Note: This document was prepared by Jan Vermeiren in March 2000, for publication in the World Bank's Disaster Management Series no.2, Managing Disaster Risk in Emerging Economies, Alcira Kreimer and Margaret Arnold, editors.
This chapter is based on the experience gained from the Caribbean Disaster Mitigation Project (CDMP), a six-year, US$5.0 million project executed by the Organization of American States (OAS) with financing from the Office of Foreign Disaster Assistance of the U.S. Agency for International Development (OFDA/USAID). The purpose of the project was to establish sustainable public/private disaster mitigation mechanisms that measurably lessen loss of life, reduce potential damage, and shorten the disaster recovery period. The project was completed in December 1999, but many of the activities and institutional arrangements that were pilot-tested and established under the project remain firmly in place.
One of the objectives of the CDMP was to promote natural hazard damage mitigation and the use of loss-reduction incentives in the Caribbean property insurance industry. Soon after its inception in 1993 the project assisted national insurance associations in several of the Caribbean states in organizing meetings and technical conferences to address issues facing the industry, and to explore how the industry could play a more effective role in reducing property risk in the region. Whereas these meetings regularly counted received strong participation and support from the local representatives of the industry, little headway was made in mounting joint efforts to improve the quality of risk assessment and underwriting. The project soon discovered that one of the main reasons for this was that the local insurance companies and agencies retain little of the risk.
The Caribbean property insurance industry is characterized by a proliferation of general agency units representing foreign companies sharing the market with a relatively small number of Caribbean-owned companies. Industry experts agree that the number of agencies and companies is disproportionately large for the small volume of property risk underwriting in the region. In addition, the portion of the catastrophe risk retained by the companies in the region is small, estimated at approximately 15 percent, with the remainder being ceded to reinsurers outside the region. As a consequence, competition for agency fees and reinsurance commissions tends to drive the underwriting practice, often at the expense of a sound appreciation of the underlying risk.Caribbean Reinsurance Crisis of 1993-94
Rates for property insurance in the Caribbean started creeping up in 1989, triggered by reinsurance losses caused by Hurricanes Gilbert (1988) and Hugo (1989). Then in August 1992 came Hurricane Andrew followed by winter storms in Europe. These events created an extremely tight reinsurance market, which peaked in 1993 and continued through 1994. Prices reached levels of 200 percent to 300 percent above those of 1989 and prior years. Several companies refused to extend coverage to the Caribbean, and those that did imposed a 2 percent deductible on the insured value. Primary insurers and agencies in the region, highly dependent on the reinsurers, had no option but to pass on the increases to property owners.
The dramatic increase in the cost of primary insurance generated widespread complaints from the housing and commercial sectors throughout the region. It also put a temporary hold on several large tourism and commercial projects under development. Responding to the concerns expressed by key sectors in their economies, CARICOM heads of government first addressed the regional catastrophe insurance crisis at their fourteenth regular meeting in the Bahamas in July 1993. At their request a multidisciplinary Working Party on Insurance and Reinsurance was established in 1994 to explore potential actions by government and private sector to address the issues involved in maintaining adequate catastrophe insurance coverage in the Caribbean.
Late in 1994 the Organization of American States (OAS), as executing agency for the CDMP, responded to a request from the chairman of the CARICOM Working Party and assisted in preparing a working paper on Catastrophe Protection in the Caribbean. The paper guided the working party. The paper addresses industry performance, retention of risk at a regional level, and opportunities for reducing risk. The World Bank joined in this effort, specifically to study mechanisms to establish a regional catastrophe risk fund.CARICOM Report on Insurance, Reinsurance, and Catastrophe Protection
The working party submitted its report to the CARICOM heads of government on February 29, 1996.
The reports recommendations cover the following areas:
The CARICOM ministers of finance reviewed the report in a subsequent meeting and endorsed its recommendations. However, by that time the urgency that had led to the creation of the working party had disappeared. New capital had entered the reinsurance market, and reinsurance rates had come down to a level somewhat above the pre-1993 rates. The political will necessary to effect such changes as introducing a stronger regulatory framework and requiring more effective financial management and reporting of the industry faded away.
