If only there was a way to make money on the hurricane season …
… there is.
Its called reinsurance sidecars – where investors buy-in to the risks and returns of insurance premiums.
Yes, we can …
This was detailed in a previous blog-commentary from the movement behind the book Go Lean…Caribbean. As we embark on the Hurricane Season 2018, it is important to remember that there is a better way – a Way Forward – to optimize Caribbean life. Let’s Encore that blog from October 13, 2017 here-now:
Go Lean Commentary – Funding Caribbean Risk
A penny saved is … a penny.
This is not exactly how the expression goes. It is supposed to refer to the good habit of “saving money”, which is a positive community ethos – underlying sentiment that informs the beliefs, customs, or practices. “Saving money” is a practice that the stewards of any society should advocate for its people. It’s a simple formula: Earn money; spend some; save some!
This is easier said than done. A practice of saving money – for a rainy day or any catastrophe – takes discipline, the discipline not to spend. One tactic is to pay yourself first! Before paying other overhead expenses, the priority would be to set aside monies in a savings program or some insurance program. Yes, an insurance strategy could be even smarter for rainy days or catastrophes; it allows the hedging of risks by leveraging across a wider pool; more people – savers – put-in and only a few … or just one withdraws. This is also the approach of the thoughtful Caribbean Catastrophe Risk Insurance Fund (CCRIF).
It is very sad when communities are not able to save or insure a “Rainy Day” fund for when it rains, especially in the tropical region where it doesn’t just rain, but pours and storms.
What is sadder is when the heavy-lifting of “savings” or insurance is done, but the dollar amount is not enough; because a “penny saved is only just a penny”.
This is the Caribbean dilemma, today. We have just experienced 2 devastating hurricanes – Irma and Maria – that have wreaked havoc on our region. We now need to tap the “Rainy Day” fund and frankly, it is simply not enough!
See the actuality of this dilemma in the news article here and the related VIDEO on CCRIF:
Title: CCRIF to make payouts to countries affected by Hurricane Irma
The Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC) will be making payouts totaling over US$15 million to three Caribbean countries affected by Hurricane Irma earlier this week.
“The CCRIF board and team offer condolences for the loss of life and hope these funds will provide some assistance. We stand ready to support the Government and people of these CCRIF countries as they recover from the effects of this devastating hurricane,” said CCRIF chief executive officer, Isaac Anthony.
Payments totaling US$15.2 million
The CCRIF plans to pay US$6.7 million to Antigua and Barbuda, US$6.5 million to Anguilla and US$2.2 million to St. Kitts-Nevis.
The storm has been blamed for at least 10 deaths and millions of dollars in property damages as it made its way through the Lesser Antilles this week.
In the case of Barbuda, Prime Minister Gaston Browne has ordered an immediate evacuation of some 1,800 people on the island. The government has also announced a state of emergency.
“Nothing is functional in Barbuda,” Browne said, adding that he has given instructions that ‘every single soul must be taken out of Barbuda”.
The CCRIF is verifying the payout calculations and is in discussion with the three governments about arrangements for the transfer of these funds. The transfer will be completed within 14 days after the storm, as mandated by CCRIF’s operational guidelines.
“Anguilla and St. Kitts & Nevis also have Excess Rainfall (XSR) policies and CCRIF is assessing if these policies were triggered by the rains from Hurricane Irma, which may possibly result in a second payout under those policies. The assessment under the XSR policies will be determined in the next few days,” the CCRIF added.
Segregated portfolio company
The CCRIF SPC is a segregated portfolio company, owned, operated and registered in the Caribbean. It limits the financial impact of catastrophic hurricanes, earthquakes and excess rainfall in the Caribbean and, since 2015, Central American governments by quickly providing short-term liquidity when a parametric insurance policy is triggered.
Since its inception in 2007, the facility has made 22 payouts for hurricanes, earthquakes and excess rainfall to 10-member governments totaling approximately US$69 million.
It said the new payments will bring the total payouts to approximately US$85 million. Last year CCRIF made payouts totaling US$29 million to four countries after Hurricane Matthew.
Source: Posted September 9, 2017; retrieved October 13, 2017 from: https://www.caribbeannationalweekly.com/caribbean-breaking-news-featured/ccrif-make-payouts-countries-affected-hurricane-irma/
VIDEO – WorldBank CCRIF Caribbean Gold – https://youtu.be/IlZ56ON9KnI
Published on Feb 28, 2017 – Working towards sovereign risk protection in the Caribbean and Central America.
