World Bank FPD Forum 2010

1. World Bank FPD Forum 2010 Public-Private Partnerships in Catastrophe Risk Financing: Challenges and Opportunities for Developing Countries Presented by Isaac Anthony Permanent Secretary/Director of Finance Ministry of Finance, Economic Affairs and National Development Government of Saint Lucia Board Member, CCRIF

2. World Bank FPD Forum 2010 Fiscal Management of Natural Disasters in Saint Lucia and the Role of the CCRIF as a Regional Risk Pooling Mechanism

3. Background Information – Saint Lucia • Saint Lucia is a volcanic island in the Caribbean Sea • Capital city of Castries is located at latitude 14.1° North and 61° West • The total land area is 238 square miles • The population is approximately 171,000 people • Political system – Westminster-Styled Democracy • Principal languages – English and French Patois • Member of CARICOM

4. Background Information – Saint Lucia • Natural Disasters: Hurricane Allen – 1980 Tropical Storm Debbie – 1994 Hurricane Ivan – 2004 Hurricane Dean - 2007 Earthquake 7.3 magnitude - 2008

5. Fiscal Management of Natural Disasters in Saint Lucia Focus has been on: • Disaster mitigation projects funded by the World Bank and Caribbean Development Bank with emphasis on: • strengthening the country’s infrastructure against the impact of adverse natural events • building response capacity • enhancing institutional capacity of the various ministries and agencies • Use of insurance has been very limited with very few of state owned assets covered

6. The government passed a comprehensive Disaster Management Act in 2006, which amongst other things, makes provision for allocation of resources related to post disaster recovery efforts • Limited budgetary provisions • Participation in the CCRIF as of 2007

7. What is CCRIF • The Caribbean Catastrophe Risk Insurance Facility is: • a regional catastrophe fund for Caribbean governments designed to limit impact of devastating hurricanes and earthquakes and other natural catastrophic events • the first multi-country risk pool in the world • the first insurance instrument successfully develop a parametric policy backed by both traditional and capital markets • CCRIF provides participating territories with liquidity to help with immediate post disaster recovery as well as medium term rebuilding efforts

8. The Rationale for Caribbean Governments to Establish CCRIF • The vulnerability of Caribbean states to natural disasters, including hurricanes, floods and earthquakes is very high • On average, a Caribbean territory is impacted by one major storm every two years • In 2004, four storms caused an estimated damage of $4.5 billion

9. Storms can also cause damage to multiple countries • Hurricance Ivan impacted 8 different countries • The impact of these natural disasters vary significantly, in some instances causing limited damages and at other times wreaking havoc • In Grenada, the losses resulting from Hurricane Ivan in 2004, amounted to approximately 200% of the island’s gross domestic product (GDP). Significant losses were also recorded in Jamaica and the Cayman Islands • The impact of the losses always places immense financial burden on small states already with limited fiscal space • Owing to the gravity of losses, there is heavy reliance on international donors to meet the post-disaster financial needs

10. Governments generally have a large number of assets exposed to damage during natural disasters • Full insurance coverage of these assets is often considered beyond the reach of most governments in the region • Access to traditional catastrophe insurance and reinsurance markets is limited owing to high transaction costs • The creation of a risk transfer facility with the capacity to address some of these challenges was deemed critical • The massive destruction to Haiti caused by the recent earthquake is further vindication to establish CCRIF

11. The Role of CCRIF as a Regional Risk Pooling Mechanism • Having experienced the major disaster of Hurricane Ivan, Heads of Government of the CARICOM with the assistance of the World Bank established the insurance facility, Caribbean Catastrophe Risk Insurance Facility (CCRIF) • The facility represents a timely and important shift from disaster response to ex-ante disaster management and mitigation • The designs of the facility provides participating territories with the opportunity to obtain access to catastrophe insurance at the lowest cost

12. The concept of pooling risk by participating countries makes the overall risk more stable to the reinsurance market • Noting that the natural disaster risks among the participating states are not highly correlated, the variability of the CCRIF insurance portfolio is less than the combined variability of the individual territories • This therefore, creates the opportunity for reducing the cost of coverage when country specific risks are pooled into the facility • The pooling enables economies of scale that drive the cost down significantly

13. The premium paid by each country is almost half what it would have to pay if it had to approach the reinsurance market independently • Participating countries determine the level of coverage they wish to purchase • The decision to purchase is often based on the level of exposure to risk and their capacity to pay for coverage • Annual premiums paid are proportionate to their own specific risk exposure. As an example, annual premiums vary between USD200,00 and USD2,000,000 for payouts from USD10 million to USD50 million • Insurance risk is retained by CCRIF through its reserves whilst a portion is transferred to the international reinsurance market

14. Challenges for Other Countries • The establishment of a CCRIF-like organisation in other regions of the world requires significant collaborative action amongst individual countries and donors • The instrument which supports the operations of the CCRIF are highly technical and complex and are not easily understood by persons without knowledge of basic insurance matters • Expectations that payments are automatically due once impacted by natural disasters • Uncertainty about the number of countries who would participate initially and continually and at what level of coverage • Level of funding from donor community is critical to financing the the initial operationalization of the facility • Level of coverage purchased to meet full needs of participating governments may be inadequate

15. Opportunities for Other Countries • The success of CCRIF should make it a lot easier to establish a similar risk transfer mechanism in other regions • Participating governments to benefit from insurance coverage for lower premiums • Possibility of providing several insurance products • Prospect of extending coverage to the private sector • Insurance Facility could provide technical assistance and other services and emerge as a key player in regional disaster management programmes

16. Lessons Learnt from CCRIF • Other regions considering establishing a similar risk transfer mechanisms should: • Understand their risks • Conduct territory-specific cost benefit analysis • Create a forum for communication • It should be seen as one element of a country’s disaster risk management framework. • Like other types of insurance, the risk covered is specific to what is contained in the insurance policy. • Effective communication is vital for all stakeholders

17. World Bank FPD Forum End of Presentation