The Role of CCRIF in the Caribbean

Dr Simon YoungCEO, Caribbean Risk Managers Ltd

Facility Supervisor

FPD Forum 2010: Public-Private Partnerships in Catastrophe Risk Financing: Challenges and Opportunities for Developing Countries

CCRIF 101

• Set up in 2007 to provide rapid liquidity to member Caribbean governments

• Capitalised by donors and participants (via a membership fee)

• Uses parametric index which converts wind speed (for storm) or ground acceleration (for quake) into a government loss estimate at key sampling sites, which are aggregated to national loss

• Pools risks to provide geographical diversification and economies of scale, within regional framework of socio-political cooperation and mutual economic interests

Liquidity Gap

PPP

• CCRIF is an insurance company registered in the Cayman Islands, but 100% owned by a Trust – the ultimate beneficiaries of which are the member countries – so is essentially not-for-profit

• It provides value by minimising premium costs to countries through deployment of its own capital and reinsurance capacity from the global traditional and capital markets to achieve least-cost claims paying capacity to a high level of survivability

• Operated as a ‘virtual’ entity to reduce costs – no staff or building overhead

Value of Pooling

More than Insurance

• Coordinating and supporting technical assistance and acting as a clearing-house for data/expertise relevant to catastrophe risk management

• Establishing and supporting regional networks of collaborative partners within and external to Governments

• Supporting development of risk management tools and expertise within Governments and Civil Society, particularly through the use of Country Risk Officers

• Providing capacity to assist in design of suitable index-based or hybrid products to be provided at sub-national level either directly or via community-based partners

• Ability to use its balance sheet to hold basis risk for local index-based pooling schemes

• Use existing partnerships with global reinsurance markets to facilitate cost-effective risk transfer out of the region as required

Current CCRIF Initiatives

• MoUs with ECLAC, CDEMA and CIMH• Nurturing and providing technical support for a

parametric RT facility for electrical T&D systems with CARILEC

• Have completed second-generation risk modelling framework (quake and hurricane, including surge and wave) and have an operational real-time synthetic rainfall tool – these are available as a basis for designing products in different sectors

• Can potentially move quickly to develop other new products based on partner institution data (e.g. drought indices produced by CIMH)

• Technical assistance programme and RTFS

Real-time Forecast System

Opportunities

• Insurance mechanisms feature strongly in the negotiating text for a post-Kyoto global climate change treaty, and will be picked up again during 2010

• Insurance must be seen only as one of a number of risk management tools which are needed to manage climate and other catastrophe risks

• Haiti further highlighted the positive role of pooled parametric insurance, but also demonstrated challenges

Holistic Adaptation Framework

CoP15/Haiti Impact on CCRIF

• We have seen an increase in interest from global development community in– scaling up CCRIF (an EQ premium of $2M for

Haiti, and a different deductible/limit combination, could have yielded $80M payout) to provide greater levels of protection, particularly for quake

– CCRIF as a model for other regions (building on momentum generated in pre-CoP15 outreach efforts)

– ex-ante financing of disaster risk costs

Challenges

• High deductible means that it only covers major catastrophe events in which national economies are severely impacted, and also currently only reaches the national government (not necessarily the most vulnerable people)

• Basis risk means that events can occur which produce significant losses but no payout (and the opposite is possible)

• Concept of parametric is poorly understood, so clients expect their ‘insurance policy’ to cover everything

• Scale of the risk currently retained is daunting when converted to annual premium, even at good rate, and demonstrating an appropriate place for risk transfer as a complement to other DRM tools, especially risk reduction, takes a lot of time and effort

Jamaica Quake Example

Conclusions

• CCRIF-like regional risk-sharing entities can provide the most cost-effective way to deal with cat risk transfer. A cost-benefit ratio of 1.5 can be assigned to the overall operations. Total risk transferred by an individual policy-holder can be 20 to 50 times the value of the premium paid.

• CCRIF’s institutional set up is a true public-private partnership; World Bank instruments/donor funds accessed by private not-for-profit company owned and operated by its regional members. Strong initial capitalisation allows CCRIF to access global reinsurance markets only where it is cost-effective to do so.

• Challenges to replicating CCRIF include: the need to develop hazard/risk models in regions with little historical data, the need to drill down to the local level, and the need to reduce basis risk