The Caribbean Catastrophe RiskInsurance Initiative

Finance and Operations Strategy Project

Joseph M Matalon

Chairman, CGM Group

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 ?

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

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

)

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

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

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

Risk Transfer

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

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)

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

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

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

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

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

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

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

Primary Contacts

• Dr Simon Young, GeoSY Ltd202 465 4301 simon@geosy.com

• Matthew Pragnell, CGM Group876 906 0348

matthewpragnell@iibre.com

• Dr Jan Vermeiren, KAC240 821 1202

jcvermeiren@mail.methaz.net

Country Contacts

• Jamaica– Joe Matalon

• 876 922 6670• joseph@icdgroup.net

• Barbados– Tommy Smith

• 876 948 6995• thomassmith@iib-jm.com

Country Contacts

• Trinidad & Tobago– Peter Melhado

• 876 922 6670• peter.melhado@icdgroup.net

• Grenada, St Kitts & Nevis, Antigua & Barbuda, Dominica, Saint Lucia, St Vincent & the Grenadines, Belize– Steven Stichter

• 240 821 1202• sstichter@mail.methaz.net

Country Contacts

• Cayman Islands, Bermuda– Saundra Bailey

• 876 906 0348• saundrabailey@iibre.com

– Vikram Dhiman• 876 922 6670• vikramd@icdgroup.net

Country Contacts

• Montserrat, British Virgin Islands, Turks & Caicos Islands, Anguilla– Paul Rousseau

• 876 383 4698• paul@geosy.com

• Bahamas, Guyana, Suriname– Bobby Dawes

• 876 906 0348• eberledawes@iibre.com

Country Contacts

• Haiti– Clive Myers

• 876 906 0348• clivemyers@iibre.com