Authors: Servaas Houben
link: http://theeuropeanactuary.org/downloads/TEA%201-10%20SCREEN.pdf (page 12)
Publisher, publication date: The European Actuary, 2015-04
Although the ABC islands (Aruba, Bonaire and Curacao) have been hit by natural disasters in the past, the frequency of these natural disasters has been rather limited. The most recent hurricane occurred in 2010 (Tomas) and damage was mainly caused by water instead of wind. Another flooding event occurred in Aruba in 2004 (Hurricane Iwan). However the number of natural disasters in the ABC islands is small when compared with most other Caribbean islands:
|Country||Nr of disasters||Country||Nr of disasters||Country||Nr of disasters|
|Anguilla||2||Dominican Republic||12||Puerto Rico||11|
|Antigua and Barbuda||7||Grenada||2||St Kitts and Nevis||7|
|Belize||6||Haiti||22||Saint Vincent and Grenadines||13|
|British Virgin Islands||5||Martinique||13||Trinidad and Tobago||8|
|Cuba||23||Montserrat||6||Turks and Caicos||2|
|Dominica||9||Netherlands Antilles||3||US Virgin Islands||17|
Table 1: natural disasters across the Caribbean from 1899 to 1996
The table above also highlights the concentration of risks within the Caribbean. Therefore one can hardly speak of a homogeneous geographical area for which risk assessments can be easily combined. Furthermore, the limited size and population of most countries, resulting in limited data on premium income and expense outgo, creates a further pricing challenge. Wind and flooding disasters are the most relevant risks for the Dutch Caribbean and the exposure to earthquakes is very limited.
Despite these challenges, most insurance companies apply reinsurance. These reinsurance companies tend to be generally foreign, as the limited scale has so far discouraged any local reinsurance companies to play an important role. Furthermore the current local legislation, based on a kind of Solvency I regime, is not risk based yet and hence the focus is mainly on P&L and solvency ratios, instead of risk measurement and management. Nevertheless, the latest draft guidelines are showing a move towards risk assessment and quantification and hence the risk reducing role of reinsurance may be expected to play a more central role in the coming years.
Apart from the traditional reinsurance companies (with worldwide coverage), a regional collaboration has been created from mainly former West-Indies countries. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) tries to reduce natural disaster expenses through the pooling of risks, and by avoiding potential mark-ups that would occur when using traditional reinsurance. Especially the access to immediate liquidity might be an attractive characteristic which is so vital when natural disasters occur.
An interesting development is the introduction of micro insurance in Haiti, a country prone to natural disasters. This program is especially focused on the poor who rely on small-scale farming, whose income is heavily affected by natural disasters.
Reinsurance pricing in the Dutch Caribbean is a challenging business as the islands are not part of the more homogeneous hurricane belt: although this is a huge advantage in respect of less human tragedy, the lack of data and events makes the pricing of natural disaster risks all the more difficult. Pooling of risks like in the CCRIF framework might be an interesting alternative, although most countries in the CCRIF not only suffer from hurricanes but also from earthquakes, while the Dutch Caribbean are not exposed to the latter. Therefore, looking for countries with more similar risk characteristics to share risk exposure might be a sensible alternative.
Axco Reinsurance report, Dutch Caribbean – Life & Benefits, September 2014
Axco Reinsurance report, Dutch Caribbean – Non-Life (P&C), September 2014
Caribbean Catastrophe Risk Insurance Facility (CCRIF), Pooling Risk to Protect Against Natural Disasters, January 2011
Information on Haiti micro-insurance, http://www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_site/industries/financial+markets/retail+finance/insurance/micro
World Bank, Insurance, Reinsurance and Catastrophe Protection in the Caribbean, May 1996