Can Public-Private Insurance Provide Sufficient Disaster Coverage?

Feb 16, 2010


The Inter-American Dialogue spoke with three experts in reference to public versus private insurance providers and proper disaster coverage.

Q: Haiti’s devastating Jan. 12 earthquake, which is feared to have caused as many as 200,000 deaths, was a sober reminder of the threat natural disasters pose to countries in Latin America and the Caribbean. Can public-private insurance mechanisms, like the World Bank’s Caribbean Catastrophe Risk Insurance Facility, provide sufficient protection to disaster-prone countries in the region? What should be done to improve governments’ access to such public-private facilities?

A: Simon R. Young, CEO of Caribbean Risk Managers Ltd. and facility supervisor of the Caribbean Catastrophe Risk Insurance Facility: “The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is the world’s first multi-country risk pool, and is also the first catastrophe fund to utilize parametric policies. It operates as a public-private partnership, providing a joint reserve mechanism for Caribbean governments, designed to limit the financial impact of natural disasters by quickly providing liquidity when a policy is triggered. CCRIF represents a cost-effective way to prefinance short-term sovereign liquidity after a hurricane or earthquake, filling the gap between immediate response aid and long-term redevelopment financing. CCRIF’s role in comprehensive disaster management is clearly highlighted in its response to the Jan. 12 earthquake in Haiti. Immediately after the earthquake, CCRIF indicated that the initial magnitude/location information (the ‘parameters’ required to calculate the loss) suggested that a payout would be triggered. Within a day, CCRIF announced that Haiti would receive $7.75 million and within 14 days the payout-approximately 20 times Haiti’s $385,500 premium for earthquake coverage-was made to Haiti’s government. Selection of different coverage options and payment of five times more premium could have yielded a payout of almost $100 million. While the CCRIF payout to Haiti is small compared to the actual losses, the funds were apparently well-received. According to Associated Press estimates, less than 1 percent of pledged aid to Haiti will provide actual liquidity to the government; thus CCRIF’s payout will play a critical role in helping to keep the wheels of government turning-by allowing the payment of salaries for the public sector, for example.”

A: Samantha Hu, based in Shanghai, and Gerardo Rodriguez-Albizu, based in Miami, associates at Diaz Reus & Targ, LLP: “Natural disasters such as earthquakes, floods and droughts in a developing country can have a devastating effect and cripple a country’s already fragile economic climate. How to mitigate such risk is a major challenge for governments in the developing and developed world alike. The unique characteristics offered by public-private insurance mechanisms should provide sufficient protection to disaster-prone countries. First, the public sector possesses the political and legal capabilities to set up the necessary infrastructure for the private sector to work unhindered. Second, private insurance companies are uniquely adept at dealing with economic catastrophes. Third, private insurance companies, coupled with the public sector’s political and socioeconomic capital, possess unbridled access to global financial markets. This combination allows local governments and NGOs to share the risks inherent in insuring the economic sustainability of disaster-prone countries. Although public-private partnership insurance mechanisms can meet the challenge, local governments play a pivotal role in providing access to those facilities. For example, a predictable and universally accepted legal framework is key. A stable, regulated insurance and capital market provides the private sector with the comfort level needed to partner with governments or NGOs. Moreover, it will provide private insurers with efficient access to global markets, thus creating the ideal environment to insure against such catastrophes like the one experienced in Haiti.”

A: Nikhil da Victoria Lobo, vice president of Insurance and Specialty at Swiss Re in New York: “By issuing its member governments parametric insurance policies, the CCRIF provides a transparent method for governments to quantify their risk exposure and transfer this exposure to the insurance and capital markets. The policies provide rapid funds to offset immediate emergency expenses, reducing reliance on post-disaster aid. Today, in addition to the CCRIF, the World Bank’s MultiCat Program and the IDB’s insurance facility for Central America also offer sovereign parametric insurance. With hundreds of millions of dollars of capacity annually, these platforms allow governments to choose what risk they retain and what they transfer. The CCRIF has proven that parametric insurance works. Haiti’s parametric earthquake insurance policy paid its full policy limit shortly after the disaster, and the CCRIF also made payments to members in 2008 and 2007 for other disasters. Unfortunately, Haiti’s earthquake policy was relatively small, with more resources allocated to the hurricane policy. Therefore, three steps should be taken to grow sovereign catastrophe risk transfer in the region. First, multilaterals and reinsurers should better explain to governments how these insurance platforms work and how they complement risk mitigation and management. Second, governments should join one of the platforms, using pilot transactions to build institutional capacity, enhance risk evaluation and foster risk consciousness. Finally, donors should fund further development and expansion of these platforms, even supporting initial premiums to encourage governments as first movers. Haiti’s earthquake was another painful reminder that natural disasters are unforeseeable in their timing and unpredictable in their impact. Insurance cannot solve these challenges but it can deliver a powerful antidote to alleviate some of the pain.”

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