1. 1 Natural Catastrophe Insurance Scheme for Small States Presentation by Peter M Jones - MIGA World Bank Catastrophe Risk Financing Seminar, October 27, 2005.

2. 2 What is the Problem? Small states are heavily exposed to natural disasters (Windstorm, Earthquake, etc.) Their limited size and borrowing capacity restrict their resilience to disasters Heavy dependence on post disaster financing and aid from international donors Access to insurance is limited due to size of placement and high transaction costs Lack of historical information on intensity of natural disasters in some regions (Pacific & Indian Ocean)

3. 3 What is the Solution? Small states pool their risks to create economies of scale A captive insurance company, owned by the members of the pool and international donors, is created to act as the primary insurer Member countries and international donors provide risk capital to the captive The captive issues insurance cover using parametric triggers to the member countries The captive purchases reinsurance from the private insurance market

4. 4 Risk Financing Strategy Self-insure more frequent but less severe events (e.g., hurricanes with return period of 20 years or less) through the use of risk capital –Country A : Hurricane Cat 3 or less –Country B : Hurricane Cat 2 or less Reinsure less frequent but more severe events Cost of coverage decreases as reserve (risk capital) increases

5. 5 What is Parametric Insurance? Claims are paid based upon the intensity of a pre-defined natural event(s) occurring in a pre- defined area up to aggregate limit in any one year Compensation is paid immediately the event is measured (Cat 3 hurricane, 6.0 earthquake) Compensation is a pre-agreed amount based upon the intensity of the natural disaster It is not a contract of indemnity and does not require the loss to be evaluated

6. 6 Examples of Risk Gates 10km & 50km Buffer

7. 7 What are the benefits? Small States will gain access to affordable insurance through risk pooling and economies of scale (a larger and more diversified portfolio) Risk retention within the captive through the provision of risk bearing capital by international donors also reduces cost of premium Sharing of operational costs Multi-year coverage at a known premium Ensures immediate availability of sufficient liquidity to allow the country to stay on their feet after a natural disaster

8. 8 What are the disadvantages? Payments of compensation may not match actual losses Commitment to remain a member of the pool over the long term The loss of a key member country could adversely impact the future premiums of other members Total losses in a given year exceed the aggregate limit under the policy

9. 9 How would it work? A payment of compensation is triggered when a hurricane enters the insured location Compensation covers multiple hurricanes in any one year provided the payments do not exceed the aggregate limit of cover The premium rate is a function of: 1.The pure premium rate; 2.The operating costs & maintaining the captive; 3.The cost of capital and reinsurance; and 4.Allowance for unexpected loss

10. 10 Example Hurricane CategoryPayout (% of aggregate limit) Category 1Nil Category 220% Category 333% Category 450% Category 5100%

11. 11 Reaction of Reinsurance Market Very positive and supportive (post Katrina, but pre Rita) Attracted by the addition of countries and regions where exposure is low and thus adds to portfolio diversification Want to be seen to be supporting risk management by small states

12. 12 Next Steps Implement a pilot scheme for the CARICOM countries for the 2007 Hurricane season Commence process of sourcing event and loss information (windstorm and earthquake) for countries in both the Pacific and Indian Oceans Create, validate and achieve reinsurer acceptance of parametric risk models Expand the scope of the existing captive to provide cover for these extra regions.