Just a month ago, very few Bahamians had heard about the Caribbean Catastrophe Risk Insurance Facility (CCRIF), otherwise referred to as CCRIF. Alas Hurricane Matthew descended upon our chain of islands with its fury and refused to spare our capital cities from destruction while making the acronym CCRIF popular in our country. We became more enlightened about a program designed to protect member countries within the region from perils created by acts of nature to which they are prone based on location.
As we have come to expect, politics continues to raise its head in the national discourse in the days following one of the most devastating storms to hit our Bahamaland in decades. However, based on the importance of protecting our people and country for future generations, CCRIF cannot and must not remain an enigma and our approach to management of disaster should generate constructive, objective and reasoned discussion going forward.
A national plan for disasters
There are several ways to address the disaster risk management and financing. Besides the obvious procurement of insurance from the private sector, a regional facility such as CCRIF or other international programs or self-insurance, a government could engage in budget reallocation, imposition of taxes and/or rely on the assistance of donors following a natural disaster. It is apparent that the imposition of taxes at a time when the economy is struggling following two years of negative growth and in an environment of high unemployment would not have been prudent. The government has also decided not to cut spending within the current budget to finance the rebuilding effort.
The verdict is that we will borrow to cover the expenses associated with restoration in the aftermath of Hurricane Matthew. The issuance of a $150 million hurricane recovery and reconstruction bond (HRRB) has been chosen as the vehicle through which this borrowing will take place. It has been stated that the funds raised will be used to cover the costs of both Hurricane Joaquin and Hurricane Matthew. While this is a short-term fix, it is simply not sustainable when we consider our financial condition as a nation and the susceptibility of our archipelago to multiple tropical events for six months every year. How much and for how long will we have to borrow to pay for natural disasters with our current high debt-to-GDP ratio? What have we done with funds saved from a deliberate policy to self-insure over the years? It seems that the proverbial chickens have come home to roost.
The Bahamas' involvement in CCRIF
Per media reports, the government acting on advice had discontinued financial contributions to the CCRIF in exchange for contributions to a sovereign disaster relief fund (DRF). Presumably this decision was made post-debate of the national 2016/17 budget where block 50 projected a three-year allocation of $900k p.a. for CCRIF premiums. Nevertheless, the rationale provided for the decision was The Bahamas' inability to claim from CCRIF in years past coupled with the fact that a category four storm would have had to hit Nassau. This raises a few questions which space will not permit us to explore in full; specifically, much queries abound as to the timing of the decision to opt out.
The Bahamas has been a part of the CCRIF since its early stages and would have paid about $9 million in premiums; did we know the details of our coverage during that period and before now? Who negotiated the coverage on our behalf and what was the basis for procuring a facility which we evidently claim is or has been basically useless? Why would a sovereign government underwrite a policy with a trigger proviso that the nation's capital must be hit by a category five storm when precedence shows that the capital has not been hit in decades?
Was this money well spent or is the public just lacking sufficient information to assess whether our decisions on CCRIF have been prudent? Will the terms of the policy be released? The Bahamas has participated in the CCRIF over two distinct administrations, surely the government, including the opposition, should know the details of our involvement.
Disaster insurance and parametric triggers
The CCRIF employs a parametric or index trigger approach to disaster or catastrophe insurance. Parametric insurance payments are made based on the intensity of an event such as earthquake, volume of rainfall or wind speed of a hurricane and the loss amount based on a pre-determined model. Insurance claims are paid when countries suffer a catastrophe or weather event that breaches their pre-defined parametric trigger. The policies offered under the CCRIF include tropical cyclone (covering damage from wind and storm surge), excess rainfall and earthquake. The Bahamas was noted as a member of CCRIF with tropical cyclone and excess rainfall coverage at some point.
While a national hurricane or DRF could be a part of the overall medium to long-term plan, it must be strengthened by other well-established programs. The question is how much would we be allocating to this fund annually and where will this money come from when we are still struggling to eliminate the deficit, reduce the national debt and cut government spending?
For such a fund to be useful as a self-insurance pool, it must contain substantial sums capable of defraying the cost of multiple major hurricanes within a hurricane season. Additionally, what will be the governance structure of this fund and who will manage this segregated fund? We also cannot rule out the utility of actual private insurance of the people's assets which is backed by significant foreign reinsurance facilities.
We must revisit the terms of our involvement in CCRIF and ascertain whether they can be renegotiated with adjustments to premiums if necessary. If this has been done already, the details of the discussions and conclusions should be shared with the populace. This is important when we consider the payouts made by the CCRIF in relation to Hurricane Matthew to date. What makes us or our CCRIF policies so unique that we couldn't receive payments under the facility while other nations impacted by Hurricane Matthew were eligible? Inquiring minds would like to know.
CCRIF payments for Matthew
It was reported that CCRIF made payments of just over US$29 million to Haiti, Barbados, Saint Lucia and St. Vincent and the Grenadines within 14 days of the end of the event; in this case Hurricane Matthew. Per the CCRIF, the facility has made a total of 21 payouts to 10 member governments totaling almost $68 million. The CCRIF is bolstered by a reinsurance facility or panel and a US$30 million catastrophe bond.
Barbados has received US$975,000 for the tropical cyclone policy and about US$753,000 for the excess rainfall policy from CCRIF after Hurricane Matthew triggered the facility albeit Matthew was still a tropical storm when it impacted that country. However, CCRIF was reported as stating that preliminary runs of its loss model for wind and storm surge produced some government losses in Barbados.
"Modelled loss levels in Saint Lucia and St. Vincent & the Grenadines were below the attachment points for each country's parametric tropical cyclone insurance policy, meaning that no payout is due to them. However, in Barbados the modelled loss was above its parametric tropical cyclone insurance policy's attachment point, triggering the facility for the first time under Hurricane Matthew and the CCRIF's preliminary calculations show that a payout of US$975,000 is due," Artemis reported.
On its part, Haiti received or is set to receive a little over $20 million under its tropical cyclone policy and about US$3 million under its excess rainfall policy from CCRIF. Matthew was a category four hurricane when it hit Haiti.
Conclusion
In the final analysis, the government must conclude whether it will deploy an ex-ante strategy (i.e., insurance provided by CCRIF or other means), ex-post strategy (budget reallocation, tax increases or donor assistance) or both as it relates to financing the risk of natural disasters.
An ex-ante strategy allows the government to plan and avoid worsening our nation's fiscal position or government programs allocated for in the national budget. Moreover, the government should reconsider its position as it relates to CCRIF. A recently populated DRF will be insufficient to fund the cost of natural disasters such as hurricanes that are becoming more frequent, costly and fierce year on year. The DRF policy must be clear and viable to ensure the sustainability of our nation's financial and economic position. There is no doubt that this discussion is a matter of national priority.
o Arinthia S. Komolafe is an attorney-at-law. Comments on this article can be directed to a.s.komolafe510@gmail.com.
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