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Storms

Pacific Catastrophe Risk Assessment & Finance Initiative: Rebuilding after Cyclone Pam

As a Category 5 cyclone (the most severe), Cyclone Pam caused extreme destruction in the island nation of Vanuatu. Many people lost everything they owned, and the infrastructure was badly damaged.

20.03.2015

The small island nations of the South Pacific, to which Vanuatu belongs, are very heavily exposed to natural catastrophe risks. Strengthening the infrastructure and buildings to withstand such disasters takes priority. New types of insurance solutions can also help reduce the financial consequences of such disasters in developing countries. People who have often lost everything they possess and in many cases are no longer able to support themselves can thus be helped. In Vanuatu, some of the emergency aid and clearing-up operations will presumably be borne by the Pacific Catastrophe Risk Assessment & Finance Initiative, a pilot project initiated and implemented by the World Bank and funded mainly by donor countries. Munich Re is one of five insurers involved in reinsuring the project. Topics Online spoke about this with Michael Roth, a Senior Manager in Munich Re's Public Sector Business Development unit.

As a Category 5 cyclone (the most severe), Cyclone Pam caused extreme destruction in the island nation of Vanuatu. Many people lost everything they owned, and the infrastructure was badly damaged. © NASA

What exactly is the Pacific Disaster Risk Finance and Insurance Program?

The Pacific Catastrophe Risk Assessment & Finance Initiative is a programme funded by various donors and implemented by the World Bank as part of the World Bank’s global Disaster Risk Financing and Insurance Program. The aim is to promote insurance solutions as a contribution to financing catastrophe losses in emerging and developing countries. The focus here is on advising policymakers, analysing risks and developing outline solutions for financing and insuring catastrophe risks.

Who is involved in the programme and how high are the limits of indemnity?

Through this initiative, the participating nations (Vanuatu, Cook Islands, Marshall Islands, Tonga and Samoa) cede risks from tropical cyclones and earthquakes/tsunamis via a insurance derivative to the World Bank. Again via derivatives, the World Bank passes the risks on to the participating insurers and reinsurers, among them Munich Re. Vanuatu purchased tropical cyclone cover amounting to around US$ 6m, and earthquake cover amounting to around US$ 3.6m. Munich Re has a participation in the programme, and also assisted with advice in the development stage of the PCRAFI initiative. All in all, the limit of indemnity under the insurance programme for the participating nations is US$ 41.7m, the main focus being on the cyclone risk.

What do the participating countries get from such an insurance solution?

The participating Pacific Island States do not generally have access to the capital markets and cannot quickly raise capital on the capital markets to finance losses following natural disasters. The use of parametric triggers, whereby payouts are linked to the strength of the respective natural disaster and not to actual loss amounts, allows payouts to be made under the insurance programme within a very short time. The funds that are thus quickly available can be used for emergency aid and for clearing-up operations following a natural disaster. The PCRAFI initiative was developed in close cooperation with the participating nations, with the result that the programme meets the countries' interests as far as possible. Through this involvement, the policymakers were also able to gain a much better idea of their countries' risk exposure, and thus also to take more targeted measures to prevent and reduce risk.

How does the payout work, and do payments from the programme go directly to the people affected?

The relevant states receive the payout. The funds are used for emergency aid and clearing-up operations and therefore also indirectly benefit the people affected.

We are talking about a pilot phase. How are the other plans looking?

The World Bank is holding discussions about the future of PCRAFI. Examples like comparable programmes in Africa (ARC) and for countries in the Caribbean (CCRIF) show how such region-wide insurance concepts can be institutionalised. Such solutions can help developing countries, as they provide financial resources relatively quickly, and the loss is also spread over several shoulders.

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