Caribbean Catastrophe Risk Insurance Facility

NAVV IAC Conference June 1-3, 2008

The Caribbean Catastrophe Risk Insurance Facility

A joint reserve mechanism that allows Caribbean Governments to access liquidity at short notice in case of a major earthquake or hurricane: • quick disbursing through the innovative use of parametric instruments;• transparent rules – contribution are based on each island’s specific risk and payout based on clear triggers.• financially efficient – harvesting the benefits of risk pooling among 16 countries and leveraging the capacity of the financial markets;

A Joint Reserve Mechanism

The Facility retains some of the risk through its own reserves and transfers the rest to the reinsurance market.

Contract formulation enables reinsurance coverage from both the traditional reinsurance and capital markets.

Annual premium as a multiple of the technical risk (AAL) for the selected coverage.

Parametric Insurance

Catastrophe Insurance Pool

Key benefits of CCRIF

• Its cheap – because of regional pooling, seed capital and low overhead. Facility prices in year one were about half of what the open-market cost of coverage would be (were the same coverage available, which it is not);

• Its reliable – no negotiating with loss adjustors or paperwork to prove all the loss; once the event has happened, participants are informed within a couple of days exactly what the payout will be, and paperwork is minimal

• It has long term sustainability – sophisticated financial modeling are used to ensure that the Facility won’t go belly up in the first big storm or earthquake, or even a succession of them

A Regional Initiative

• Membership open to CARICOM Members and Associate Members;

• Designed using mostly local expertise;

• Registered in the Region;

• Managed by local firms (private/public partnership);

• Controlled by a Board made of representatives of the participating countries and donors.

The way forward

• Policy improvements for 2008 season include:

increase in aggregate limit per country to $100 million; reduction in premium cost by 10% (with minimum payout equal to premium); lowering of attachment point for hurricanes to 1 in 15 year events;

• Inclusion of new hazard (floods) and/or risks (agriculture, utilities, etc.);

• Partnership for the development of probabilistic risk models for the region.

Wrap-up

• CCRIF is a unique financial instrument pioneered through regional collaboration;

• Best viewed as a joint reserve fund with objective rules for premium calculation and payout qualification;

• Innovative use of parametric instruments has created a cross-over between reinsurance and capital markets, creating great interest in both;

• Not an answer to everything, but an efficient solution to some of the risks faced by Caribbean countries;

• The CCRIF can be used as a foundation to develop and promote companion products;

Contacts

Francis GhesquiereRegional Coordinator DRMThe World Bank Email: fghesquiere@worldbank.orgTel.: 202-458-1964

Simon YoungFacility SupervisorCaribbean Catastrophe Risk Insurance FacilityEmail: syoung@caribrm.comTel.: 202-465 4301

Tangible benefits of pooling

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,000

$400,000,000

Quake Hurricane

Lo

ss (

US

D)

Facility Loss, 150-yr

Aggregate of country losses

Risk Transfer Structure

DFA Analysis

• 90% of the time, the Facility has more than 115M of capital at the end of 10 years

• Facility is solvent after 10 years 99.86% of the time

• The ‘smallest’ event that can break the Facility in any of the 100,000 runs of 10 years each is a 1 in 3,500 event

DFA Analysis I

• Dynamic Financial Analysis uses Monte Carlo methods to test 10-yr financials for CCRIF

• Using the financial conditions outlined previously, DFA shows that the Facility is solvent after 10 years 99.86% of the time

• This means that in only 14 of 10,000 runs of 10-year financials does the Facility fail

DFA Analysis II

• 90% of the time, the Facility has more than 115M of capital at the end of 10 years

• Average policy premium multiple for those 10 years is ~1.8

• The ‘smallest’ event that can break the Facility in any of the 100,000 runs of 10 years each is a 1 in 3,500 event