The Caribbean Catastrophe RiskInsurance Facility

Structure of the Facility

Joseph M. Matalon

Chairman, CGM Group

Outline

• Governance Structure

• Operating Structure

• Financial Strategy– DFA– Benefits of pooling– Capital growth and sustainability– Initial capitalisation

Facility Governance

CCRI Facility

Captive insurance Company

BOARD OF DIRECTORS

1 WB Nominee1 Donor Nominee

1 Nominee from Countries2 Independent Insurance Experts

CCRII Trust

Trust owns the Captive

Settlor

World Bank

Trust DeedBeneficiaries

Participating countries

Facility Management

Reserves

Reinsurance/ART(Purchased in international

financial market)

Risk TransferPayments

Risk Transfer Receipts

Growth

A Captive Manager will be employed to perform ‘back-office’ functions of the Facility

The Facility Supervisor will perform ‘front-office’ functions, including:• Risk management and financial modelling• Policy sales and collections• Claims adjudication and settlement

Reinsurance or ART is placed in international market through a Placement Broker

Reserves managed by the World Bank (all interest compound to the reserve)

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 invested seed capital and surpluses

• Expenditure: reinsurance/ART payments, Facility management costs and loss payouts when triggered

• Aiming for long-term survivability of Facility, so heavily reinsured initially

Financial Flows

Reserves

Reinsurance/ART(Purchased in international

financial markets)

Country 2

Country 3

Country 1

Country 4

Country 5

Country 6

Country 7

Risk TransferPayments

Risk TransferReceipts

LossPayments

Premium

Initial donor contribution

Initial donor contribution

Initial donor contribution

Growth

Reinsurance and ARTs

• Alternative Risk Transfer (ART) mechanisms such as Cat Bonds and Risk Swaps are being considered in conjunction with the World Bank Treasury

• Risk transfer will also be achieved through traditional reinsurance; while the catastrophe market is very ‘hard’ right now, the low level of hurricane activity this season may soften the market

• Pooling, good definition of risk and geographical diversification should lead to better pricing from reinsurers and good market for capital instruments

• The Dynamic Financial Analysis (DFA) model developed by the project team will enable the Facility Supervisor to structure risk transfer in the most cost-effective manner

Tangible benefits of pooling

$0

$50,000,000

$100,000,000

$150,000,000

$200,000,000

$250,000,000

$300,000,000

$350,000,000

$400,000,000

Quake Hurricane

Lo

ss

(U

SD

)

Facility Loss, 150-yr

Aggregate of country losses

Growth and sustainability

• The DFA allows forward modelling of the financial health of the Facility when subjected to catastrophe events

• Country premium rates will be as low as possible while retaining the ability of the Facility to grow its capital and to cover all losses

• As capital grows, coverage can be expanded and premium rate changes can be isolated from reinsurance market cycles

Initial capitalisation

• Establishment of the Facility would be impossible without substantial capitalisation provided by the Donor Community, which allows for flexibility in transfer and retention of risk

• This Donor commitment to the region will only be to the benefit of those countries who participate in the Facility

• Greater initial capitalisation translates into greater benefits to participating countries through reduced premium costs

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 make budgetary provisions for the initial deposit and annual premium payments – the Facility will operate most effectively with long term commitment by countries to participate

• Pooling and diversification will only assist in reducing cost if we get a substantial number of countries taking part

Summary

• The Facility is being structured so as to make the most efficient use of both Donor capital and participant premium payments

• The Governance structure will be transparent and will ensure that the Facility is operated in the best interest of all participants

• Significant financial benefits accrue to the region as a whole through the innovative mechanisms provided by the Facility