CARIBBEAN AND CENTRAL AMERICAN PARTNERSHIP FOR CATASTROPHE RISK INSURANCE POOLING RISK TO SAFEGUARD AGAINST CATASTROPHES GENERATED BY NATURAL EVENTS May 2014
NINE COUNTRIES IN THE CARIBBEAN AND CENTRAL AMERICA HAVE EXPERIENCED A DISASTER EVENT WITH AN ECONOMIC IMPACT >50% OF GDP SINCE 1980 2 Source: Various, including ECLAC reports, EM-DAT database and country reports. 2
AVERAGE LOSSES DUE TO EXTREME WEATHER EVENTS FOR SELECTED CARIBBEAN AND CENTRAL AMERICAN COUNTRIES (1992-2011) Source: Harmeling, S. and Eckstein D. Global Climate Risk Index 2013. Germanwatch, November 2012 3
FINANCIAL PROTECTION INSTRUMENTS REPRESENT ONE IMPORTANT ELEMENT OF AN INTEGRATED DISASTER RISK MANAGEMENT STRATEGY Institutional, Political, Normative and Financial Context Risk Identification Risk Reduction Financial Protection Preparedness Post-disaster Reconstruction Maps of hazards, risks, community perception, development, risk modelling Social perception, priority settings Territorial and sectorial planning, building codes Mitigation works, structural reinforcement Education, creation of a culture of prevention Reserve mechanism, budget planning Risk transfer, insurance, etc. Budget appropriation, execution in emergency Alert and early warning systems Response planning, training, equipment, logistics, simulations Response systems management Institutional planning, strengthening Recovery, planning reconstruction policies Rehabilitation plans 4
STEPS TO MANAGE FINANCIAL RISK Assess and quantify risk Define and measure contingent liabilities Reduce contingent liabilities Reduce disaster impact by integrating risk information into public investments Reduce economic impact by creating incentives for private sector resilience Reduce Financial Risk Risk Evaluation Deploy and Monitor Funding Secure Funding Integrate disaster risk in fiscal risk and public debt management Improve post-disaster budget response capacity Clarify post-disaster financial assistance Establish effective administrative systems for post-disaster approval, transfer and monitoring of funds 5
DIFFERENT FINANCIAL INSTRUMENTS ARE USED TO MANAGE DIFFERENT TYPES OF RISK LAYERS Disaster Risk Financial Instruments to Manage Disaster Risk Probability of the Event Low High High Low Severity of the Impact High Risk Layer (e.g., large earthquakes, tropical storms, hurricanes) Medium Risk Layer (e.g., floods, minor earthquakes) Low Risk Layer (e.g., local floods, landslides) Disaster Risk Insurance (e.g., parametric insurance, catastrophe bonds) Contingent Lines of Credit Contingent Budgets, Reserves, Annual Budget Allocations Risk Retention Risk Transfer 6
TIME DIMENSION OF MANAGING FINANCIAL RISK ASSOCIATED WITH DISASTERS GENERATED BY NATURAL EVENTS Necessary Resources ($) Response Recovery Reconstruction Time 7
PROPOSAL FOR A CARIBBAN AND CENTRAL AMERICAN PARTNERSHIP 8
CURRENT 16 MEMBERS OF CCRIF Anguilla Antigua and Barbuda The Bahamas Barbados Belize Bermuda Cayman Islands Dominica Grenada Haiti Jamaica Saint Kitts and Nevis Saint Lucia Saint Vincent and the Grenadines Trinidad and Tobago Turks and Caicos 9
SCHEMATIC OF A POTENTIAL CARIBBEAN AND CENTRAL AMERICAN PARTNERSHIP Payout REINSURANCE MARKET Reinsurance Contract Caribbean Catastrophe Risk Insurance Facility (CCRIF) POTENTIAL Shared Capital CARIBBEAN Countries Participation Deposit Annual Premium Payout CARIBBEAN Capital Reinsurance Contract CENTRAL AMERICAN Capital Participation Deposit Annual Premium Payout CENTRAL AMERICAN Countries 10
CONCEPTUAL BENEFITS FROM RISK POOLING AND IMPROVED INFORMATION ON AN INSURANCE PREMIUM Technical insurance premium (BEFORE risk pooling with weak risk information) Uncertainty Loading Technical insurance premium (AFTER risk pooling and improved risk information) Cost of Capital (reserves and cost of risk transfer) Operating Costs 1. Lower reinsurance costs due to better structured and diversified portfolio 2. Joint reserves to retain the first aggregate loss 3. Critical mass and access to capital markets Economies of scale in operating costs (e.g. fixed costs) Uncertainty Loading Cost of Capital (reserves and cost of risk transfer) Operating Costs Annual Expected Loss Underlying risk is unchanged Annual Expected Loss 11 11
