With Model Set, CCRIF Looks Towards the Capital Markets

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) will closely examine issuing a catastrophe bond during its next reinsurance renewal after completing a multi-year internal modeling project.

“In the past we knew we would change the model, but now that it’s locked in we feel that during the next renewal we are in a position to explore getting three years over cover,” says Simon Young, Ph.D., facility supervisor. “That would help us a lot in getting the core part of our portfolio covered.”

Young says that the CCRIF examined the use to insurance-linked securities during its last renewal period but determined that its newly completed internal parametric modeling system would first need to be accepted by traditional reinsurance carriers.

“The new model as gotten the traditional reinsurance support and some buy-in from the capital markets side,” Young adds. “[Insurance-linked securities] are in our short and medium-term plans and we know our system will be able to handle that.”

Last week the CCRIF announced that it had completed work on its “second generation” model to measure hurricane and earthquake risks specific to the Caribbean region.

Young says that the new model was developed internally with the assistance of Kinetic Analysis Corporation and includes modules at a higher resolution with the inclusion of storm surge estimates that will enable CCRIF to more develop an excess rainfall policy for member countries that is expected to be available by the end of 2010.

“The external models don’t concentrate on the resolution that we need for the Caribbean. We need to follow national level losses instead of the insurance portfolio losses,” Young says. He adds that the newly completed internal model will be an open platform that can be used as a framework for research to be accessed by academic institutions in the region.

Previously, the CCRIF had used an index-based model provided by Oakland, Calif-based Eqecat which had won the original bidding process when the CCRIF was created by The World Bank.

“Eqecat had given us a locked-down model, but storm surge is a very important factor of losses in the Caribbean and member countries had raised that as an issue early on, Young explains. “We felt that any of the propriety model did address storm surge as we needed.


Changing to the internal model “significantly complicated” reinsurance pricing during this year’s renewal.

“The biggest single change is that the model that we used up until this year used a short term hurricane outlook, while the new model uses a full historical outlook,” Young says.

Added to the mix was a move from an index to parametric trigger and the inclusion of storm surge as an explicit loss generator in the new model.

The change in the model created an pricing “uplift” of 25 percent to 30 percent on the CCRIF’s reinsurance contracts, while at the same time the pool decreased prices for member countries on an average of 10 percent.

Young adds that premium prices for the pool have been set as “low as we can for long-term sustainability” of the program and that the goal of the CCRIF is not to make an underwriting profit.

“We started at a relatively high premium price because as a pool we wanted to generate capital early on, and we have progressively lowered that until we get to where what we think is a long-term sustainable level,’ Young says. “We are using very little of our capital right now.”

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