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Should Barbados and the region be more focused on disaster risk insurance?
In the past decade, the frequency and severity of natural catastrophes and extreme events have radically increased, causing major economic losses and human suffering.
Despite the Caribbean being one of the more disaster-prone areas of the world, less than four per cent of disaster damage is covered by insurance – one of the lowest levels of coverage – compared to more than 30 per cent in North America, the region with the highest.
The low levels of private insurance observed in the region, along with the limited diversification of risk feasible at the domestic level, have created large volumes of contingent liabilities to governments in the aftermath of all too frequent storms.
It is here that the vital importance of insurance and risk management, in tackling the challenges posed by climate risk and extreme events, becomes apparent, particularly in small economies, given that insurability is essential for the welfare and growth of any society.
In a region where the lion’s share of both population and infrastructure rests along the coastline, the destruction of natural habitat, utilities, communication and transportation networks, as well as critical buildings is likely to endanger tourism and agriculture, the lifeblood of most economies in the Greater Caribbean.
Following a sequence of high profile natural catastrophes, private insurers in the region have shown an increasing reluctance to underwrite this type of risk leaving public agencies in many countries to fill the breach.
The lack of liquidity immediately after a disaster usually delays recovery and undermines public investment programmes.
For this reason, more effective financing strategies by taking ex ante actions are needed by regional governments.
Some of the alternatives available include the establishment of national insurance funds, reinsurance underwriting and use of hedging instruments in the capital market.
The region has seen the development of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the world’s first regional fund utilising parametric insurance, owned operated and registered in the Caribbean for Caribbean governments.
The fund, which has now been expanded to cover Central America under a separate facility, gives governments the opportunity to purchase catastrophe coverage with lowest-possible pricing.
Since losses by any given event tend to be concentrated in only a few countries, the CCRIF gains economies of scale and diversification by pooling all the countries in a single portfolio.
Given the inherent implication that the correlation of risk among the whole group of countries is low, it is expected that as reserves increase, the pool will become increasingly resilient and less dependent on reinsurance, with a consequent reduction in the cost of premiums.
Given the disaster history of the region, and its impact on the economies, the insurance and reinsurance sectors have given governments surprisingly little input to understand and set financial strategies in the face of the sovereign risk in the event of disasters.
It is well known that an efficient insurance industry can stimulate economic growth as well as reduce the exposure that entities both private and public face.
Accordingly, the future should not be seen as an exercise in gambling. All bets are off and the choice is ours.
George Nicholson is the director of transport and disaster risk reduction, Association of Caribbean States.