The Americas | Hurricane Irma

The Caribbean’s pioneering form of disaster insurance

Too little, but not too late

ON SEPTEMBER 12th, before it could reckon how much damage Hurricane Irma had caused, Turks and Caicos got some heartening news. Within a fortnight the tiny Caribbean territory would get $13.6m to pay for disaster relief. Days earlier, Antigua and Barbuda, St Kitts and Nevis and Anguilla were pledged $15.6m. The sum, a substantial 1% of their combined GDP, won’t come from foreign do-gooders. It is a reward for home-grown prudence.

Like 13 other members of the Caribbean Community (Caricom) and Nicaragua, the four had been paying into the Caribbean Catastrophe Risk Insurance Facility (CCRIF). Created in 2007, it has so far doled out $69m to places battered by storms, floods and earthquakes. Unused funds are retained as reserves. Besides its own resources, CCRIF can draw on around $140m underwritten annually by reinsurers.

Spreading risk across Caricom and beyond—CCRIF is open to associate members such as Anguilla and, since 2015, to Central American countries—has kept premiums affordable. “Parametric” triggers release money automatically depending on how severe a calamity is (as measured by wind speed, rainfall or magnitude of tremors) rather than after a tedious damage assessment. That makes cash available in the critical early days.

Disaster-based financial instruments have been around since the 1990s. In 2006 Mexico issued the world’s first sovereign catastrophe bond to finance its Natural Disaster Fund (FONDEN); investors lose their principal if calamity occurs, as it did on September 7th when a powerful earthquake killed at least 96 people. This helps Mexico deal with the aftermath.

The Caribbean pioneered sovereign parametric insurance taken out by governments, not companies or households. Other parts of the world have followed. The African Union and the Pacific Islands Forum have launched CCRIF-like initiatives. In August the cyclone-prone Philippines set up something akin to FONDEN.

Such schemes have problems. The promise of payouts may encourage recklessness, such as building on vulnerable land. The money, which often flows directly into treasuries with a patchy governance record, could be misspent (or stolen). At first countries worried that unscrupulous brokers were overcharging for the reinsurance.

Still, CCRIF and the like are worthwhile, says Stefan Dercon, a disaster-finance expert at Oxford University. Insurance has not replaced broader preparations for disaster. On the contrary, Mr Dercon observes, “paying for insurance forces you to think what to insure” and how to protect those assets. Some schemes dictate how payouts must be spent. Premiums for reinsurance have fallen, suggesting brokers are keen to build markets, not bilk customers.

A bigger problem, says Simon Young, who until 2013 headed the company that supervises CCRIF, is that countries still scrimp on coverage. The Bahamas let its policy lapse and missed out on a $32m payout after Hurricane Matthew socked it in 2016. In some territories Irma has wiped out assets worth more than annual GDP. CCRIF will cover a fraction of that. As similar tragedies grow more common with climate change, governments may increasingly view premiums not as a cost, but as an investment.

This article appeared in the The Americas section of the print edition under the headline "Too little, but not too late"

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