Pre-Seminar Debate - The Evolution of Natural Catastrophe Coverage in France ...
CCRIF 2007
1. 24
The joy of winning
…A solution to withstand the elements
Motivated by the terrible damage
wreaked by the 2004 hurricane sea-
son, which claimed thousands of
lives in the Caribbean, the World
Bank set about planning a viable
insurance solution for this region.
The island states, while particularly
exposed, had no adequate means of
insuring themselves against natural
catastrophe losses and the nancial
consequences. Their economic situ-
ation was all the more precarious
because storm losses also wiped out
their main sources of income, tour-
ism and agriculture. The only relief
was provided by donor countries
via the World Bank, but this aid was
usually not paid out to the countries
affected until weeks or months after
the event – too late to repair the worst
damage or to help the people in the
regions hardest hit.
Together with insurance broker
Ben eld in London, the World Bank
therefore developed a solution for
the Caribbean island states that was
based on a parametric trigger. If the
intensity of a storm or earthquake
exceeds a prede ned threshold –
measured in terms of wind speed or
ground acceleration, for example –
the country affected immediately
receives a payment that constitutes
a reasonable approximation of the
expected loss. In this scheme, the
CCRIF functions as a primary insurer
and contract partner for the insured
states and, in turn, has to reinsure
itself at market conditions.
Given our expertise in this area, the
Word Bank approached Munich Re at
the beginning of 2006 to ask for our
support with the project. Our experts
examined the concept and also the
trigger function (which ensures that
the parametric criteria are related as
closely as possible to the probable
losses in each individual country) and
proposed several modi cations.
Munich Re assumes syndicate lead
Finally, in May 2006, Ben eld put the
reinsurance capacity out to tender in
a roadshow. Within a very short time,
thanks to smooth interdisciplinary
cooperation between our underwrit-
ing experts, geo risk researchers,
mathematicians and the innovation
team responsible, we were able to
quote a risk-adequate but competi-
tive price and to offer capacity of up
to 100%. The successful outcome was
that Munich Re assumed the syndi-
cate lead for CCRIF’s reinsurance and
obtained the lion‘s share of the rein-
surance programme. In good time
before the beginning of last year’s
hurricane season, the CCRIF was able
to offer cover, with the result that
16 Caribbean states were insured
against natural catastrophe losses as
from 1 June 2007.
What are the details of this new type
of insurance solution? The participat-
ing countries can currently insure
themselves via the CCRIF against
hurricane and earthquake losses.
Principally, the CCRIF covers losses
from natural catastrophes that are to
be expected in this region every 20 to
150 years.
The talk was nearly always of hurri-
cane damage in Florida or New
Orleans, but en route the hurricanes
had usually left a trail of destruction
across the Caribbean. The Caribbean
Islands are an exposed region in
which governments were unable to
insure themselves against natural
catastrophe losses. This has now
changed. Since 2007, the island states
of the Caribbean have had access to
a new form of coverage for hurricane
and earthquake losses via the Carib-
bean Catastrophe Risk Insurance
Facility (CCRIF). Munich Re partnered
the innovative idea from the outset
and, as syndicate leader, is assuming
a large part of the reinsurance.
1:20
Attachment point
1:150
Exhaustion point
Flexible solution
The CCRIF enables even financially weak
states to protect themselves against peak
risks. The given range of cover is an occur-
rence probability of at least 1:20 and at
most 1:150, i.e. the natural catastrophe in
question occurs statistically every 20 to
150 years. Within this range, the insured
states can determine the cover they
desire. The retention is always at least
50%.
Source: Munich Re
Ceded portion (max. 50%)
50%
0%
100%Self insurance
Munich Re Group Annual Report 2007
2. 25Munich Re Group Annual Report 2007
The joy of winning
Within this range, the countries can
select the degree of protection they
desire – for instance, only starting at
events with an occurrence probability
of 50 years, or ending at a 125-year
event. In addition, the states deter-
mine what portion of the potential
losses they are willing to carry them-
selves, thus controlling the size of the
insurance premium. In this way, even
nancially weak states can insure
themselves against peak risks.
Clear concept, swift payments
A further great advantage of the
scheme is that the parametric trigger,
being based solely on objective
measurements such as wind speed
or ground acceleration, enables cash
payments to be made more quickly
than under customary insurance
models based on the actual losses
incurred. Compensation can be paid
after a storm as soon as the requisite
independent readings are available
and have been veri ed, so that
urgently needed measures for repair-
ing the infrastructure, for example,
can be nanced without much delay.
The CCRIF carries losses of up to
US$ 10m per year itself and has
obtained additional cover of
US$ 110m. This is placed on the
reinsurance market but also on the
capital markets where, for risks of
US$ 20m, Munich Re’s Risk Trading
Unit designed a natural catastrophe
swap, which was concluded between
the Word Bank and the CCRIF. Under
an identical swap between the World
Bank and Munich Re, these risks were
subsequently passed on to Munich
Re. This means that for the rst time
emerging countries, too, are indi-
rectly using the capital market to
cover natural catastrophe risks.
2007 already demonstrated the
importance of such coverage for the
region, even though it was a year
with relatively low losses. After an
earthquake shook the Caribbean on
29 November, the trigger was acti-
vated for the rst time for the islands
of St. Lucia and Dominica – and the
CCRIF paid immediately. As the
claims burden for the CCRIF was
within its retention of US$ 10m, the
reinsurance cover was not affected.
But the potential bene ts of the
CCRIF idea do not end there. This
coverage model could be extended to
other natural hazards or transferred
to other regions. In other words, it
presents many different opportun-
ities for accessing new markets and
client groups with innovative prod-
ucts, and generating pro table
growth.
Threatened paradise: Previously, the Carib-
bean island states were scarcely able to
insure themselves against natural catas-
trophes. Thomas Raab (left), Underwriting
Manager for the Caribbean, and Andreas
Moser (right) from the Innovative Solutions
Team, worked successfully to change this.