Living up to our responsibilities

Partnerships between the private and public sectors can greatly enhance insurance protection in emerging and developing countries. One of the most successful in a series of innovative solutions supported by Swiss Re provides insurance cover for natural catastrophes in the Caribbean.

Closing the insurance gap in emerging countries

One important problem for emerging and developing countries is their low level of insurance protection – all the more of a problem since many of them face a range of substantial perils, from windstorms and floods to earthquakes. Inadequate insurance protection means that the damage and costs from natural disasters can set back economic and social development by years.

Supporting developing countries to become more resilient to major risks is a key objective for us. Given the current lack of efficient local insurance markets, partnerships with public sector organisations – governments, NGOs, microfinance institutions or supranational organisations – play a central role in meeting this objective. Over recent years, we have built a solid track record of creating innovative risk transfer solutions based on public-private partnerships.

Effective disaster protection for the Caribbean

Swiss Re is the lead reinsurer for the Caribbean Catastrophe Risk Insurance Facility (CCRIF). Owned and operated by 16 Caribbean governments, this riskpooling facility aims to limit the financial impact of catastrophic hurricanes and earthquakes. CCRIF is a parametric solution, which uses the physical parameters of events (strength of earthquakes, wind speeds) to calculate overall losses and determine payout levels. Such products enable governments to plan ahead and secure guaranteed levels of funding before catastrophes occur; CCRIF marks the first time this approach has been taken by a whole region.

Several member countries benefited from CCRIF in 2010. The government of Haiti received a payout directly after its devastating earthquake. The government of Anguilla was paid in September 2010 after Hurricane Earl damaged buildings, downed power lines and caused flooding and beach erosion. The governments of Barbados, Saint Lucia and St. Vincent and the Grenadines all received payments in November 2010 following tropical cyclone Tomas.

Accounting for climate change

Many developing nations also find themselves in the front line facing the potential effects of a changing climate. CCRIF invited us, as a principal member of the Economics of Climate Adaptation (ECA) working group, to help refine its disaster risk management in the light of climate change. Launched in 2009, the ECA framework is a pioneering instrument to assess total climate risks and identify cost-effective adaptation strategies. An ECA study with analytical input from Swiss Re of eight CCRIF countries found that, for some of them, damage from wind, storm surges and inland flooding already amounted to 6% of GDP, a figure that could rise another 1 – 3% by 2030 (assuming a strong climate change scenario). But the study also revealed that (most of) these countries could implement cost-effective adaptation measures, ranging from constructing sea walls to enforcing building codes. Dealing effectively with climate change will require combinations of practical adaptation and risk transfer through insurance.

First application in a mature market

Interest in parametric risk transfer solutions is also growing among governments of high-income countries. Though a much larger proportion of direct losses will be covered by insurance in the event of a natural disaster, public authorities still face similar challenges in funding emergency measures and dealing with uninsured economic losses. In 2010, Swiss Re developed a parametric hurricane solution for the Alabama State Insurance Fund (SIF) in the US – the very first programme of its kind. As with other Southern US states, catastrophic hurricanes pose a large and growing risk to Alabama. Under this parametric solution, the SIF would rapidly receive a payment if a hurricane of a certain strength reaches Alabama, giving the state government the flexibility to apply funds when and where they are most needed.

Published 24 March 2011