CCRIF – what it is and how/why it works Matthew Pragnell CEO, CGM Gallagher Group Director, Caribbean Risk Managers Ltd (Facility Supervisor) [email protected].

CCRIF – what it is and how/why it works

Matthew Pragnell

CEO, CGM Gallagher Group

Director, Caribbean Risk Managers Ltd

(Facility Supervisor)[email protected]

Regional Workshop: How can Governments better cope with climate risk in agriculture.

Queretaro – 9th October 2008

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Background

• CARICOM Heads of Government asked the World Bank to design and implement a cost-effective risk transfer programme

• They were prompted by the almost 200% of GDP damage inflicted on both Grenada and the Cayman Islands by Hurricane Ivan in 2004

• All parties identified the high exposure to natural hazards that existed across the region to the small island economies, and the consequential risk to sustainable development

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Hurricane Ivan

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Aims of CCRIF

• To cover the post-disaster liquidity gap faced by governments between immediate emergency aid and long-term redevelopment assistance

• To enable governments to receive money quickly, with the amount calculated completely objectively

• To minimise the burden on governments to provide exposure information prior to coverage being initiated and loss information after a disaster

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How CCRIF was put together

• Japanese government funded the development project through the Jamaica Social Investment Fund (~US$ 1.6 million in development budget)

• WB provided technical input alongside two main contractors, EQECAT for modelling and CGM consortium for developing the financing and operational strategy

• Work started in March 2006 and the Facility was incorporated in April 2007, with first policies incepting on 1 June 2007

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Structure of CCRIF

• CCRIF is a Cayman-domiciled insurance company owned by a special purpose trust

• It is governed by a trust deed, within which the 5 directors must ensure that the CCRIF operates

• The board has representation from participants (via CARICOM nominee) and donors (via CDB nominee), and has two technical experts

• CCRIF’s operations are laid out in an Operations Manual and are executed by a number of service-provider companies (Facility Supervisor, Insurance Manager, Reinsurance Broker, Asset Manager, Communications/PR Advisor)

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Organigram

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Types of coverage

• CCRIF currently offers parametric policies for wind and earthquake

• Policies have a high per-event deductible (1 in 15-yr loss for hurricane, 1 in 20-yr for quake) and an annual coverage limit

• Pricing is calculated as a function of the pure risk (Average Annualized Loss) on each contract

• Coverage is designed to cover short term revenue shortfall (c.f. Business Interruption), NOT infrastructure, indirect social costs, etc

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Risk Management

• CCRIF issued 30 annual policies to 16 CARICOM countries in 2008

• CCRIF initially raised capital to cover claims and operating costs from donors (c. US$50 million) and from its participants (c. US$22 million)

• Reinsurance is purchased to increase claims paying capacity, with CCRIF retaining the first US$12.5 million

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Risk Metrics

• CCRIF uses dynamic financial analysis to forward-model its finances and guide risk transfer decisions

• For 2008, CCRIF purchased US$132.5 million in excess of loss reinsurance, whilst retaining US$12.5 million

• Claims paying capacity is greater than the modelled aggregate annual loss with a 1 in 10,000 chance of occurring

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Financial Strategy

• Annual premium income is c. US$22 million at a multiple of 2.25 to AAL for each participant

• CCRIF plans to reduce the premium ratio by up to 33% over the coming 2-3 years

• Capital continues to build to a level such that premium pricing is minimised for an acceptable level of long-term survivability

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Benefits

• Pooling of risk across wide geographical area provides excellent diversification

• Pricing based on technical risk avoids cross-subsidisation

• Parametric policies allow total objectivity and rapid payouts

• Pooling into single reinsurance transaction improves access and pricing and allows innovative structures

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Limitations

• High deductible means that it only covers major catastrophe events in which national economies are severely impacted

• Basis risk means that events can occur which produce significant losses but no payout (and the opposite is possible)

• Concept of parametric is poorly understood, so clients expect their ‘insurance policy’ to cover everything

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Development Plans

• Expand membership– to further diversify risk– to enable access to CCRIF for a broader range of

countries

• Provide new products– Rainfall/flood coverage – Electrical transmission/distribution cover– Parametric agricultural coverage for governments

• Improve current products by updating/revising cat modelling

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Outreach

• CCRIF continues to engage its stakeholders through workshops, conference presentations and development/distribution of multi-media information packages

• CCRIF works closely with many Caribbean technical agencies and development agency partners in support of increased understanding and use of risk management for sustainable development

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Conclusions

• CCRIF is the world’s first parametric risk pool and the first multi-national pool covering sovereign risk

• CCRIF has successfully implemented a low-cost insurance programme for governments which has maximised its attraction to participants, donors and risk transfer markets

• CCRIF works because– payouts are fast– premiums are low– the pool is mutually beneficial and transparently fair

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Lessons for agri-insurance

• Parametric agricultural insurance will require lower return-period attachment points, so modelling and policy design will need to be higher resolution to achieve acceptably low basis risk

• CCRIF keeps operational costs low by dealing with governments directly and by being a ‘virtual’ organisation. This model cannot work in the agricultural sector without a ‘middle-man’ (govt. or private sector) to manage participants at the farmer/smallholder level

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