We now know what CCRIF is; how it works; and who can engage this program in terms of investors and beneficiaries; see more encyclopedic details in the Appendix A below. But …
… it is the assessment of this commentary that CCRIF is flawed and inadequate for the Caribbean’s needs.
- The CCRIF is designed for 1-in-15 year hurricane (Source: http://www.ccrif.org/content/rtfs-faqs). Truth be told, thanks to Climate Change we are seeing storms yearly.
- There is a catastrophic trigger – complicated formula – which generates a “measly” payout for a hurricane or earthquake.
- This is a sovereign fund only and the trigger level is dependent on the coverage purchased by individual countries.
- The pool is too small. Member governments may purchase coverage which triggers for a ‘one-in-15-year’ hurricane and a ‘one-in-20-year’ earthquake, with maximum coverage of US$100M available for each peril. The cost of coverage is a direct function of the amount of risk being transferred, ensuring no cross-subsidisation of premiums and a level playing field for all participants.
This fund is “too little, too late” for what the region needs. But like all other Caribbean integration (CariCom) efforts, it is a good start! Still after 50 years of autonomous rule, the expectation is not just for a start, it is for solutions.
While the habit of “saving” or paying for insurance is a best-practice, the financial amount is important for the subjective assessment of success. The foregoing news article relates that $15.2 million will be paid-out to the affected countries. But this amount is so small, too small! Consider just for Hurricane Irma alone, the estimated damage amount has been tabulated at $62.87 billion. While $50 Billion of that amount relates to the US Mainland, the rest is the Caribbean. So the Caribbean’s share is $12.9 Billion; – see Chart here:
On the other hand. Hurricane Maria, has estimates for damages at $51.2 billion. None of that amount relates to the US Mainland, the amount is all Caribbean, considering Puerto Rico and the US Virgin Islands; see Chart here:
An immediate result of these storms on the Caribbean will probably be the defection of masses of people from the region. As of this date – October 12, 2017 – Puerto Rico is still not relieved nor recovered from Hurricane Maria. In fact 84% of the island still does not have power. Since Puerto Ricans are American citizens, they have freedom of movement from the island to the US Mainland. In addition, many of the other Caribbean islands will also suffer abandonment as the Diaspora is large in North America and Europe; so bonafide family connections will allow for their emigration. Expect more societal abandonment in the region!
The quest of the movement behind the book Go Lean…Caribbean – available to download for free – is to lower the abandonment rates of our Caribbean citizens fleeing the homeland. Our quest is conceivable, believable and achievable. But the status quo of the Caribbean Catastrophe Insurance Funds is inadequate; it must improve. It must reform and transform.
The Go Lean book describes a Way Forward. The book serves as a roadmap for the introduction and implementation of the technocratic Caribbean Union Trade Federation (CU), for the elevation of Caribbean society – for all member-states. This CU/Go Lean roadmap has these 3 prime directives:
- Optimization of the economic engines in order to grow the regional economy to $800 Billion and create 2.2 million new jobs.
- Establishment of a Homeland Security and Emergency Management apparatus to ensure public safety and protect the resultant economic engines.
- Improve Caribbean governance to support these engines, including a separation-of-powers between the member-states and CU federal agencies.
The book stresses that reforming and transforming the Caribbean societal engines must be a regional pursuit. This was an early motivation for the roadmap, as pronounced in the opening Declaration of Interdependence (Pages 12 – 13):
xi. Whereas all men are entitled to the benefits of good governance in a free society, “new guards” must be enacted to dissuade the emergence of incompetence, corruption, nepotism and cronyism at the peril of the people’s best interest. The Federation must guarantee the executions of a social contract between government and the governed.
xvi. Whereas security of our homeland is inextricably linked to prosperity of the homeland, the economic and security interest of the region needs to be aligned under the same governance. Since economic crimes … can imperil the functioning of the wheels of commerce for all the citizenry, the accedence of this Federation must equip the security apparatus with the tools and techniques for predictive and proactive interdictions.
xxiv. Whereas a free market economy can be induced and spurred for continuous progress, the Federation must install the controls to better manage aspects of the economy: jobs, inflation, savings rate, investments and other economic principles. Thereby attracting direct foreign investment because of the stability and vibrancy of our economy.
