The $8 Million Question: Haiti and the Relevance of Catastrophe Pools
The $8 million payment from the Caribbean Catastrophe Risk Insurance Facility (CCRIF) to the Haitian government following last week’s disastrous earthquake has brought new attention to the issue of regional cat pools.
And despite some challenges in paying claims and questions around the amount of earthquake coverage, professionals responsible for the program argue the Haiti experience demonstrates the need for cat pools in other regions.
“The feedback that I have received has been very positive in terms of it playing a valid role in the Caribbean and in Haiti,” says Simon Young, PhD, facility supervisor for the CCRIF. “Nothing that has happened so far has diminished what we feel these vehicles can do.”
The CCRIF was created in 2007 as a parametric catastrophe pool by 15 regional governments and the World Bank.
The primary goal of the CCRIF is to provide short term liquidity to participant countries immediately after a natural disaster, says Francis Ghesquiere, lead disaster risk management specialist for the World Bank in Washington D.C.
“For many small developing countries, every source of income disappears after a major event,” says Ghesquiere. “That’s why we call this a liquidity facility. It allows a country to stay on their feet while more money comes in.”
Ghesquiere — who led the World Bank team that assisted the Caribbean countries in establishing the CCRIF — explains that many small developing countries in the region lack the financial reserves to deal with major disaster.
“For Mexico or Colombia to put aside $50 million to $100 million to disperse in the immediate aftermath of a major disaster is not a problem, but for Dominica, which has 47,000 inhabitants and a budget of $400 million, it’s economically impossible,” he explains.
Many Caribbean countries are also laden with significant sovereign debt, cutting off banks as another source of liquidity that could help jump-start reconstruction or maintain payments to public servants.
The CCRIF is sometimes mistakenly considered an insurance policy that allows a country to replace infrastructure or reimburse its population for losses, but Ghesquiere adds that the goal of the program is much more tailored to the specific need for immediate liquidity.
As such, Ghesquiere explains, it is much closer to an efficient joint-reserve facility than an insurance program.
“The objective is not to provide full coverage of possible losses; that would be unaffordable,” Ghesquiere says. “CCRIF provides participating countries with a safety net for a shock to their budget. It is much cheaper to finance loss through normal budget proceeds, loans or even special taxes. Buying insurance is very expensive.”
The Haitian quake is the third time the CCRIF has been triggered.
In 2008, the fund paid Turks and Caicos $6.3 million in the aftermath of Hurricane Ike, and in its first year, it paid Jamaica approximately $1 million for losses following Hurricane Dean.
The Haitian earthquake is providing new tests for the CCRIF when it comes to claims-paying due diligence, according to Young.
“A big advantage of the CCRIF is the rapid payout, but flooding a country with money is a dangerous thing,” he says. “This will be a test. It’s not something that you can write into a protocol.”
Expanding Cat Pool
Functionally, the CCRIF is funded by donations from foreign governments and premiums from member countries, and manages a portion of its liabilities through a risk swap with the World Bank.
The fund also purchases reinsurance and currently utilizes a roster of firms, including Swiss Re, Munich Re, Paris Re, Partner Re and Hiscox.
Young, who is also is CEO of the risk consulting firm CaribRM, says he can foresee expanding the CCRIF in the future and may consider capital markets solutions.
“Right now we have such strong support from reinsurers that it’s not under consideration, but it’s something that we keep our eyes on,” he says.
Specifically, Young said that he has had discussions with the World Bank conerning its newly created MultiCat program.
Last year the World Bank announced the creation of the MultiCat program, which allows participants to buy insurance coverage for multiple perils through a catastrophe bond.
The first bond to be issued by the program is MultiCat Mexico, a parametrically triggered vehicle that will cover losses for the Mexican government from earthquakes, floods and wind storms.
Young explains that one of the reasons the CCRIF uses a parametric trigger is its acceptance in the capital markets.
Ghesquiere adds that the World Bank also is exploring the possibility of constructing another regional catastrophe pool for a number of smaller Pacific Island nations.
“It makes a lot of sense to replicate this in the Pacific Region, but there are challenges as well,” he says.
Small Islands in the Pacific benefit from risks that distributed around a large territory that has “low correlation”, Ghesquiere explains.
For example, while one island’s largest risk may be tsunami, another island’s highest risk may come from typhoon wind. One typhoon is also unlikely to affect more than one of two countries at the same time.
But not all risks are easily transferred.
While the Caribbean risks of hurricane and earthquake are also non-correlated, they benefit from being specific and easier to transfer through a risk management program. Central America is highly exposed to floods and landslide, which is hard to model and hard to transfer.
“Earthquake and windstorm risks are easier to model for a parametric type of trigger,” he says. “But when a risk is more tied to rainfall than wind, it becomes much harder to measure and model.”
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