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The Caribbean Catastrophe RiskInsurance Initiative
Finance and Operations Strategy Project
Joseph M Matalon
Chairman, CGM Group
Outline
• What is the ‘Facility’ ?
• How will it be financed ?
• How will it be operated ?
• What are the benefits ?
• What are the barriers ?
• What do we need to move forward ?
What is the ‘Facility’ ?
• It will be an insurance company set up as an offshore ‘captive’
• Sole product will be parametric insurance policies sold to Government Treasuries
• Payout will not be related directly to loss – it is not an indemnity contract
• Payout instead will be based on a pre-designed parametric index for earthquake and hurricane perils
Parametric Index
Hypothetical insurance payout
0
10
20
30
40
50
60
70 80 90 100 110 120 130 140 150 160 170
Windspeed (mph)
payo
ut (
US
$ m
illion
)
How will it be financed ?
• International donors will provide initial seed capital via a World Bank Trust Fund
• Income: from premiums and from return on the invested seed capital
• Expenditure: reinsurance/ART premiums, Facility management and payouts when triggered
• Aiming for long-term survivability of Facility, so heavily reinsured initially
Financial Flows
Reserves
Reinsurance/ART(Purchased in international
financial market)
Country 2
Country 3
Country 1
Country 4
Country 5
Country 6
Country 7
ReinsurancePremium
ReinsurancePayout
Payout
Premium
Initial donor contribution
Initial donor contribution
Initial donor contribution
Growth
Reinsurance and ARTs
• Alternative Risk Transfer (ART) mechanisms such as Cat Bonds will be considered
• Risk transfer can be achieved through traditional reinsurance, but hurricane market very ‘hard’ right now, leading to high cost
• Capacity appears to be sufficient without impacting regional insurance industry
• Pooling, good definition of risk and geographical diversification should lead to better pricing from reinsurers and good market for capital instruments
Risk Transfer
How will it be operated ? – a working model
• CCRIF: an offshore captive, probably domiciled in Cayman or Bermuda, where regulatory regime and experience are optimal and barriers/administrative costs appear to be minimised
• Facility Board: 1 WB, 1 Donor and 1 client country representative, two ex-regional insurance or reinsurance experts
• Facility Supervision: contracted with a specialist risk management company; Facility will sub-contract certain admin functions (legal, accounting, regulatory), asset management (probably to World Bank Treasury) and reinsurance placement
Facility Management
Reserves
Reinsurance/ART(Purchased in international
financial market)
ReinsurancePremium
ReinsurancePayout
Growth
Facility is managed by a Supervisor answering to a Board.
The Facility supervisor will:• Contract policies• Manage assets• Risk management • Manage claims• Meet regulatory obligations
Reinsurance or ART is placed in international market and adjusted annually
Reserves managed by the WB (all interest compound to the reserve)
What are the primary benefits ?
• We believe the Facility offers the best mechanism to optimise catastrophe insurance pricing in the Caribbean
• Parametric contracts minimise Facility operational costs and simplify the insurance contract
• Cash with no strings will be available within 1 month of a triggering peril occurring
Reducing insurance cost
• Commercial premium = pure premium + operational costs + catastrophe load + return on equity
• Pure premium will be better defined than in a normal indemnity policy, so less room for ‘conservatism’ in pricing the pure premium
• Operational costs minimised through economies of scale and parametric contracts
• Cat load reduced through geographical diversity and donor seed capital
• Facility will be non-profit
Commercial vs Pure Premium in the Caribbean
32%
0%1%2%3%4%5%6%7%8%9%
10%
Bah
amas
Jam
aica
Ant
igua
&B
arbu
da
Dom
inic
a
St L
ucia
Bar
bado
s
St K
itts
and
Nev
is
Gre
nada
Trin
idad
St V
ince
nt a
ndth
e G
rena
dine
s
Pure premium
Commercial premium
Some secondary benefits
• Country sends message to wider world that it is committed to effective risk management, and is taking steps to safeguard government operations after a disaster
• Private sector investors and the tourism market will have increased confidence in the country’s ability to quickly overcome the setback after a disaster
• Country credit rating partially protected• Support for currencies (if floating) in post-
disaster situation
What are the barriers ?
• Where relevant, individual countries need to make exceptions to existing legislation (which may debar the purchase of insurance from offshore insurance vehicles)
• Individual countries will need to finance annual premium payments (3-year commitment)
• Pooling and diversification will only assist in reducing cost if we get a substantial number of countries taking part
What do we need to move forward ?
• A good idea of which countries are interested and at what level (what annual premium might they be prepared to pay ?, for what payout ?)
• Transfer of all information to relevant officials so that countries are ready to sign once insurance policy contracts are finalised in September
• Countries need to move forward with enabling legislation, once operational structure is finalised
We are here to help
• Our project team is tasked with helping all countries analyse the pros and cons of participation
• We will visit individual countries where necessary, and will host sub-regional seminars for country groups (OECS, UKOTs)
• Each country will have an assigned member of the team as primary contact – these team members will introduce themselves during the day
Primary Contacts
• Dr Simon Young, GeoSY Ltd202 465 4301 [email protected]
• Matthew Pragnell, CGM Group876 906 0348
• Dr Jan Vermeiren, KAC240 821 1202
Country Contacts
• Jamaica– Joe Matalon
• 876 922 6670• [email protected]
• Barbados– Tommy Smith
• 876 948 6995• [email protected]
Country Contacts
• Trinidad & Tobago– Peter Melhado
• 876 922 6670• [email protected]
• Grenada, St Kitts & Nevis, Antigua & Barbuda, Dominica, Saint Lucia, St Vincent & the Grenadines, Belize– Steven Stichter
• 240 821 1202• [email protected]
Country Contacts
• Cayman Islands, Bermuda– Saundra Bailey
• 876 906 0348• [email protected]
– Vikram Dhiman• 876 922 6670• [email protected]
Country Contacts
• Montserrat, British Virgin Islands, Turks & Caicos Islands, Anguilla– Paul Rousseau
• 876 383 4698• [email protected]
• Bahamas, Guyana, Suriname– Bobby Dawes
• 876 906 0348• [email protected]