MANILA, Philippines – To address the increasing number of natural disasters, the Department of Finance is proposing a multi-nation natural catastrophe (NatCat) risk pooled insurance facility.
Finance Secretary Cesar V. Purisima made the proposal in the aftermath of the number of NatCat, which displaced millions of Filipinos. In fact, Purisima claims that he approached multilateral agencies, such as the World Bank and the Asian Development Bank (ADB), to help spearhead the NatCat insurance facility.
As an example, the finance chief cited the case of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), composed of 16 member governments in the Caribbean area.
CCRIF is a non-profit, multi nation risk pooling facility, owned, operated and registered in the Caribbean for Caribbean governments. It is designed to limit the financial impact of catastrophic hurricanes and earthquakes to Caribbean governments by quickly providing short-term liquidity.
The initial target of the risk-pooled facility is vulnerable nations in the Asia Pacific region, such as Indonesia, Thailand, Malaysia and Japan.
“We’ve proposed to the World Bank that all countries be asked to be part of a mandatory insurance pool and the insurance premium to be based on each country’s share of the carbon footprint,” Purisma said.
Meanwhile, the ADB, the Insurance Commission (IC), the finance department, the private insurance sector, and other pertinent government agencies are working on a pilot earthquake fund. It already received a $225-million technical assistance funding from the ADB.
The plan is to develop a financially sustainable pilot earthquake catastrophe insurance pool covering middle class and mid-sized enterprise property owners thus reducing the potential liability on the National Governments budget.
The ADB said that the pilot insurance pool would strengthen national private insurance companies’ ability to underwrite new policies on catastrophe risk and enhance their capacity to proactively manage and transfer risk to international reinsurance companies.
The Philippines is one of the most highly prone countries to natural disasters, including earthquakes, in the Asia Pacific region.
“We are continuing to explore other financial instruments to help us deal with financial risks brought by disasters,” Purisima said.
Meanwhile, the CCRIF was developed through funding from the Japanese government. It was subsequently 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.
It is considered a paradigm shift in the way governments treat risk, with Caribbean governments leading the way in pre-disaster planning. It operates as a public-private partnership, and is set up as a non-profit ‘mutual’ insurance entity in the Cayman Islands.
The facility utilizes a parametric insurance that should provide liquidity quickly.
The parametric system allows the facility to estimate the loss on the ground by using data from the National Hurricane Centre (NHC) in the case of hurricanes and the United States Geological Survey (USGS) in the case of earthquakes, and a pre-agreed proxy relationship developed within a catastrophe risk model.
“This method means that loss adjusters are not required to survey affected governments to determine loss, a process which can take several months or years and would prevent the CCRIF from doing what it was set out to do – get funds to member governments quickly,” data from the CCRIF said.
The information provided by the NHC and the USGS are in the public domain and so are available for scrutiny.
To a certain scale, it is similar to the weather-based microinsurance being utilized by some private non-life, NatCat-geared insurance companies.
The facility functions similarly to a mutual insurance company, which is controlled by its participating governments. It was initially capitalized by the participating countries themselves, with support from donor partners.
“One could consider a system by which several countries would agree to combine their emergency reserve funds into a common pool. If each individual country were to build up its own reserves to sustain a catastrophic event, the sum of these country-specific reserves would be much larger than the actual needs of the pooled countries in a given year.
“Considering that on average only one to three Caribbean countries are affected by a hurricane or an earthquake in any given year, a pool holding only the reserves for three potential payouts should be sufficient for the entire group of countries participating in the pool. Each year as the pool is depleted, participating countries would replenish it in proportion to their probable use of the funds in the pool.
“CCRIF works in a similar manner by combining the benefits of pooled reserves from participating countries with the financial capacity of the international financial markets,” it explained.
In 2009–2010, CCRIF’s aggregate exposure for policies written was just over $600 million, of which $20 million was retained by CCRIF, and $132.5 million in reinsurance being purchased above that to increase the claims-paying capacity of the facility.
Reinsurance was purchased from the international reinsurance markets, including Munich Re, Swiss Re, Paris Re, Partner Re and Lloyd’s of London syndicate Hiscox. The top layer of risk worth $30 million was placed into the capital markets via a catastrophe swap between CCRIF and the World Bank Treasury. The top of the reinsurance structure, at $152.5 million, provides claims-paying capacity for aggregate annual losses with a less than one-in-1,000 chance of occurring.