BENEFITS OF A CARIBBEAN AND CENTRAL AMERICAN PARTNERSHIP Caribbean Lower Risk Costs: If placement of reinsurance coverage is bundled, there will be saving from diversification, by being able to retain lower layers (more capital available) and by its increased size may gain access to capital markets. Cost-Savings Associated with Efficiency Gains: As the initiative obtains critical mass there will be economies of scale associated to administrative and investment costs. Size matters: As a result of the expansion of CCRIF, new reinsurers and other risk carriers of capital markets may be interested in participating, thus by increased competition be more efficient and increase the probability of success of the facility as such. Central America Lower Premiums: If countries approach the reinsurance market through CCRIF, they could benefit from savings roughly equivalent to 45% of the total premium volume they would pay if they approached those markets on their own. Cost-Savings Associated with Efficiency Gains: Efficiency gains will result from the very nature of parametric insurance, partial sharing of capital, as well as sharing of specific administrative and operating costs. Increased Access: The CCRIF parametric model is a payout mechanism already accepted by international reinsurance markets. Applying this model to Central American countries will enable greater access to reinsurance markets and help guarantee the most competitive pricing available. 12
PREMIUM REDUCTION AS A RESULT OF THE PARTNERSHIP Possible Participation Scenarios with New COSEFIN Members COSEFIN CARICOM Three Central American countries join 1 20% Fee Three countries join & Increased capital retention capacity of US$7.5 million 2 22% 10% Six countries join & Increased capital retention capacity of US$15 million 3 27% 11% Six countries join & Increased capital retention capacity of US$7.5 million & Access to capital market 4 36% 25% 1. Minimal level of partnership: the reinsurance is placed through CCRIF without sharing diversification. CCRIF will charge a service fee corresponding to the value of the use of the CCRIF brand and risk model. 2. Based on donor contributions of US$35 million. 3. Based on donor contributions of US$75 million. 4. Same as scenario 3, but due to its size, the CCRIF can access the capital market and reduce its cost by US$2m. 13
PROTOTYPE OF INSURANCE POLICIES Coverage The difference between the coverage limit and the deductible mulitplied by the ceding percentage. Maximum Insurance Payout Losses retained by the country 1/75 to 1/200 Ceding Percentage The percentage of coverage that a country decides to acquire. Coverage Limit The severity of the event at and above which the maximum payment is triggered. Deductible This quantity represents the losses retained by a country. A deductible is the quantity of expenses that a country must pay out of pocket before CCRIF begins payment for remaining losses. Line of Contingent Credit Reserve Fund FINANCIAL COVERAGE 1/10 to 1/20 Losses retained by the country Trigger This point represents the minimum intensity of an event from which the insurance begins to pay. 14
CENTRAL AMERICA BENCHMARK PRICING ESTIMATE (EQ / TC) ANNUAL PREMIUMS US$ 5M PER PERIL Country Deductible Coverage Limit Annual Limit Annual Limit Rate on Line (20 years) (150 years) (Minimum) (Maximum) (Median) Costa Rica (EQ) 67 M 682 M 140 M 177 M 3.15% Dominican Republic (EQ) 44 M 566 M 135 M 172 M 3.26% El Salvador (EQ) 163 M 1,091 M 132 M 167 M 3.34% Guatemala (EQ) 198 M 1,499 M 133 M 168 M 3.32% Honduras (EQ) 5.0 M (10 years) 139 M 108 M 134 M 3.86% Nicaragua (EQ) 56 M 424 M 131 M 165 M 3.38% Panama (EQ) 23 M 284 M 137 M 174 M 3.22% Dominican Republic (TC) 290 M 2,762 M 133 M 169 M 3.31% Guatemala (TC) 5.0 M 34 M 22 M 28 M 3.50% Honduras (TC) 10 M (10 years) 135 M 80 M 96 M 5.68% Nicaragua (TC) 1.0 M (10 years) 93 M 75 M 92 M 5.48% Notes: 1. The estimated coverage is subject to change depending on the number of participating countries, donor contributions and the total reinsurance cost. 2. EQ = Earthquake; TC = Tropical Cyclone; M = Million 15
THE MULTI-DONOR TRUST FUND Multidonor Trust Fund Central American Cell in CCRIF Donor 1 initial contribution Donor 2 initial contribution Donor 3 initial contribution Donor 4 initial contribution Relations with CCRIF are driven by a Grant Agreement Expenditure financed have to follow procedures established in an Operations Manual Funds are released as required Climate Risk Insurance for CARICOM countries within CCRIF Reserve needs Initial reserves Operating expenditures Reinsurance needs Insurance payouts CCRIF administration Financial audits Board meeting Technical Assistance expenses Country 1 contribution Country 2 contribution Country 3 contribution Country 4 contribution 16
SCHEMATIC OF THE MULTI-DONOR TRUST FUND 17
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