CCRIF SPC is a not-for-profit risk pooling facility, owned, operated and registered in the Caribbean. It offers parametric insurance designed to limit the financial impact of catastrophic tropical cyclones, earthquakes and excess rainfall events on Caribbean and – since 2015 – Central American governments by quickly providing short-term liquidity when a policy is triggered. It is the world’s first regional risk-pooling fund issuing parametric insurance and, as such, gives its member governments the opportunity to purchase natural catastrophe coverage at a price substantially below what they would be able to obtain through a non-pooled arrangement.
CCRIF SPC is the new name for the Caribbean Catastrophe Risk Insurance Facility. The Caribbean Catastrophe Risk Insurance Facility was formed in 2007 to provide parametric insurance for hurricanes and earthquakes to Caribbean governments. In 2014, the facility was restructured into a segregated portfolio company (SPC) to facilitate offering new products and expansion into new geographic areas. The new structure, in which products are offered through a number of segregated portfolios, allows for total segregation of risk but still provides opportunities to share operational functions and costs and to maximize the benefits of diversification. The function and purpose of CCRIF SPC is the same as the original Caribbean Catastrophe Risk Insurance Facility.
CCRIF SPC offers Earthquake (EQ), Tropical Cyclone (TC) and Excess Rainfall (XSR) policies to Caribbean and Central American governments and will be offering Loan Portfolio Cover (LPC) policies to financial institutions in Caribbean countries.
CCRIF provides or will provide these products through the following segregated portfolios (SPs):
- CCRIF SPC on behalf of Caribbean EQ-TC SP – providing Earthquake and Tropical Cyclone policies for Caribbean governments
- CCRIF SPC on behalf of Caribbean XSR SP – providing Excess Rainfall policies for Caribbean governments
- CCRIF SPC on behalf of Central America SP – providing Earthquake and Tropical Cyclone policies for Central American governments
- CCRIF SPC on behalf of Loan Portfolio Cover SP – to provide Loan Portfolio Cover policies for financial institutions in Caribbean countries
The Tropical Cyclone (TC) product is linked to wind and storm surge damage in a defined tropical cyclone. Rainfall is not covered by TC policies. The Excess Rainfall (XSR) product is linked to damage from rainfall and an XSR policy can be triggered if rainfall thresholds are met due to a tropical cyclone or to non-cyclonic systems such as trough systems. The TC and XSR products operate independently and if both policies are triggered by a given tropical cyclone then payouts on both policies would be due.
CCRIF is always seeking to meet the needs of its current and potential future member countries. Currently, CCRIF is exploring the development of a drought/ agriculture product.
Nineteen Caribbean governments are currently members of the Facility: Anguilla, Antigua & Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, Montserrat, St. Kitts & Nevis, Saint Lucia, Sint Maarten, St. Vincent & the Grenadines, Trinidad & Tobago and Turks & Caicos Islands. Three Central American governments are currently members of the Facility: Nicaragua, Panama and Guatemala.
Currently, CCRIF is open to Caribbean and Central American governments only.
How will expansion into Central America affect the Caribbean members?
Central American states are partnering with CCRIF through a segregated-cell approach. Central American and Caribbean states are grouped into legally separated pools of risk (two segregated portfolios) allowing for separation of risk management operations for Central American and current CCRIF countries (e.g. pricing, policy format) but enabling a bundled access to the reinsurance market.
Collaboration with new countries may provide important premium reduction benefits to existing CCRIF members due to the increased size of the CCRIF portfolio and increased access to the capital markets. Both Caribbean and Central American countries benefit from additional savings if these countries approach the reinsurance market and capital markets through CCRIF together rather than independently.
The risk to current members of allowing Central American countries to join is minimal. The Central America segregated portfolio pools the tropical cyclone and earthquake risk of participating Central American countries. The segregation of the portfolio makes it possible for current Caribbean members to keep their accumulated capital reserves legally separate from the new members’ capital reserves and risk.