The Go Lean book provides 370-pages of turn-by-turn instructions on “how” to adopt new community ethos, plus the strategies, tactics, implementations and advocacies to execute so as to reboot, reform and transform the societal engines of Caribbean society, despite the reality and risks of natural disasters. Accepting that the CCRIF is a government-member-state solution, the Go Lean book proposes a supplement of private solutions, instruments facilitated by the region’s Capital Markets – think the Caribbean version of Wall Street. The Go Lean book proposal is for region-wide (all 30 member-states; 4 language groups) private insurance companies and Re-insurance Side-cars traded on the Capital Markets.
Re-insurance Side-cars is a derivative product – see Appendix B below.
Consider these sample references to Re-insurance Side-cars in the book:
|Tactical – Separation of Powers – Emergency Management Agency
There is also an economic/financial scope for this department. As the effort for a comprehensive property-casualty fund to cover the entire Caribbean region will also be coordinated by this agency. The classic solution is a large pool of premium payers and claims filed by the affected area. Beyond this model, there are also advanced products like re-issuance side-cars for market assimilation. The public can then invest and profit from the threat/realization of regional risks. This derivative product is a bet, a gamble, but in the end, the result is an insurance fund of last resort, much like the Joint Underwriters Agency (JUA) in Florida.
|Implementation – 10 Ways to Pay for Change
#8 Homeland Security – Hurricane Insurance Fund
The risk pool for a 42-million population is so much lower than each member-state’s sole mitigation efforts. The CU will establish (contract with a service provider) reinsurance funds (& sidecars) from Day One, and glean the excess premiums-over-claims as profit.
|Advocacy – Ways to Improve Housing
#7 Hurricane Risk Reinsurance Fund
This fund fits the Emergency Management objectives of rebuilding and restoring after disasters. This is similar to Florida’s Joint Underwriters Association but instead regulated at the CU so as to maximize the premium pool.
|Advocacy – 10 Revenue Sources
#9 Natural Disaster Insurance Fund
The CU’s Emergency Management Agency will maintain a regional reinsurance fund to offset the casualty coverage for insurance carriers in the region. The difference between premiums and claims constitute revenues for the CU.
|Advocacy – 10 Ways to Impact Public Works
#10 Capital Markets
A Single Market and currency union will allow for the emergence of viable capital markets for stocks and bonds (public and private), thereby creating the economic engine to fuel growth and development. This forges financial products for “pre” disaster project funding (drainage, levies, dykes, sea walls) and post disaster recovery (reinsurance sidecars).
|Advocacy – 10 Ways to Improve for Natural Disasters
#7 JUA-style Insurance Fund
The fiduciary management of premiums and claims to allow the immediate response for reconstruction after disasters. These financial services, sidecars traded in markets can be direct or indirect as in reinsurance or insurer-of-last-resort.
|Advocacy – 10 Ways to Improve for Emergency Management
#8 Casualty Insurance Plans – Reinsurance “Sidecars”
There is also a financial battlefield for Emergency Management. Reinsurance “sidecars” allow investment bonds to be issued in the financial marketplaces to raise casualty insurance capital. The differences between premiums and claims (plus reserves) equal the profit to be shared with investors. The end result should be an insurance fund of last resort.
|Advocacy – 10 Ways to Develop a Pre-Fab Housing Industry
#10 Homeowners Casualty Insurance
Pre-Fab-ulous houses will be built with the structural integrity to withstand typical tropical storms/hurricanes. The CU will facilitate the Property Casualty insurance industry by offering Reinsurance sidecar options on the capital markets.
|Advocacy – 10 Ways to Improve Fisheries
#7 Marine Financing
There is also a financial element to facilitating the Fisheries industry. Most fishing vessels require financing and insurance products. These areas have gotten more challenging with “climate change” and the higher propensity of hurricanes. The CU will adopt advanced financial products for the region’s capital-securities markets (i.e. Reinsurance sidecars), to offer the prospects of risk-and-reward to investors, thus inviting more capital to the fisheries marketplace.
|Advocacy – 10 Ways to Help the Middle Class
Prepare for Healthcare Realities
While a Middle Class family may obtain a degree of financial security, just one catastrophic illness or injury can wipe out a family’s fortunes overnight. This is the proper place for insurance programs, and reinsurance to hedge the risk for carriers. The CU will proactively institute the measures (industry) to protect Middle Class prospects from this real threat.
