A Review of CCRIF’s Operation...A Review of CCRIF’s Operation After its First Season v v Figures Figure 3.1. The CCRIF Multi-Donor Trust Fund: Flow of Funds Contributed by Partners

T H E C A R I B B E A N C A T A S T R O P H E R I S K I N S U R A N C E I N I T I A T I V E

A Review of CCRIF’s OperationAfter Its First Season

December 1, 2008

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T H E C A R I B B E A N C A T A S T R O P H E R I S K I N S U R A N C E I N I T I A T I V E

A Review of CCRIF’s Operation After its First Season

December 1, 2008

ii Caribbean Catastrophe Risk Insurance Facility

Copyright © 2009 The International Bank for Reconstruction and Development/ The World Bank1818 H Street, N.W.Washington, D.C. 20433, USAAll rights reserved

Manufactured in the United States of AmericaFirst printing January 2009

The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and ac-cepts no responsibility for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries.

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Produced by the Knowledge and Learning Team, Development Effectiveness Unit, Latin America and the Caribbean Region, World Bank

A Review of CCRIF’s Operation After its First Season iii

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Contents

1. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

2. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

3. Background on the CCRIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

4. Review of the 2007/08 Season . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4.1. Establishment of the Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94.2. The 2007/08 Policy Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

5. Operational Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

5.1. Current Structure of the CCRIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155.2. Performance of the Operational Structure . . . . . . . . . . . . . . . . . . . . . . . . . . 185.3. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

6. Financial Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

6.1. The Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216.2. Operating Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226.3. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

7. Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

7.1 Risk Financing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

iv Caribbean Catastrophe Risk Insurance Facility

7.2.Financial Performance of the First Season . . . . . . . . . . . . . . . . . . . . . . . . . . . 307.3.Financial Stability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327.4.Projections for Hypothetical Risk Management Strategies . . . . . . . . . . . . . . 337.5.Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

8.Governance Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

8.1.Performance of the Governance Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . 398.2.Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

9.Interaction with Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

9.1.Member Economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 419.2.Donors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439.3.Financial Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 439.4.Disaster Risk Management Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449.5.Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

10.Recommendations for Future Endeavors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Annex 1. Documents Reviewed by the Review Team . . . . . . . . . . . . . . . . . . . . . . . . . 49

Annex 2. People Interviewed by the Review Team . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Annex 3. Audited Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Boxes

Box 3.1. Catastrophe Risk Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Box 3.2. The Benefits of Risk Pooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Box 3.3. Flexibility of the Insurance Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Box 4.1. The Operational Cycle of the CCRIF . . . . . . . . . . . . . . . . . . . . . . . . . . 11Box 4.2. Main Decisions of the Board for the 2007/2008 Season . . . . . . . . . . . . 13Box 5.1. Main Recommendations about the Operating Structure . . . . . . . . . . . . 19Box 6.1. Main Recommendations about Financial Management . . . . . . . . . . . . 25Box 7.1. Managing the Risk of Insolvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Box 7.2. Main Risk Management Recommendations . . . . . . . . . . . . . . . . . . . . . 37Box 8.1. Main Recommendations Regarding Governance Structure . . . . . . . . . . 40Box 9.1. Lessons Learned from Hurricane Dean . . . . . . . . . . . . . . . . . . . . . . . . 42Box 9.2. Main Recommendations about the Relationship with Stakeholders . . . 45Box 10.1. Main Recommendations for Future Endeavors . . . . . . . . . . . . . . . . . . 48

A Review of CCRIF’s Operation After its First Season v

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Figures

Figure 3.1. The CCRIF Multi-Donor Trust Fund: Flow of Funds Contributed by Partners 6Figure 3.2. CCRIF, Value of Risk Pooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Figure 3.3. Catastrophe Reinsurance Price Index . . . . . . . . . . . . . . . . . . . . . . . . . 8Figure 4.1. Tracks of Hurricane Dean and Felix . . . . . . . . . . . . . . . . . . . . . . . . . 11Figure 5.1. Operational Structure of the Facility; Alternative Risk Transfer (ART) Solutions (e.g. catastrophe bonds, catastrophe swaps) . . . . . . . . . . . . . . . . . . . . 15Figure 7.1. The CCRIF Risk Financing Structure . . . . . . . . . . . . . . . . . . . . . . . . 29Figure 7.2. The CCRIF Risk Financing Structure for 2007/2008 and 2008/2009 30Figure 7.3. Distribution of Total Annual Claims, as Modeled by the CCRIF’s Parameteric Loss Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Figure 7.4. Distribution of CCRIF Reserves after Ten Years, Based on the First Three Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Tables

