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Reducing Financial Vulnerability to Natural Disasters – The Caribbean Experience

Reducing Financial Vulnerability to Natural Disasters – The Caribbean Experience


Overview

A series of World Bank projects helped create the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and also fund the initial membership of several countries from the region. The facility ensures these countries have rapid access to emergency financing after severe weather events, and several have already done so. Haiti, Dominica, St. Lucia, and St. Vincent and the Grenadines suffered earthquakes or hurricanes sufficient to trigger payouts totaling US$13 million. These rapid cash infusions reduced each government’s financial vulnerability to the disasters, helping them to make ends meet while waiting for larger-scale financing.

Challenge

In 2004, Hurricane Ivan inflicted losses on Grenada estimated at 200 percent of its gross domestic product (GDP).  The government’s fiscal revenues plummeted.  It was financially unable even to keep civil servants at work to mount immediate relief efforts to address the human dimensions of the tragedy.

Latin American and Caribbean countries are among the most exposed to natural disasters in the world.  The Caribbean states have particularly limited capacity to respond as their domestic revenue bases are small and they lack timely and affordable access to external finance, including insurance.  Without financial instruments to enable the governments to buffer the impact of natural disasters, the social and economic gains from years of development can be quickly wiped out, particularly for the poor.

For these reasons, after Hurricane Ivan, the Caribbean Community (CARICOM) asked the World Bank to help develop a mechanism to reduce its members’ financial vulnerability to future hurricanes and earthquakes.


Approach

The Bank’s disaster risk management experts worked closely with external risk management specialists to design and establish the Caribbean Catastrophe Risk Insurance Facility (CCRIF).  Aggregating individual country risk into a diversified portfolio, CCRIF can offer members hurricane and earthquake insurance at a price 45-50 percent lower than what they might be able to obtain directly from insurance markets.  Claims payment follows the occurrence of a pre-defined event (e.g., wind speed or ground motion of a certain magnitude) rather than an assessment of actual losses after the fact.  This enables CCRIF to make a rapid payout to the insured government (so far, within three weeks) to help meet its immediate financial needs.   Financial risk transfer must be complemented by policy reforms and physical investments to strengthen the disaster resilience of public and private assets.  The Bank also provides technical and financial assistance to Haiti and OECS countries on these matters.


Results

The Bank’s development objective was to reduce the countries’ financial vulnerability to natural disasters, and success was measured by claims-paying capacity of the fund, as well as its actual support for member countries:

  • IDA funding enabled the beneficiary countries to join CCRIF and purchase financial protection against catastrophic hurricane and earthquake events.  As a result, IDA funding also contributed to the diversification of CCRIF’s risk portfolio, its premium income, the growth of its claims paying capacity, and its ability to offer affordably-priced insurance to its members. The beneficiary countries have continued to purchase insurance after their IDA funding was exhausted.
  • Dominica and St. Lucia received payouts of US$528,000 and US$419,000, respectively, after a November 2007 earthquake.
  • Haiti received a US$7.8 million payout after the devastating January 2010 earthquake.
  • St. Lucia and St. Vincent and the Grenadines received payouts of US$3.2 million and US$1.1 million, respectively, following Hurricane Tomas in October 2010.
  • CCRIF’s claims-paying capacity is robust.  With its 2010-2011 reinsurance, CCRIF will remain financially viable even after paying claims resulting from a highly unusual series of events – claims that would far exceed its modeled average annual loss – without needing recapitalization in order to continue operations.


Bank Contribution

IDA funds paid for 100 percent of the countries’ membership fee and premiums for the first two years, broken down as follows: Haiti US$9.0 million; Dominica US$4.5 million; Grenada US$4.5 million; St. Lucia US$4.5 million, and: St. Vincent and the Grenadines US$700,000.  The World Bank projects covered 50 percent of the countries’ premiums for the third year and, for Dominica and St. Lucia, also for the fourth.


Partners

Grant funding from the Government of Japan and support from the Jamaican Social Investment Fund supported preparation of the projects.  Grant contributions to a multi-donor trust fund from the governments of Bermuda, Canada, France, Ireland, and the United Kingdom, as well as from the European Union, the Caribbean Development Bank, and the IBRD played an essential role by financing certain of CCRIF’s administrative, reinsurance, and research and development costs during its first four years of operations (2007-2011).  This permitted CCRIF to build its reserves and risk-bearing capacity quickly and, as it did so, to progressively lower the cost of its products.


Moving Forward

The Bank continued to supervise CCRIF until the multi-donor trust fund closed in January 2012.  CCRIF is expected to be able to sustain its operations.  As described above, its risk-bearing capacity is strong, comparing favorably with other natural disaster insurance providers, such as the California State Earthquake Authority.  As the first multi-country natural disaster risk pool and parametric insurance facility in the world, CCRIF is being closely studied by governments with a view to replicating it in other regions of the world.


Beneficiaries

Direct beneficiaries are the insured governments and people of the CCRIF member countries as they rely on governments which are well positioned to provide services in the aftermaths of emergencies. Government’s financial capacity to begin the recovery process is strengthened by the payout which becomes part of their general fiscal revenues.  The poor are important indirect beneficiaries.  They are disproportionally affected by natural disasters and are most dependent upon Government relief and recovery operations.


For more information, please visit the Projects website.

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