|Advocacy – 10 Ways to Impact The Guianas
#4 Disaster Planning, Preparation & Response
Hurricanes are not as dire a threat for The Guianas as the Caribbean islands, yet still there are many natural disasters for this region to contend with, namely floods and earthquakes. The CU will better plan-prepare-respond, with Public Works initiatives (dams, reservoirs) and a professional Emergency Management Agency to recover with elite financial products (i.e. reinsurance sidecars) powered by regional capital markets to restore economic engines in these Guiana states.
|Advocacy – 10 Ways to Impact Belize
#7 Disaster Planning, Preparation & Response
Mother Nature, and the reality of hurricanes, has been a source of contention in Belize’s history. The CU will better plan-prepare-respond with a professional Emergency Management Agency and recover with elite financial products (i.e. reinsurance sidecars) powered by capital markets so as to restore economic engines in Belize.
|Advocacy – 10 Ways to Impact US Territories
Advocacy – 10 Ways to Impact British Territories
Advocacy – 10 Ways to Impact Dutch Territories
Advocacy – 10 Ways to Impact French Territories
#4 Disaster Preparation & Response
Mother Nature, and the reality of hurricanes, plays no favorites for one island versus another due to political alliance. The CU will better plan-prepare-respond, with a professional Emergency Management Agency and recover with elite financial products (i.e. reinsurance sidecars) powered by regional capital markets to quickly restore economic engines in the islands.
As an individual or community, to devote a lot of time, talent and treasury to the practice of saving for a rainy-day fund is a positive ethos. To only get a measly payoff – after all that effort – is a negative. The manifestation of this measly scenario calls into question the whole viability of the Caribbean “pooled” risk strategy.
We must do better! Solutions abound!
Engaging a bigger-better regional risk pool, makes our quest realistic: a better homeland to live, work and play. We urge all Caribbean stakeholders – governments and citizens alike – to lean-in for the empowerments described here in the book Go Lean…Caribbean. 🙂
Sign the petition to lean-in for this roadmap for the Caribbean Union Trade Federation.
Appendix A – Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company (CCRIF SPC)
[This CCRIF SPC] is an insurance company headquartered in the Cayman Islands. The sixteen original member-countries of CCRIF included participants in CARICOM, and the membership of the Board of Directors is selected by CARICOM and by the Caribbean Development Bank.
Founded in 2007, CCRIF is the first multi-country risk pool in the world, and was the first insurance instrument to successfully develop parametric policies backed by both traditional and capital markets. These parametric polices release funds based upon factors of a calamity such as rainfall or wind speed, which can speed up the payout of policies rather than after damages are assessed. Unused funds are kept as reserves for the CCRIF. The fund can also draw upon $140 million in funds underwritten by reinsurance.
Source: Retrieved October 13, 2017 from: https://en.wikipedia.org/wiki/Caribbean_Catastrophe_Risk_Insurance_Facility_Segregated_Portfolio_Company
Appendix B – Reinsurance sidecars
Reinsurance sidecars, conventionally referred to as “sidecars”, are financial structures that are created to allow investors to take on the risk and return of a group of insurance policies (a “book of business”) written by an insurer or reinsurer (henceforth re/insurer) and earn the risk and return that arises from that business. A re/insurer will only pay (“cede”) the premiums associated with a book of business to such an entity if the investors place sufficient funds in the vehicle to ensure that it can meet claims if they arise. Typically, the liability of investors is limited to these funds. These structures have become quite prominent in the aftermath of Hurricane Katrina as a vehicle for re/insurers to add risk-bearing capacity, and for investors to participate in the potential profits resulting from sharp price increases in re/insurance over the four quarters following Katrina. An earlier and smaller generation of sidecars were created after 9/11 for the same purpose. …
Market growth following 9-11 and Hurricane Katrina
In the years following 9-11, the idea of raising funds from capital markets investors in addition to re/insurers to support quota-shares arose and a handful of such ventures were consummated (Olympus, DaVinci, Rockridge). These were the first true sidecars, and were a natural outgrowth of the development of re/insurance as an asset class in the form of catastrophe bonds.
Following Hurricane Katrina, the sidecar idea became very prominent among investors because it was seen as a way to participate in the risk/return of the higher-priced (“hard”) reinsurance market without investing in either existing reinsurers (who might have liabilities from the past that would undermine returns) or new reinsurers (“newcos” that would have a lengthy and expensive “ramp up” period).
Source: Retrieved October 13, 2017 from: https://en.wikipedia.org/wiki/Reinsurance_sidecar