Nevertheless, one promising development subsequent to the completion of the Working Party report was the establishment of a Caribbean Association of Insurance Regulators, an institutional framework that could play a critical role in rationalizing the Caribbean insurance industry in the future. The CARICOM Secretariat also continued to pursue progress in this area. It called on the World Bank and the OAS to provide the technical assistance to implement the recommendations on establishing a regional reinsurance program mechanism and strengthening disaster mitigation, and vulnerability reduction programs.
The World Bank obtained internal funding to study the feasibility of a Caribbean Catastrophe Reinsurance Fund, using as a model the private-sector-financed funds in California and Hawaii. In carrying out the study, the Bank held regular consultations with Caribbean regional institutions and governments, in particular those of the Organization of Eastern Caribbean States (OECS). CARICOM finance ministers were kept informed and continued to endorse the Banks initiative.
On completing its study, the Bank prepared an initial proposal for a loan program for the OECS states that combined the establishment of a regional risk management and financing mechanism with investment in mitigation and emergency preparedness measures. The impact of Hurricane Georges in September 1998 generated new urgency. The mitigation financing component was substantially expanded to include financing reconstruction for the countries affected by the hurricane and strengthening lifeline infrastructure and emergency response capacity. As part of this adjustment, the risk management component was changed to a contingency line of credit available to participating countries should a severe natural hazard strike them during the program period.
In July 1999 three OECS countries signed loan agreements under the OECS Emergency Reconstruction and Disaster Mitigation loan and credit program. Two more are expected to sign by mid-2000. In parallel the Bank is continuing to prepare a separate program covering the risk management and insurance component at the regional level.
With resources from the CDMP, the OAS pursued those recommendations of the working partys report that concerned risk reduction in public sector infrastructure, housing, and commercial properties. Specific activities carried out by the CDMP included
Key elements of the disaster mitigation methods and institutional capacity building techniques that were pilot-tested under the CDMP have been included in the World Banks OECS Emergency Reconstruction and Disaster Mitigation loan and credit program. In addition the Office of Foreign Disaster Assistance of USAID, the agency that financed the CDMP, is providing grant funding for several projects designed to build on the experience gained under CDMP. The goals are to strengthen institutional capacity for disaster mitigation and vulnerability reduction at national and regional levels in the Caribbean.Incentives for Risk Reduction: A Pilot Experience
How natural hazard damage mitigation and catastrophic insurance could strengthen each other recently was investigated by Kleindorfer and Kunreuther. The authors contend that in theory all interested parties concerned with losses from natural hazards should view risk reduction measures as favorable. However, the reality is that few property owners adopt mitigation measures voluntarily; few insurers provide incentives to encourage owners to do so; and cost competition prevents developers, designers, and contractors from building safer structures.
The authors identify three types of public-private partnerships that can encourage mitigation: (1) well enforced building codes, (2) provision by banks of long-term loans for mitigation, with the cost of the loan being offset by premium reductions, and (3) lower deductibles and/or lower premiums offered by insurers for those who invest in mitigation.Design of Pilot Program in Barbados
As part of the CDMP activities aimed at establishing partnerships with the insurance industry, in collaboration with one of the largest Caribbean-owned property insurers, the OAS has supported just such a risk-reduction initiative based on premium reduction. In summer 1997 Barbados-based UNITED Insurance Company (UIC) 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 force winds. This leading Caribbean property insurer was the first to respond to the recommendation by the CARICOM Working Party on Insurance and Reinsurance in 1994 for the Caribbean insurance industry to more proactively promote hazard mitigation.
UICs innovative program provides incentives to policyholders in the form of premium reductions ranging from 25 percent to 40 percent to apply measures designed to safeguard their properties against the perils of hurricanes. The company contracted a leading consulting engineering firm in Barbados to produce two technical booklets, "Making Your Home Hurricane Resistant," aimed at homeowners; and "Professional Guide to Performance-based Design Upgrade for Hurricane Resistant Construction," aimed at commercial property owners.
Owners of residential properties can use the first booklet as a do-it-yourself guide, following the simple instructions and graphics to apply the hurricane-resistant construction improvements. The second booklet, which applies to commercial structures, is more technically complex and requires the assistance of an engineer to implement the specified retrofitting interventions.
