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The Caribbean Catastrophe Risk Insurance Facility. The Insurance Instrument. Simon R. Young CEO, GeoSY Ltd. Outline. Coverage Parametric policy Hurricane and/or Earthquake perils Up to 50% of modelled Government losses can be covered Benefits Rapid payout No adjustment of loss required

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The caribbean catastrophe risk insurance facility l.jpg

The Caribbean Catastrophe RiskInsurance Facility

The insurance instrument l.jpg

The Insurance Instrument

Simon R. Young

CEO, GeoSY Ltd

Outline l.jpg

  • Coverage

    • Parametric policy

    • Hurricane and/or Earthquake perils

    • Up to 50% of modelled Government losses can be covered

  • Benefits

    • Rapid payout

    • No adjustment of loss required

    • Treasury can use money for its most pressing needs

    • Premium prices average around half of open market cost (if same cover were available)

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Parametric Policy

  • Parametric policies pay out on the basis of a measured parameter of the hazard event rather than on actual scale of loss

  • For hurricanes, the parameter is wind speed, for earthquakes it is ground acceleration

  • Using published information characterising an event (by NHC for hurricanes, USGS for earthquakes), an equation is used to calculate the parametric index value for each country for the event. For larger countries, the total index value is a weighted average from two or more measurement point

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Choosing coverage

  • Three variables in choosing coverage

    • Attachment point (index units, return period, modelled loss or windspeed/grnd acceleration)

    • Exhaustion point

    • Ceding percentage

  • Ceding % is the proportion of the risk (exhaustion – attachment) which is covered by the policy

Example l.jpg

  • Grenada chooses an attachment at ~50 years return period for hurricane coverage, which happens to be 76 mph average wind speed, 9,000 index units, or a loss of USD 9 million

  • Upper limit on exhaustion point is 150 yr return period, so they chose that, which is 120 mph, 100,000 index units, or a loss of USD 100 million.

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Grenada Ivan payout

  • Say Grenada chose 50% ceding, for a premium of just under USD 1 Million for hurricane cover

  • Payout calculation:

    • Event Index – Attach Index = 71,535

    • Exhast Index – Attach Index = 90,000

    • Policy Limit = USD 90 M * 50% = USD 45 M

    • Payout = 45 M * 71,535/90,000

  • = $35,767,500

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Limits on choice

  • Ceding % is limited to a max of 50%

    • This eases concerns that reinsurers may have about double coverage and the indemnity basis for the loss

  • Attachment cannot go below 20-yr RP

    • Allows for Facility to act as a true Cat insurer

  • Exhaustion cannot go above 150-yr RP

    • Ensures that the parametric index works effectively (above this RP, basis risk becomes unacceptably high)

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Other policy characteristics

  • Attachment is per event – the index value for a single quake or storm event must reach that country’s attachment, otherwise no payment is due. The attachment for the next storm remains the same whether or not a payment was made

  • Policy limit is annual – you can aggregate index points over more than one storm or quake event (not including aftershocks) until you have reached your policy limit

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Other terms

  • Hurricane and Earthquake policies will be priced and sold separately

  • No reinstatement available – once the annual limit is reached, no cover will be available until the renewal

  • There will be NO CREDIT available; no cover notes, no coverage until premium payment is paid and cleared

  • All policies will have a 1 April renewal date, and initially partial year coverage will not be available

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Key benefits of the policies

  • Its CHEAP – because of regional pooling, donor-provided seed capital and low overhead, Facility prices will likely be LESS THAN HALF of what the open-market cost of coverage would be (were the same coverage available, which it is not)

  • Its RELIABLE – no messing with loss adjustors or paperwork to prove all the loss; once the event has happened, you will know within days exactly what your payout will be

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More key benefits of the policies

  • Its LONG TERM – sophisticated financial modelling demonstrates that the Facility won’t go belly up in the first big storm or earthquake

  • Its TAILORED – the payout will go directly to the Treasury, most of the payout within 1 month and the remainder within 3 months; it can be used for the most pressing needs during the ‘funding gap’ between short term disaster relief and long term redevelopment aid

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Even more key benefits of the policies

  • Its something for the REGION; everyone in the Caribbean who joins will be on a level playing field (you pay what you should pay to cover your risk), but by joining, you diversify the risk and everyone benefits. If you don’t join, you won’t be able to leverage the donor support which is going into the Facility

  • You are not paying for losses to mobile homes in Florida – the seed capital and direct access to global reinsurance and capital markets will enable the Facility to flatten out the reinsurance market cycles

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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

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  • CCRIF policies offer an excellent vehicle for Governments to mitigate economic shock of natural catastrophes

  • It is a very cost-efficient way of creating a catastrophe (‘rainy day’) fund

  • Once the premium is paid, you know that the money will be there when you need it, unlike many catastrophe funds, which can get depleted covering minor events or for non-related government expenses

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We are here to help

  • Our project team is tasked with helping all countries analyse the pros and cons of different participation levels

  • The literature handed out today has all of the technical information you need to decide on coverage

  • Our team is available to answer any and all questions during the rest of today and tomorrow morning, and then via phone and email