The CCRIF idea was prompted by the damage wrought by Hurricane Ivan in 2004. Following the passage of Ivan, the Caribbean Community (CARICOM) Heads of Government held an emergency meeting to discuss critical issues surrounding the need for the provision of catastrophe risk insurance for its members. Consequently, CARICOM resolved to take action and approached the World Bank for assistance to design and implement a cost-effective risk transfer programme for member governments. This marked the beginning of what would become the Caribbean Catastrophe Risk Insurance Facility.
CCRIF was created in 2007 out of the recognition that natural catastrophes impose a significant burden on the financial ability of states to function after a disaster due to an unavailability of liquidity. The facility was originally structured as an insurance instrument to provide coverage similar to business interruption insurance in the event of losses from tropical cyclones or earthquakes. In 2013 CCRIF began offering coverage for excess rainfall and in 2015, CCRIF began offering coverage to Central American governments.
Similar to a mutual insurance company, CCRIF is operated on behalf of 17 current participating states in the Caribbean and Central America, each of which pays an annual premium directly related to the amount of risk each transfers to CCRIF and purchases coverage up to a limit of approximately US$100 million for each insured hazard (tropical cyclones, earthquakes or excess rainfall events). By pooling these catastrophe risks into a single diversified portfolio, capital needs for paying claims are significantly lowered. This in turn leads to a pricing reduction of about half of what it would cost if countries were to purchase identical coverage individually compared with buying the coverage from CCRIF.
CCRIF therefore helps to mitigate the short-term cash flow problems small developing economies suffer after major natural disasters. A critical challenge is often the need for short-term liquidity to maintain essential government services until additional resources become available. CCRIF represents a cost-effective way to pre-finance short-term liquidity to begin recovery efforts for an individual government after a catastrophic event, thereby filling the gap between immediate response aid and long-term redevelopment.
CCRIF is governed by a Board of Directors which is responsible for the approval and oversight of all policies related to the administration and operations of the Facility. The Board comprises no more than five members, including one representative for donors to the Multi-Donor Trust Fund (MDTF) who are not participants in CCRIF’s insurance programme, and is nominated by the Caribbean Development Bank (CDB); one representative for member countries that is nominated by CARICOM; two independent directors, appointed jointly by CDB and CARICOM for their insurance and financial expertise; and a Chairperson, selected by the other four directors. (The MDTF was created to support the establishment and operation of CCRIF.)
A Chief Executive Officer (CEO) has overall management and administrative responsibility for the operation of CCRIF and for the performance of the Facility and its service providers. The CEO is supported by a Chief Operations Officer who is responsible for overseeing and ensuring the effectiveness and efficiency of CCRIF’s day-to-day operations.
CCRIF is supported by a network of service providers that cover the areas of risk management, risk modelling, captive management, reinsurance, reinsurance brokerage, asset management, technical assistance, corporate communications and information technology.
What role do member governments play in the governance of CCRIF?
One member of the Board of Directors, nominated by CARICOM, has the specific responsibility for representing the interests of the member countries. Also, member governments are directly consulted through the Ministries of Finance.
CCRIF was developed under the technical leadership of the World Bank and with a grant from the Government of Japan. It was initially capitalized through contributions to a Multi-Donor Trust Fund by the Government of Canada, the European Union, the World Bank, the governments of the UK and France, the Caribbean Development Bank and the governments of Ireland and Bermuda, as well as through membership fees paid by participating governments. The Central America SP is capitalized by contributions to a special MDTF by the World Bank, European Commission and the governments of Canada and the United States.
CCRIF combines the benefits of pooled reserves from participating countries with the financial capacity of the international financial markets. It retains some of the risk transferred by the participating countries and transfers the remainder of the risk to reinsurance markets.