For UICs scheme to yield benefits to the primary insurer, several conditions need to be in place. First, the primary insurer has to be able to ensure the quality of the retrofit work undertaken by the property owners. When such work is applied to a sufficient number of risks in the companys portfolio, the company can expect its aggregate catastrophe Probable Maximum Loss (PML) to be lower. UIC uses two distinct methods to ensure the quality of the retrofit work: a self-declared certification in the case of residential owners, and certification by the engineer contracted to supervise the retrofit work in the case of commercial properties.
Second, with information to substantiate a lowered PML, the primary insurer must negotiate lower rates for the proportional treaties and excess of loss cover from the reinsurers. For the insurance company to benefit from this scheme, savings realized from lower reinsurance premiums and lower incurred claims on the retained risk should exceed the reduced premium income.
A year after the program was first launched in Barbados, it became evident that its penetration was less than what had been expected. An evaluation carried out by UICs management and CDMP identified the following factors as possible causes for the lack of success: (1) low perception of risk by the population. The last serious storm to affect Barbados had been Hurricane Janet in 1955; (2) a soft catastrophe insurance market, which encouraged commission-driven competition by smaller insurance agencies, thus undercutting the premium reductions offered by UIC without requiring retrofitting; (3) deficiencies in the promotional effort, particularly the lack of a user-friendly presentation of the guidelines for property owners.
Presently, Barbadian property owners and insurers demonstrate indifference to taking hurricane vulnerability reduction measures. UIC competitors offer premium discounts merely to retain business. For meaningful program penetration to be feasible will take a significant hardening of the catastrophe peril insurance market. Despite these issues UIC has decided to continue its incentive program in Barbados in low gear until the market materially hardens.Redesign of Pilot Program in Antigua and Barbuda
In light of it Barbados experience UIC requested assistance from CDMP in designing a new program to launch in Antigua and Barbuda. The program incorporates the lessons learned in Barbados and includes features that provide reasonable assurance that the same limitations will not be encountered in the new market.
Antigua and Barbuda was selected for several reasons. The country has suffered the impact of hurricanes more frequently and more recently than Barbados, starting with Hugo in 1989, followed by Luis in 1995, and Georges in 1998. Since the decision to launch a new program in Antigua and Barbuda was taken, Hurricanes Jose and Lenny struck the country in 1999. As a result, public understanding of extreme weather related risk is much greater, and the market for catastrophe insurance is much firmer. Antiguas needs for hurricane vulnerability reduction measures are particularly acute with the current high premium rates driven by scarce and expensive reinsurance. Furthermore, UIC invited two other companies with major holdings in Antigua and Barbuda to join the program. One has formally joined, and the other has agreed to support the initiative. The three companies together underwrite almost 80 percent of the property insurance in the country.
Consultation between the partners of this program led to the following design characteristics for the program to be implemented in Antigua and Barbuda.
The program was launched in Antigua in July 1998 by ANJO Insurance, agents for UIC. To date it has been offered exclusively to residential owners. As of February 2000, nearly 100 homeowners have joined the program, of whom approximately 35 percent are new clients. A preliminary analysis of the damage claims generated by the participating homeowners following Hurricanes Jose and Lenny indicates that insured losses from this group are lower as a proportion of total risk than the losses experienced by the nonparticipating policyholders. To date, the company has not experienced any competition aimed at undercutting the premium reduction without requiring an investment in retrofitting. The company also continues to pursue collaboration with other companies operating in the national market to implement the training, demonstration, and certification components of the program.Market Penetration
Given the lower levels of disposable income in the Caribbean compared to Europe or North America, the penetration of property insurance is also relatively lower. In a 1997 study undertaken for the World Bank, the Insurance Information Institute estimated that 30 percent of the "insurable" residences in the CARICOM countries do not have property insurance. Self-built, informal housing traditionally is considered uninsurable. However, the absence of insurance coverage for a sizable portion of Caribbean society is not the only problem, as William Tomlin, a Barbados- based insurance broker, made clear in his presentation to a meeting of the International Decade of Natural Disaster Reduction (IDNDR) in 1993, shortly after the dramatic increase in reinsurance costs.
