the caribbean catastrophe risk insurance initiative
TRANSCRIPT
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The Caribbean Catastrophe RiskInsurance Initiative
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Finance and Operations Strategy Project
Joseph M Matalon
Chairman, CGM Group
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Outline
• What is the ‘Facility’ ?
• How will it be financed ?
• How will it be operated ?
• What are the benefits ?
• What are the barriers ?
• What do we need to move forward ?
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What is the ‘Facility’ ?
• It will be an insurance company set up as an offshore ‘captive’
• Sole product will be parametric insurance policies sold to Government Treasuries
• Payout will not be related directly to loss – it is not an indemnity contract
• Payout instead will be based on a pre-designed parametric index for earthquake and hurricane perils
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Parametric Index
Hypothetical insurance payout
0
10
20
30
40
50
60
70 80 90 100 110 120 130 140 150 160 170
Windspeed (mph)
payo
ut (
US
$ m
illion
)
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How will it be financed ?
• International donors will provide initial seed capital via a World Bank Trust Fund
• Income: from premiums and from return on the invested seed capital
• Expenditure: reinsurance/ART premiums, Facility management and payouts when triggered
• Aiming for long-term survivability of Facility, so heavily reinsured initially
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Financial Flows
Reserves
Reinsurance/ART(Purchased in international
financial market)
Country 2
Country 3
Country 1
Country 4
Country 5
Country 6
Country 7
ReinsurancePremium
ReinsurancePayout
Payout
Premium
Initial donor contribution
Initial donor contribution
Initial donor contribution
Growth
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Reinsurance and ARTs
• Alternative Risk Transfer (ART) mechanisms such as Cat Bonds will be considered
• Risk transfer can be achieved through traditional reinsurance, but hurricane market very ‘hard’ right now, leading to high cost
• Capacity appears to be sufficient without impacting regional insurance industry
• Pooling, good definition of risk and geographical diversification should lead to better pricing from reinsurers and good market for capital instruments
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Risk Transfer
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How will it be operated ? – a working model
• CCRIF: an offshore captive, probably domiciled in Cayman or Bermuda, where regulatory regime and experience are optimal and barriers/administrative costs appear to be minimised
• Facility Board: 1 WB, 1 Donor and 1 client country representative, two ex-regional insurance or reinsurance experts
• Facility Supervision: contracted with a specialist risk management company; Facility will sub-contract certain admin functions (legal, accounting, regulatory), asset management (probably to World Bank Treasury) and reinsurance placement
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Facility Management
Reserves
Reinsurance/ART(Purchased in international
financial market)
ReinsurancePremium
ReinsurancePayout
Growth
Facility is managed by a Supervisor answering to a Board.
The Facility supervisor will:• Contract policies• Manage assets• Risk management • Manage claims• Meet regulatory obligations
Reinsurance or ART is placed in international market and adjusted annually
Reserves managed by the WB (all interest compound to the reserve)
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What are the primary benefits ?
• We believe the Facility offers the best mechanism to optimise catastrophe insurance pricing in the Caribbean
• Parametric contracts minimise Facility operational costs and simplify the insurance contract
• Cash with no strings will be available within 1 month of a triggering peril occurring
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Reducing insurance cost
• Commercial premium = pure premium + operational costs + catastrophe load + return on equity
• Pure premium will be better defined than in a normal indemnity policy, so less room for ‘conservatism’ in pricing the pure premium
• Operational costs minimised through economies of scale and parametric contracts
• Cat load reduced through geographical diversity and donor seed capital
• Facility will be non-profit
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Commercial vs Pure Premium in the Caribbean
32%
0%1%2%3%4%5%6%7%8%9%
10%
Bah
amas
Jam
aica
Ant
igua
&B
arbu
da
Dom
inic
a
St L
ucia
Bar
bado
s
St K
itts
and
Nev
is
Gre
nada
Trin
idad
St V
ince
nt a
ndth
e G
rena
dine
s
Pure premium
Commercial premium
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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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What are the barriers ?
• Where relevant, individual countries need to make exceptions to existing legislation (which may debar the purchase of insurance from offshore insurance vehicles)
• Individual countries will need to finance annual premium payments (3-year commitment)
• Pooling and diversification will only assist in reducing cost if we get a substantial number of countries taking part
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What do we need to move forward ?
• A good idea of which countries are interested and at what level (what annual premium might they be prepared to pay ?, for what payout ?)
• Transfer of all information to relevant officials so that countries are ready to sign once insurance policy contracts are finalised in September
• Countries need to move forward with enabling legislation, once operational structure is finalised
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We are here to help
• Our project team is tasked with helping all countries analyse the pros and cons of participation
• We will visit individual countries where necessary, and will host sub-regional seminars for country groups (OECS, UKOTs)
• Each country will have an assigned member of the team as primary contact – these team members will introduce themselves during the day
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Primary Contacts
• Dr Simon Young, GeoSY Ltd202 465 4301 [email protected]
• Matthew Pragnell, CGM Group876 906 0348
• Dr Jan Vermeiren, KAC240 821 1202
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Country Contacts
• Jamaica– Joe Matalon
• 876 922 6670• [email protected]
• Barbados– Tommy Smith
• 876 948 6995• [email protected]
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Country Contacts
• Trinidad & Tobago– Peter Melhado
• 876 922 6670• [email protected]
• Grenada, St Kitts & Nevis, Antigua & Barbuda, Dominica, Saint Lucia, St Vincent & the Grenadines, Belize– Steven Stichter
• 240 821 1202• [email protected]
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Country Contacts
• Cayman Islands, Bermuda– Saundra Bailey
• 876 906 0348• [email protected]
– Vikram Dhiman• 876 922 6670• [email protected]
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Country Contacts
• Montserrat, British Virgin Islands, Turks & Caicos Islands, Anguilla– Paul Rousseau
• 876 383 4698• [email protected]
• Bahamas, Guyana, Suriname– Bobby Dawes
• 876 906 0348• [email protected]