting the Pacific Island nations on their road to resilience, the World Bank aims to expand the availability of parametric disaster insurance protection, partly through the use of private capital, while expanding the range of parametric insurance products available in the region as well.

Recently, the World Bank, alongside German and United Kingdom governments, announced the launch of an initiative to help vulnerable countries manage climate change and natural disaster related shocks, the US $145 million Global Risk Financing Facility (GRiF).

Bringing a range of financial protection options to nations in need of disaster and climate risk financing, transfer or resilience, is a key way that the World Bank is helping to broaden the understanding of the value of risk transfer, insurance and reinsurance around the world.

Instruments from contingency funds, contingent loans and grants, to risk transfer solutions such as parametric insurance and even catastrophe bonds, the World Bank continues to enable at-risk nations to access the benefits of global reinsurance and capital markets.

In the Pacific Islands region the World Bank already has its Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), which aims to help countries in the region become better protected against catastrophe risks.

As well as providing 15 Pacific countries with disaster risk modeling tools and a catalogue of data on thousands of historic disaster events going back more than 50 years, plus exposure data on more than 400,000 buildings, the PCRAFI initiative has also helped to drive the uptake of market-based financial solutions for disaster risk transfer.

Expansion of the PCRAFI and its insurance entity, the World Bank supported Pacific Catastrophe Risk Insurance Company (PCRIC), has been on the cards for a while, as we wrote previously here.

Expanding risk pools for regional catastrophe risk insurance facilities is key, as it allows them to realise increased efficiencies and benefits from access to global reinsurance capital.

But it’s not just the size of the pool that matters here, it’s also the diversification within it and that means the perils covered as well.

So far the PCRIC has provided parametric earthquake and cyclone insurance protection to five Pacific Island nations, resulting in a risk pool of around $45 million in size.

The World Bank said that it will now work to support the expansion of the PCRIC, to offer more complete protection options to rural regions of the Pacific.

One area currently being looked at is volcanic risk, another peril for which some parts of the Pacific region would benefit from access to disaster insurance.

Any expansion of the Pacific disaster risk pool to include a new peril such as volcanic eruption risk would help to further grow and diversify the pool, making its reinsurance more efficient overall and providing benefits to all members.

In addition, the World Bank wants to find new ways to bring the private sector into this work to leverage risk capital and it notes the central role that insurance has to play here.

New product development, using technology such as mobile apps to enable access to insurance for those who are harder to reach, is also on the cards for the region.

Of course, all of this expansion of the amount of risk transferred to private markets from the Pacific region and the resulting growth of the risk pool, could in time make financing instruments such as insurance-linked securities (ILS) and catastrophe bonds a viable tool to transfer at least some of the risks to the capital markets.