Insurance, Reinsurance and Natural Hazard Vulnerability Reduction

The ability of the private sector  to recover from disasters due to natural hazards is determined to a large extent by the resilience of public sector infrastructure. Economic activity and employment in private business are severely impaired when structures are damaged and public sector infrastructure is destroyed by storm forces, because of poor location, use of inappropriate design standards or lack of maintenance. Business owners have a clear self-interest as well as a community obligation to encourage and support public sector policies and programs aimed at reducing the physical vulnerability of housing and social and economic infrastructure.

This self-interest of the private sector in a society more resistant to natural disasters is particularly clear in the case of property insurance industry in the Caribbean. The first, and traditional, responsibility of the insurance sector lies in maximizing the availability of affordable catastrophe peril coverage. Such coverage helps minimize the disruption after disasters by compensating some losses suffered by the insured, thus allowing them to begin recovery. However, the low penetration of property insurance in the Caribbean greatly reduces the potential contribution of this mechanism to disaster recovery.

Catastrophe insurance focuses foremost on spreading or distributing losses, rather than on reducing losses. It is in the industry's interest, however, to reduce the vulnerability of an area, and consequently the potential loss, as this would lead to lower premium rates (because the risk is lower) and a larger overall market. The insurance industry can promote loss reduction through incentives to policy holders for taking loss reduction measures and by providing support for public sector and community-based disaster prevention. Caribbean insurers, however, retain a low percentage of the insured risk locally, ceding the bulk of their risk to international reinsurers. As a consequence, the incentive to invest their own funds in local vulnerability reduction is also significantly reduced. International reinsurers could encourage underwriters to take such initiatives, by providing lower reinsurance premiums for portfolios at lower risk to natural hazards. Few, if any, such initiatives are presently in operation in the Caribbean.

An expanded discussion of the opportunities for hazard mitigation in the insurance industry is available in the document Risk Transfer and Finance Experience in the Caribbean.

CDMP Activities Related to the Insurance Industry

'Promotion of Loss Reduction Incentives and Hazard Mitigation in the Property Insurance Industry' was included as one of the goals of the Caribbean Disaster Mitigation Project from its inception. CDMP activities to further this goal include support for national insurance associations in organizing technical conferences and in disseminating hazard and risk information and production of hazard and risk maps and information to promote safer location of development. National workshops to address the issue of natural hazards and insurance were held, with the support of CDMP, in the Bahamas, Belize, the Dominican Republic and Jamaica. CDMP has also actively supported hazard mapping and vulnerability assessment work, including storm hazard modeling projects in Antigua, Belize, Dominica and Jamaica; a multi-hazard assessment in Kingston Jamaica and an estimate of probable maximum loss of public sector infrastructure from a hurricane event in selected countries in the Eastern Caribbean. Further information on CDMP insurance-related activities is available from the project progress bulletin.

Beginning in 1998, Barbados-based United Insurance began a program in which homeowners and businesses can qualify for significant reductions in insurance premiums by retrofitting homes and buildings to better withstand hurricane wind forces. These and other recommendations are included in the 1994 Report of the CARICOM Working Party on Insurance and Reinsurance. This report also identified challenges to a more pro-active role for Caribbean insurance industry in promoting hazard mitigation, including an ineffective regulatory environment, low retention of insurance risk in the region and temporary softness in the reinsurance market.

Other Information Sources

There are many organizations and institutions that are working to reduce losses to natural hazards through insurance mechanisms. The Wharton School's Risk Management and Decision Processes Center has long conducted studies of the relationship between hazards and the insurance market. The Bermuda-based Risk Prediction Initiative (RPI) has as its goal "to facilitate a working relationship between climate scientists and businesses that can benefit from climate-related information and predictions." RPI's current focus for its work is on the link between hurricane research and the insurance and reinsurance industries. In the US, the insurance industry has created the Institute for Building and Home Safety to develop approaches to reducing deaths and losses due to natural hazards.