Tomlin noted that as a consequence of the tightening of the reinsurance markets, primary insurers were forced to impose a 2 percent deductible clause in their policies, passing a significant portion of the catastrophe risk to their policyholders without any option of purchasing it back. Furthermore, due to the high cost of insurance, many policyholders started deliberately underinsuring or not insuring a large portion of their risk. Since the crisis of 1993-1994, primary insurance rates have come down, but they still are about 100 percent above their pre-crisis level. The 2 percent deductible is still in force, and the habit of underinsuring is still largely in place.Reducing Risk in the Informal Housing Sector
Safer homes are a key element in building disaster-resistant communities. Many factors play a role in ensuring that housing can withstand the effects of natural hazards. Builders and artisans who construct and repair homes bear a direct responsibility for the success or failure of these structures. Many others, however, supply an important context for safe home construction.
In the formal sector, incorporation of natural hazard damage mitigation guidelines in the local building code, and proper enforcement of that code, can significantly increase housing safety during hazardous events. In the informal sector, training local builders in the minimum requirements of safer home construction can institutionalize damage mitigation techniques in the construction of lower-income housing, typically the most vulnerable. Availability of funds to support home construction, retrofitting, and improvement can also affect the adherence to hazard-resistant building techniques in design and construction work.
Home construction in the lower-income segments of Caribbean society is normally a continuous process whereby the original, often very modest, structure is expanded and improved periodically when household savings and short-term credit permit the owner to do so. Since homeowners barely seek insurance for their property, other means of risk management need to be found.
Recognizing that informal housing represents a substantial part of the existing housing stock, the CDMP formed a partnership with the Cooperative Housing Foundation (CHF), a United States-based nongovernmental organization (NGO) with wide experience in low-income housing programs, to introduce a program addressing safety of construction in this sector. Focused on the OECS countries, the Hurricane Resistant Home Improvement Program is being implemented by National Development Foundations in Antigua and Barbuda, Dominica, and St. Lucia. Replication by the St. Kitts and Nevis Development Foundation is in the planning stage.
Lower-income families most stand to lose when their homes are damaged by a natural hazard because much of what they own is tied up in their home and belongings. Winds of tropical-storm strength (63 to 119 km per hour) can be expected to affect the Windward Islands on the average once every 10 years. Leeward Islands are somewhat more exposed and can expect category I hurricane-strength winds (120 to 153 km per hour) for the same return period. Thus, a home not properly constructed to resist these wind forces can be expected to lose its roof once every 10 years, resulting in significant damage.
With technical assistance from the CDMP and CHF, the National Development Foundations in three of the OECS countries acted as the local implementing agencies. They embarked on the Hurricane Resistant Home Improvement Program in their countries with a national awareness campaign and outreach program targeted at selected communities. Local carpenters and construction artisans, who traditionally are engaged by householders in the targeted communities, are trained in applying safe construction techniques in which emphasis is put on protecting the roof and all openings, such as windows and doors.
The technology consists of simple, time-tested construction techniques using appropriate materials: strong connections (at the ridge board, between the joists and the top plate, between the floor and the foundation, at the foundation footing); long, strong screws/nails; hurricane straps, and strong roofing materials. The essence of these training programs is captured in two simple documents produced by the local implementing agencies: Basic Minimum Standards for Retrofitting  and Making the Right Connections: A Self-Guided Manual of Safe Construction Techniques. 
Traditional finance systems (commercial banks, savings and loans) generally are unable or uninterested in lending to low-income working families due to the small size of the loan, insufficient collateral, and lack of credit history. In recognition of this limitation, CHF assisted the local implementing agencies of the Hurricane Resistant Home Improvement Program to establish a revolving loan fund, which provides low-income families with small loans for home improvement combined with hurricane-resistant retrofitting. During the initial phase of the program, a typical loan would be under EC$5,000.00 (US$1,750.00), and the monthly payment could not exceed 25 percent of household monthly income.