Table 4.1. Time Frame of the Establishment of the CCRIF . . . . . . . . . . . . . . . . . . 9Table 6.1. Original and Final Budgets of the 2007/2008 Season . . . . . . . . . . . . . 23Table 7.1. Approximate Summary Statistics for the First Two Years . . . . . . . . . . 31Table 7.2. Illustrative 2008/09 Profit and Loss Statement in Three Different Scenarios 33Table 7.3. Summary of Results from Simulations . . . . . . . . . . . . . . . . . . . . . . . . 35

Acronyms and Abbreviations

AEL Average expected lossART Alternative Risk TransferCaribRM Caribbean Risk Managers LimitedCARICOM Caribbean CommunityCARILEC Caribbean Association of Electrical UtilitiesCCRIF Caribbean Catastrophe Risk Insurance Facility (or the Facility) CDB Caribbean Development BankCDERA Caribbean Disaster Emergency Response AgencyCIMH Caribbean Institute of Hydrology and MeteorologyDFA Dynamic Financial AnalysisECLAC Commission for Latin America and the Caribbean (United Nations)GAAP Generally Accepted Accounting PrinciplesIDA International Development AssociationLIBOR London Interbank Offer RateMDR Mean damage ratioMDTF Multi-Donor Trust Fund PIoJ Planning Institute of JamaicaSAO Statement of Actuarial OpinionUWI University of the West Indies

A Review of CCRIF’s Operation After its First Season vii

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1. Executive Summary

This report, published 18 months after the inception of the Caribbean Catastrophe Risk Insurance Facility (the “CCRIF” or the “Facility”) reviews the Facility’s first year of operation (June 1, 2007 – May 31, 2008). Prepared essentially to inform the Board of Directors of the Facility, it has been drafted to allow for a wider distribution and to update all stakeholders (including participating governments, donors and the wider disaster community). As a result, the report includes background information on the establishment and operations of the Facility.

The CCRIF is a joint reserve mechanism that operates like a mutual insurance company to provide participating governments1 with coverage akin to business inter-ruption insurance. The Facility’s main purpose is to provide a financial solution to the short-term liquidity needs of Caribbean governments in the aftermath of disasters with catastrophic proportions. The Facility was established in May 2007 at the request of the Caribbean Community (CARICOM) Heads of Government. It is currently gov-erned by a Board of Directors composed of representatives of member countries, the donors2 and technical experts. Sixteen governments joined the Facility at its inception, all of them acquiring coverage against hurricane wind losses and 14 also acquiring cov-erage against earthquake (ground shaking) losses.

This first year of operation provided a good test of the operationability of the Facility. Four major storms and one earthquake affected the Caribbean region, resulting in the first indemnity payments ever paid out from a parametric insurance

1 The following CARICOM members are members of the CCRIF: Anguilla, Antigua & Barbuda, the Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St Kitts & Nevis, St Lucia, St Vincent & the Grenadines, Trinidad & Tobago and Turks & Caicos Islands.2 Bermuda, Canada, France, Ireland, the United Kingdom, the Caribbean Development Bank, and IBRD contributed approximately US$50 million to a Multi-Donor Trust Fund to support the CCRIF. An additional contribution from the European Commission of US$15 million is being processed.

viii Caribbean Catastrophe Risk Insurance Facility

contract3. These payments were processed within one month after the event, demonstrating the effectiveness of the operational procedure set in place. Four tropical storms, including Hurricanes Dean, Felix, Noel, and Olga, affected participating governments but did not generate catastrophic economic losses that would have triggered a payout from the Facility. Responding to demand expressed by the participating countries to provide coverage for lower intensity storms, the CCRIF Board approved the lowering of the deductible for hurricanes (from which indemnity payments are triggered) for the 2008/09 season.

The strategy of outsourcing all services to the Facility has proven effective and benefitted from the flexibility of the various parties to adjust contract terms and op-erational procedures as new situations arise. Overall, this strategy allows for effective control of operational costs, which were maintained below the announced ceiling of 5% of premium income. A fairly mild hurricane season, combined with conservative risk management helped the Facility to build strong financial standing. It also allowed the Facility to double the maximum coverage per peril to US$100 million and lower the premium costs by 10% for the 2008/09 season. A first financial audit was issued in September 2008 with a clean opinion on the financial management of the Facility.

Measures of the long-term sustainability of the Facility, both in terms of prob-ability of insolvency within the coverage period and in the medium term, rank the Facility as one of the safest insurance programs in the world4. This was made possible by the contribution of donors to the Facility’s reserves, but also by the good perception of the reinsurance industry5, allowing for reinsurance placements at very competitive rates. In addition, the combination of own reserves and cost-effective risk transfers allow the CCRIF to offer catastrophe coverage well below estimated market rates.

Gradual transition towards the CCRIF Board made up of representatives from member countries and donors is ongoing. The CCRIF Board has been in operation since the creation of the Facility and is currently made up of one representative of the member countries (appointed through CARICOM), one representative of the donors (appointed through CDB) and three technical experts. Two new representatives (one representing member countries and one representing the donors) are scheduled to be appointed by July 2009 to replace the technical experts appointed when the Facility was established.

