The CCRIF Model - An Essential Component of a Climate Change Adaptation Strategy
The critical United Nations Climate Change Conference taking place in Copenhagen in December 2009 is the last opportunity for the governments of the world to formulate a new protocol to address climate change before the Kyoto Protocol ends in 2012. The changing climate is a global driver of increasing disaster risk and threatens to undermine the critical development gains made by the most vulnerable countries, including small island developing states such as those in the Caribbean.
Through a combination of increasing hazard risks and decreasing resilience, the threat of climate change is indisputable. Over the past decade, great weather disasters have caused some 800,000 fatalities and a trillion dollars in economic loss worldwide, with the developing world bearing the brunt of these impacts.
Addressing these growing losses must be a critical component of any climate change adaptation framework within a global climate deal, and it is within this framework that the Caribbean Catastrophe Risk Insurance Facility (CCRIF) model can make a critical contribution. Parties to the United Nations Framework Convention on Climate Change, in their Bali Action Plan, explicitly identified both risk reduction strategies and risk transfer mechanisms, including insurance, as elements which must be included in a Copenhagen agreement. In the case of rare extreme events, such as a once-in-50 year flood or drought, which are expected to become more frequent in many regions due to climate change, standard climate adaptation strategies are typically not cost-effective.
It is in these instances that risk transfer tools can play a significant role in buffering extreme impacts and preventing the abrupt reversal of fortune of individuals, communities and nations which so often follows natural disasters.
As a novel idea nurtured by Caribbean governments into a successfully operating and globally unique risk transfer solution, CCRIF shows how risk transfer instruments can be a key part of a country’s risk management framework. Through the pooling of capital into a collective reserve and spreading of risks geographically, the Facility provides extremely cost-efficient coverage options for its participants against extreme natural events, the socio-economic impacts of which are beyond the management capacity of any individual country. CCRIF issues parametric insurance policies, which use modelled hazard parameters as a basis for loss estimation and payment. Parametric policies enable very rapid payouts, providing governments with liquidity to help with immediate postdisaster recovery as well as medium term rebuilding efforts. Parametric policies also differ from traditional insurance in that they do not create a ‘moral hazard’, whereby risk reduction activities may be dis-incentivised by the presence of insurance coverage.
Parametric solutions with risk-based pricing work hand in hand with other risk management tools, fully rewarding risk reduction actions.
Within wider discussions on adaptation to climate change, CCRIF is highlighted as the only working model of a multi-national and parametric-based catastrophe risk pool and
is considered a viable template for expansion and/or replication globally, as envisaged under the Alliance of Small Island States (AOSIS) submission to COP14 in 2008 and as represented in the Copenhagen negotiating text on adaptation (section D of non-paper 31 and paragraphs 9 and 10 of non-paper 41).
Furthermore, CCRIF has demonstrated an ability to work closely with existing regional and national institutions in highlighting the critical role of risk management and transfer and integrating these disciplines into a broader comprehensive disaster management framework being implemented by the Caribbean Disaster and Emergency Management Agency under the Hyogo Framework for Action. As such, CCRIF is acting as a catalyst for development and implementation of index-based insurance programmes at the individual and community level, where it can provide technical support, capacity building and, where necessary, risk transfer capacity.
The Facility therefore provides a starting point for discussions on and implementation of risk transfer solutions as part of the overall climate change adaptation framework.
The CCRIF model, which combines public sector needs and donor/participant capitalisation with efficient access to private reinsurance and capital markets, all within a not-for-profit structure being operated for and by the Caribbean region, is a strong indication that through collective partnerships, multi-national risk-sharing schemes can operate successfully.
This is further evidenced through the strong support provided to CCRIF by a number of key developed countries and leading financial institutions including the European Union, who recently joined CCRIF’s 16 member governments, Canada, the World Bank, the United Kingdom, France, the Caribbean Development Bank, Ireland and Bermuda in contributing to the Facility’s claims-paying capacity.
The CCRIF model thus provides a tangible example of an operational regional risk pooling mechanism which can be adapted for other regions as part of a comprehensive toolkit available to the developing nations of the world to assist in their adaptation to climate change.