Seed funding for the revolving loan funds has been provided by CDMP and CHF at concessionary rates. Loans to the homeowners will be made at market rates, enabling the local implementing agencies to use the spread to defray their administrative costs. A key variable in determining the viability of the program is the volume of the loan portfolio, which depends directly on the size of the revolving loan fund. Two of the local implementing agencies were successful in attracting substantial amounts of local funding for their revolving loan fund, enabling them to reach a loan volume that makes their operation sustainable.
A comprehensive description of the program and practical guidelines for local implementing agencies can be found in the CDMP publication, Hurricane Resistant Home Improvement Program: A Toolkit. Introducing Property Insurance in Nontraditional Markets
As noted earlier, the informal housing sector in the Caribbean traditionally is not a market for individual property insurance. There is, however, a potential to exploit group insurance arrangements, using some of the many NGOs or civic service groups that assist this sector of society in meeting its housing needs.
The National Research and Development Foundation (NRDF) of St. Lucia has been the most successful of the local implementing agencies of the CDMP Hurricane Resistant Home Improvement program in the Eastern Caribbean. The number of home improvement loans on NRDFs books as of December 1999 was 195, for a total value of EC$1,886,378.00, amounting to approximately EC$9,700.00 or US$3,600.00 per loan. To feed the revolving loan fund, the foundation was able to contract loans at rates from 4 percent to 5.5 percent from three local commercial banks, as well as from governments National Insurance Scheme.
NRDF management long had expressed concern over the lack of access to property insurance among the clients of its home improvement program. Through a St. Lucia broker, the NRDF was able to obtain a Homeowners Comprehensive Group Plan underwritten by a Caribbean subsidiary of a United Kingdom-based insurance company. The insurance coverage became effective in 1998. All recipients of home improvement/retrofit loans must purchase insurance under the group plan. NRDF project officers have been trained by the insurer in valuation of the properties, and their estimates are accepted by the insurer. Premium rates charged to the owners range from 0.60 percent for concrete block homes to 1.05 percent for homes constructed largely or entirely of timber.Linking Property Insurance with Construction Quality Control
The Homeowners Comprehensive Group Insurance plan achieves more than merely transferring part of the catastrophe risk affecting the households participating in a hurricane-resistant home improvement program. Since the insurance is offered only to those who participate in the program, it is in effect treating the program's investment in retrofitting as a condition of access. The Hurricane Resistant Home Improvement program, as operated by the NRDF of St. Lucia, offers an excellent example of linking property insurance to the quality of the risk.
Linking property insurance to the quality of construction has been practiced for many decades by what are called the highly protected risk carriers, such as Industrial Risk Insurers or Factory Mutual. The extra investment in loss prevention made by the owner as a condition to obtain coverage from this class of insurers is rewarded by a significant reduction in the premium. Several large commercial and industrial risks in the Caribbean have been underwritten in this way.
Another example is the way construction review is institutionalized in France, including its overseas departments. Hurricane Luis, which hit St. Martin in September 1995, caused substantial damage and disruption to the islands infrastructure and economy. There was, however, a significant difference in the degree of damages suffered by the two distinct parts of the island. The Dutch side suffered a more substantial impact on its infrastructure and commercial buildings, and took longer to recover than the French side.
A comparative analysis of how both sides fared under the impact of the hurricane was carried out by Tony Gibbs, a consulting engineer based in Barbados with a keen interest in quality design and construction. The objective was to discover whether differences in the administration and practice of construction in the two parts of the island could lead to different levels of damage. The following factors on the French side were identified as possible causes for this difference:
The "bureaux de controle," or technical inspection services, are independent engineering firms licensed by the state. They can be contracted to check the quality of design and construction of buildings and can issue a formal certification that a building meets the necessary standards. Their involvement in construction in France, or any of its territories, is brought about by the Spinetta Act of 1978. This law requires that owners of buildings that can be used or occupied by others are required to obtain insurance to cover the appearance of defects for 10 years after handing over the building (decennial insurance). As a condition for underwriting such risks, the insurance company requires that a technical inspection service firm review the design and construction and certify the building. The owner selects the technical inspection service, with the agreement of the insurer, and pays for the service.
