Introduction
Let
me begin by complimenting the World Bank on the work
which has been done to put us in a position to have
this pledging conference today.
Apart
from the Bank, I wish to commend the Jamaica Social
Investment Fund, which was entrusted with the task
of managing the project which facilitated the technical
assessment. We also wish to express gratitude to the
Government of Japan which provided grant resources
to facilitate the technical studies.
Finally,
let me express special appreciation for the work of
Caroline Anstey, who has provided the main leadership
for the facility here in Washington.
The
Bank’s response is indeed laudable in carrying
us this far. We now have clear indications from eighteen
(18) regional states to participate in the Caribbean
Catastrophe Risk Insurance Facility (CCRIF). We are
now here meeting with you the Donors to invite your
participation, highlighting some of the benefits to
be derived from the proposed scheme.
Rationale
For the Insurance Scheme
There
is indeed a clear need for a regional insurance scheme
for three main reasons – first the frequency
of natural disasters in the region, especially hurricanes;
second the enormity of the economic and social costs,
both direct and indirect, resulting from them; and
third the immediate need for resources to deal with
such emergencies.
External
shocks such as natural disasters are of course, not
unique to the Caribbean region but their impact on
small island states is exceptional. Given the size
of the Caribbean islands and the less diversified
nature of the economies, a hurricane can within the
space of a few hours obliterate a country’s
entire economic base, as it did with Grenada in 2004.
Even where the devastation is not as widespread, the
impact can be felt throughout the entire economy.
There
are immediate short term, medium term and long-term
effects. These include the need for resources to pay
workers, service debt, and effect repairs to critical
social and economic infrastructure. If some of these
are not tackled quickly, there can be serious health
and environmental risks and even social upheaval.
As
we are all aware, there are institutional obstacles
to countries obtaining adequate funds to meet immediate
needs.
While
we recognize that the donor community and the multilateral
institutions will assist in the reconstruction efforts,
there is always an immediate need for resources to
cover emergencies – e.g. for clean-up operations,
to effect immediate repairs and to assist the most
vulnerable individuals and groups. This is where the
proposed CCRIF is intended to assist most.
Assessment
of the Proposed Insurance Scheme
We
are all aware of the significant advantages presented
by the parametric structure of the insurance contracts
offered under the CRRIF - easily verifiable claims,
fast payout, and flexible use of insurance proceeds.
This is facilitated by the fact that payout is determined
by the severity of the hazard and not on the actual
losses sustained. However, the main drawback to this
approach is that payouts may not properly match the
economic impact of the event – the so called
“basis risk” problem.
However,
even if the basis risks were reduced to zero, the
current CCRIF proposals suffer from an important drawback.
Whilst our specific concern relates to Caribbean member
states, the deficiency to which I am about to allude,
has been shown to have relevance even in large countries
as demonstrated by the controversy which has resulted
from the devastation brought to New Orleans by Hurricane
Katrina. The deficiency is that high-impact natural
disasters do not necessarily come solely in the form
of severe hurricanes and earthquakes. Rather, floods
and droughts can have as great a negative impact as
a hurricane or an earthquake.
My
basic point here is two fold: (i) Even with the scope
of perils currently covered by the CCRIF (i.e. hurricane
and earthquake), it is imperative that serious and
immediate thought be given to widening the range of
risks that are underwritten, to include for example,
flooding related to hurricanes; (ii) It is equally
important, within the context of Caribbean countries,
that the issue of country risk financing for hazards
related to climate change be put squarely on the agenda.
In both respects, the role of the donor community
is paramount as an expansion in the range of risks
underwritten by the facility naturally implies an
expansion in capital requirements.
A
discussion of insurance against climate related hazards
raises another important and related issue –
the need to expand risk-financing arrangements to
cover sectoral vulnerabilities. In the specific context
of Caribbean countries, I am referring to crop insurance.
Agriculture accounts for a significant share of the
GDP of Caribbean economies and accounts for an even
greater share of regional employment. Important sub-sectors
are presently, rightly or wrongly, either controlled
by, or dependent on the state. Thus, the volatility
of agricultural output has important implications
for fiscal and economic management and social interventions.
A
purely private insurance market solution to crop insurance
would be very difficult to devise within any single
territory since the correlation of losses from a given
event would make risk pooling difficult. The regional
risk pooling and access to international reinsurance
markets, possible under the CCRIF, make this facility
an ideal candidate to pursue the establishment of
a viable crop insurance programme in the region. This
is a special case for expanding the risk coverage
of the facility to account for climate volatility,
which is of particular relevance for Caribbean territories
exposed to severe periods of drought and/or severe
flooding.
Therefore,
there is much for the donor community, Caribbean states
and Caribbean civil society to do in partnership to
improve the scope and relevance of catastrophe risk
management and financing in the region. Caribbean
states need to step up their efforts at legislative
and institutional reforms aimed at strengthening the
incentive structure for risk mitigation. We hope that
our multilateral partners will continue to provide
the technical, analytical and financial resources
necessary to assist Caribbean constituents in identifying
and implementing workable solutions to our specific
problems.
The
importance of donor support to this initiative is
worthy of emphasis. Donor contributions will provide
initial seed capital as well as financing for operating
expenditures in the early years of this facility.
A minimum level of initial seed capital is vital to
the facility being able to access the international
reinsurance markets. In addition, seed capital will
promote the long-term sustainability of the CCRIF
by facilitating a higher level of risk retention which
will allow a greater proportion of premiums to be
used to build reserves over time. Therefore, donor
support is indispensable to the financial viability
and long-term sustainability of the CCRIF.
Concluding Remarks
In
closing, let me once again express my deep appreciation
for the involvement and effort of all relevant parties
in the work that has led us to this point. Let me
assure you of Jamaica’s full commitment to continued
regional collaboration in devising and implementing
strategies and programmes to reduce vulnerability
to natural hazards. We have “put our money where
our mouth is”. I wish to formally announce that
Jamaica has confirmed its commitment to participate
in the CCRIF by purchasing coverage for both earthquake
and hurricane perils. We meet here today to make this
first step one of significance.
JIS,
Washington, DC
Derrick A. Scott
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