Published On: Tue, Apr 22nd, 2014

Caribbean and Central American countries team up for catastrophe risk coverage

ccrifWASHINGTON, USA - When the 2010 earthquake struck Haiti, the Caribbean Catastrophe Risk Insurance Facility’s (CCRIF) was the first institution able to mobilize emergency funds within the first two weeks of the disaster to respond to the immediate needs of the government.

Since its creation seven years ago, CCRIF has made eight payouts amounting to US$32 million to help countries manage budget volatility in the aftermath of recent natural hazards. This mechanism has successfully leveraged capital and insurance market capacity to strengthen climate resilience in these countries.

As individuals, we are used to paying relatively small premiums to protect our families in case our houses were threatened by natural events. Small island states in the Caribbean have been applying a similar model to protect themselves against far more likely and more devastating risks caused by tropical storms and earthquakes.

Nine countries in Central America and the Caribbean experienced a disaster which had an economic impact above 50 percent of their annual GDP since 1980. The impact of Haiti’s earthquake was estimated at 120 percent of GDP. The same year, tropical cyclone Agatha, in Guatemala, had devastating consequences and poverty rates increased by 5.5 percent. One year after the shock, food expenditures were 10 to 13 percent lower and school enrollment fell by 4 percent amongst children age 7 to 11 in rural areas.

For the first time, ministers of finance of the Caribbean and Central American countries met during the World Bank Group and IMF Spring Meetings to draw lessons from the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and see how this mechanism could be leveraged and opened up to Central American countries to cover tropical storms, earthquakes and other risks, including excess rainfall.

Nicaragua and Honduras were the first countries from Central America to announce they will be joining the facility. Other Central American countries including Panama, Costa Rica, Guatemala and El Salvador also have expressed strong interest in becoming members of the CCRIF.

During the meeting, the US Treasury and Mexico announced that they would support the initiative and provide US$10 million each, in addition to the approximately US$15 million contribution already provided by Canada.

Leonard Martinez-Diaz, deputy assistant secretary, environment and energy, US Department of Treasury, called on other donors present during the meeting to contribute.

“We need to introduce a culture of insurance,” he said. “As a donor, it is very exciting to see a useful application in the area of climate adaptation that is really sustainable”.

Why is it important to introduce a culture of insurance?

CCRIF is designed to offer insurance at affordable rates. Because of its large membership, it has been able to diversify its portfolio and purchase insurance coverage at more favourable terms, resulting in an average of 50 percent savings, in comparison to countries who bought insurance individually from international markets.

This first meeting looked at the benefits of expanding the facility to a larger pool of countries, which would not only provide savings on the operating costs, but also significantly reduce the premiums to existing members.

Hasan Tuluy, World Bank vice president for Latin America and the Caribbean, who was chairing the meeting, highlighted that the CCRIF is a true example of both a regional public good where collective action has clear financial benefits as well as a private-public partnership that can help countries address the adverse impacts of a changing climate.

Tuluy concluded the discussion by announcing a pledging conference for donors to contribute to this initiative in October at the margins of the World Bank’s annual meetings.

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