This structure results in a particularly efficient risk financing instrument that provides participating countries with insurance policies at the minimum price possible. Countries obtain coverage at approximately half the price they would pay if they approached the reinsurance industry on their own. For CCRIF policies, each country pays a premium directly related to the amount of risk it transfers to CCRIF. Pooling countries’ risks reduces costs because multiple catastrophic events are highly unlikely to affect multiple states in a given year. For example, the likelihood of a severe hurricane impacting one country may be 5 per cent every year, but the likelihood of three severe hurricanes impacting three different countries is likely much lower.
CCRIF is capitalized significantly above established national benchmarks for catastrophe insurers. Specific information about CCRIF’s financial performance each year can be found in the Annual Reports, which are available on the CCRIF website.
In light of the fact that CCRIF is a non-profit organization, what would happen if CCRIF is unable to make payments based on claims made which are more than the amount of funds available if there were events in a number of countries?
The Facility has done an extensive amount of work in order to ensure that it is able to meet the claims-paying requirements necessary for a regional institution like CCRIF. Through pooling of risks between countries and extensive modelling work which is undertaken, CCRIF ensures that the Facility can make payouts or address claims up for a series of events with a less than a 1 in 1,000 chance of occurring in any one year. While 1 in 1,000 is the survivability level that is incorporated into CCRIF’s Operations Manual, currently CCRIF is even more secure than this. This essentially means that there would need to be some massive catastrophes occurring in a number of the large economies across the region: for example Jamaica being hit, as well as Barbados, Trinidad, Cayman and Bahamas within a given year. This is of course a possibility but CCRIF has tried to include or incorporate within the financial aspects of the Facility the ability to actually satisfy those claims. If claims from member governments in any one year exceeded CCRIF’s capital and reinsurance then there are guidelines in place for how that would be dealt with and claims would be paid on a proportional basis until all funds were used up. It should be noted, however, that CCRIF is owned by a Trust of which the effective ultimate beneficiaries are the CCRIF member countries, so it may be that full drawdown of all capital from CCRIF is not considered by the members to be in the best interests of the region.
Parametric insurance products are insurance contracts that make payments based on the intensity of an event (for example, hurricane wind speed, earthquake intensity, volume of rainfall) and the amount of loss calculated in a pre-agreed model caused by these events. Therefore payouts can be made very quickly after a hazard event. This is different from traditional insurance settlements that require an on-the-ground assessment of individual losses after an event before a payment can be made.
The main reasons CCRIF was designed to offer parametric insurance policies are as follows:
- Parametric insurance is generally less expensive than an equivalent indemnity insurance product.
- Payouts can be calculated and made very quickly because loss adjusters do not have to be relied on to estimate damage after a catastrophe event, which can take months or years.
- Governments do not have to provide detailed asset values and other information prior to the insurance programme commencing, and have just one form to sign during the entire claims process.
- Calculation of payouts is totally objective, based on a few simple input parameters published widely in the public domain from the globally-mandated bodies responsible for estimating those particular parameters, and a set of formulae which form part of the policy. The cost of insurance can be immediately related to the probability of an event, and the payout is independent of any mitigation efforts put in place after the policy is issued.
- The risk, which drives policy pricing, is uniformly defined (i.e. there is no subjectivity in the definition of the risk).
Despite the many benefits to parametric insurance, parametric products are exposed to basis risk, i.e., the possibility that a payout based on calculated losses may be higher or lower than actual losses on the ground. Although this is a significant challenge in terms of the development of a parametric instrument, careful design of input parameters and the loss model as undertaken by CCRIF helps reduce the basis risk.
In undertaking the development of the CCRIF parametric insurance coverage, significant investment went into developing the underlying catastrophe risk model. Catastrophe risk models are essential tools in assessing the risk associated with catastrophe events. For the most part, they are based on robust datasets containing:
• A hazard module
• An exposure module
• A vulnerability module
• A damage module
• A loss module
The CCRIF model is no different, with the modules all developed within the context of the particular hazards of relevance to the client countries, these being tropical cyclones, earthquakes and excess rainfall.