Securing access to financial resources before a disaster strikes through sovereign catastrophe risk pools allows countries to respond quickly to disasters and reduce their impact on people and their livelihoods.
This is what islands in both the Caribbean and the Pacific have done over the last decade through regional risk pools -- the Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC) and the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) Insurance Program.
In the aftermath of Hurricanes Irma and Maria this past September, CCRIF SPC provided $29.6 million in payouts in less than 15 days to six Caribbean countries: Antigua & Barbuda, Anguilla, Haiti, Saint Kitts & Nevis, The Bahamas, and Turks & Caicos Islands, while in Dominica, the CCRIF SPC along with an existing World Bank disaster reduction project, made a $19 million payout.
Likewise, in 2015, just seven days after Cyclone Pam devastated Vanuatu -- leaving one-third of the island’s population homeless and causing damages equivalent to more than 60% of the GDP -- the government received a $2 million payout from the insurance policy it had purchased through PCRAFI. While $2 million may not be a large amount of money, it was eight times the government’s emergency provision and was critical for funding urgent priorities, such as flying medical personnel to the worst affected areas.
Through sovereign catastrophe risk pools, countries can pool risks in a diversified portfolio, retain some of the risk through joint reserves and capital, and transfer excess risk to the reinsurance and capital markets.
Since it is highly unlikely that several countries will be hit by a major disaster within the same year, the diversification among participating countries creates a more stable and less capital-intensive portfolio, which is cheaper to reinsure.
By putting a price tag on risk, sovereign catastrophe risk pools can also create incentives for countries to invest in risk reduction.
This is important because donor assistance is struggling to meet the rising cost of disasters, and insurance coverage remains low in vulnerable countries. At the same time, disaster losses are on the rise, with climate-hazards increasing in frequency and intensity, and more people and assets in harm’s way.
Already the impact of natural disasters is equivalent to a $520 billion loss in annual consumption, and forces some 26 million people into poverty each year.
In the last 10 years, 26 countries in three regions—Africa, the Pacific, and the Caribbean and Central America—have joined three sovereign catastrophe risk pools, thanks in part to contributions from donors, who provided technical and financial resources to support them. They have purchased parametric catastrophe risk insurance for an aggregate coverrage of $870 million and an aggregate premium volume of $56.6. million, backed by more than 30 reinsurance companies. The three pools have made $105 million in payouts to date.
Reviewing this experience, a new report prepared by the World Bank and Global Facility for Disaster Reduction and Recovery (GFDRR) shows that catastrophe risk pools can play an important role in moving the management of disaster and climate shocks away from ad hoc humanitarian assistance toward planned development. The report, Sovereign Catastrophe Risk Pools: A World Bank Technical Contribution to the G20, makes the case for stronger cooperation between G20 countries and developing countries on disaster and climate risk financing and insurance. The report was instrumental to the G20 endorsement of the new Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions which will be launched at COP23.
Ultimately, risk pools are only one element of an effective approach to risk management. To reduce the impact of disasters on people, livelihoods and national budgets, governments should consider ways to identify and reduce the underlying drivers of risk. Risk pools, along with other disaster risk finance and insurance solutions, complement risk reduction by helping governments address those risks that can’t be mitigated. They also help move risk management toward a proactive approach focused on planning financial responses in advance, rather than relying on fundraising efforts in the aftermath of disasters.
The report shows that political commitment, donor support, sound operational design, and financial sustainability form the foundation of sucessful risk pools.