Decennial insurance covers only damage caused by what are referred to as hidden defects. A prudent owner usually will take out fire and perils insurance in addition. Typically, hidden defects are found in a structure built with inappropriate material, deficient workmanship, or below building code standards. An effective way to minimize hidden defects is to ensure compliance with the code and regulations applicable in the construction locality, including the standards and regulations required to make a building resistant to natural hazards.
It is ironic that decennial insurance, which is not catastrophic insurance, had a significant impact on reducing catastrophe losses in the side of St. Martin in which it was systematically applied. Structures built with the benefit of a quality control system imposed as a condition for insurance (on the French side) do perform better than those that did not benefit from such an approach to risk management (on the Dutch side).Conclusion
Property insurance in the Caribbean has several different faces, and its most common face is not pretty. The standard product offered by the insurance industry to the average property owner is expensive; more than half of the premium paid by the insured is allotted to commissions, profit, marketing, and administrative expenses. The underwriter pays little attention to catastrophe risk, and the industry does not offer the insured any incentive to reduce that risk. A substantial part of society is uninsured, and this applies not only to the lower income sectors but also to a large majority of government-owned properties.
Yet, other aspects of property insurance in the Caribbean demonstrate the industry's capacity to increase the awareness of risk and contribute to risk reduction. The homeowners comprehensive group plan in St. Lucia and the use of technical inspection services by French property insurers in St. Martin exemplify a more proactive role for and by the industry. These two programs as well as the highly protected risk programs have in common the fact that insurance is used to introduce a critical element of control over the quality of the design and construction, the strongest determinant of a propertys catastrophe risk.
The agencies that finance infrastructure projects in the region, be they national development banks, private sector banks, or multilateral financing agencies, are in a position to change the face of the property insurance industry in the Caribbean. If the beneficiary countries are to maintain positive growth in the face of increased losses from natural disasters, a concerted effort is needed to minimize failure of infrastructure due to the effects of natural hazards. In almost every case such failures have economic and financial consequences to national economies that far exceed the cost of repairs and reconstruction.
As a minimum, for the explicit purpose of protecting the client and themselves from catastrophic risk, lenders should require that infrastructure projects be insured as a condition for the loan. To protect their assets, underwriters of this risk should want a certification that the structure is designed and built in accordance with appropriate standards and good practice. The certification would be issued by an independent technical inspection service. Only through a loss-prevention partnership of the owner, lender, and insurer will the value of the insurance industry as a potential contributor to loss reduction be realized.
1. Organization of American States, 1996. Insurance, Reinsurance and Catastrophe Protection in the Caribbean. USAID/OAS Caribbean Disaster Mitigation Project.
2. Kunreuther, H. Kleindorfer, 1997. "The Complementary Roles of Mitigation and Insurance in Managing Catastrophic Risks". Paper presented at the Public Private Partnership 2000 Conference on the Uncertainty of Managing Catastrophic Risk. Washington, D.C.
3. Information provided by Glenford Turner, ANJO Insurance, St. Johns, Antigua and Barbuda.
4. Insurance Information Institute, 1997. "Propety Insurance in the Caribbean Community (CARICOM)". Report prepared for the World Bank.
5. Tomlin, W. 1993. "Economic Implications of Disaster Impacts", presented at the meeting of the International Decade of Natural Disaster Reduction, Port of Spain, Trinidad and Tobago, October 1993.
6. Organization of American States, Forthcoming. Atlas of Probable Storm Effects in the Caribbean Sea. USAID/OAS Caribbean Disaster Mitigation Project. Washington DC.
7. Organization of American States, 1997. Basic Minimum Standards for Retrofitting. USAID/OAS Caribbean Disaster Mitigation Project.
8. Organization of American States, 1997. Making the Right Connections: A Self-guided manual of Safe Construction Techniques. USAID/OAS Caribbean Disaster Mitigation Project.
9. Organization of American States, 1997. Hurricane Resistant Home Improvement Program: A Toolkit. Washington D.C., USAID/OAS Caribbean Disaster Mitigation Project.
10. Information provided by Mr. Bryan Walcott, Executive Director, National Research and Development Foundation, St. Lucia.
11. Gibbs, T., "The Role of Independent Design and Building Checking Agencies in Disaster Prevention". In STOP DISASTERS, IV (30): 18-19.
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