The main challenge facing the Facility remains its communication strategy. During its first year of operations, the CCRIF team endeavored to maintain a close dialogue with representatives from Ministries of Finance and Planning of member Governments, repre-sentatives of the donors as well as with the private reinsurance and investors. The events

3 The Governments of Dominica and St Lucia received payments of US$528,021 and US$418,976, respec-tively following a moderate earthquake in the Eastern Caribbean in December 2007.4 The risk of insolvency of the CCRIF in any given year is smaller than 1 in 10,000 years, much more secure than the international insurance standards of the developed world. 5 In September 2008, the Facility was awarded the Reinsurance Initiative of the Year Award, offered by the Review Worldwide Reinsurance, the leading magazine of the international reinsurance industry. The Facility was recognized a second time when it received the “Transaction of the Year Award” at the Insurance Day Award in London in December 2008.

A Review of CCRIF’s Operation After its First Season ix

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of this first season demonstrated that public officials and members of the disaster com-munity at large generally are not fully informed about the objective and functioning of the Facility. In particular, the passage of Hurricane Dean in September 2007 forced the Facility to reassess its strategy. The Facility has since hired a specialized communications firm and strengthened its capacity to communicate with the public.

Finally, in response to the demand of its members for new coverage, CCRIF is exploring the development of a number of innovative products and services. These in-clude coverage of excess rainfall and coverage of power companies in the Caribbean.

Main recommendations

This review aims to document the operations of the CCRIF during its first year of op-eration with a view to provide recommendations on areas for improvement and future development. The main recommendations are summarized below.•OperationsManual. Significant effort has already been made to document the

CCRIF’s operational procedures in a comprehensive Operations Manual. This Manual should now be updated based on the lessons learned during the first year of operation. This includes clarifying the role, responsibilities, and specific tasks of the various firms engaged in management of the Facility. Well-documented pro-cedures should ensure efficiency and transparency in the operations of the Facility and allow for continuity of operations in case of the unanticipated absence of a member of the Facility’s management team.

•Administrativeandoperationalcosts. During the 2007/08 season, operational and administrative costs of the Facility were capped at 5 percent of the premium income. The Report recommends making this rule formal. Cost-effectiveness and administrative efficiency are key requirements for the success of the CCRIF. It is also recommended that the Board strengthen budget controls by setting a cap for all contracts of the Facility.

•Developmentbudget. In addition to the implementation of a cap on operational and administrative expenses, the Report recommends the establishment of a sepa-rate budget window to be approved by the Board on an annual basis to finance re-search and development, and particular outreach activities linked to the expansion of the Facility. Such a window should provide flexibility for the CCRIF to better serve its members while keeping strict control on its operating expenditures.

•Board“RulesofProcedure.” The procedures of the CCRIF Board are defined by the standard rules of procedure for Star Trust registered in the Cayman Islands. These rules are generic and the Board’s “Rules of Procedure” should be refined to clarify issues such as the nomination and terms of its members, election and term of the chairman, quorum, majority, and virtual meetings, among others. The Secretary of the Board should produce a draft to be discussed and adopted by the Board.

x Caribbean Catastrophe Risk Insurance Facility

•Outreachandcommunications.During its first season, the CCRIF team endeav-ored to keep its principal stakeholders informed and provided as much informa-tion as possible on unfolding events and functioning of the Facility. The task is challenging due to the context in which member countries generally contact the CCRIF team (generally after a disaster), and the specialized nature of parametric insurance. The Report underscores the need to strengthen the Facility’s communi-cation strategy, including outreach to key stakeholders.

•Developmentofaflood/excessrainfallcoverageproduct. During the review, sev-eral member countries expressed strong demand for parametric flood coverage of CCRIF member countries. Recognizing that cost-effective parametric flood cov-erage may be difficult to develop, the Report recommends that the CCRIF explore the possibility of offering coverage for excess rainfall. Member countries will need to be fully briefed on the characteristics and limitations of such coverage.

•Coverageofpowerutilities. The CCRIF recently received a request from the Caribbean Association of Electrical Utilities (CARILEC) for assistance in accessing catastrophe coverage for power companies in the Caribbean Region. The report recommends that the CCRIF study the establishment of a separate captive to pro-vide financial protection to CARILEC members. This captive should be financially independent from the multi-donor trust fund (MDTF) set up for the CCRIF and current reserves of the CCRIF. Considering the number of members of CARILEC and the benefits of risk pooling, a new captive is likely to be viable.

•Actuarialreviews. To meet international insurance standards, the report recom-mends that the Facility commission an Actuarial Review that would include a Statement of Actuarial Opinion and an Independent Report on Risk Management. Considering the very specialized nature of risk management, such an external re-view would produce a valuable second opinion for the Board.

•FutureparticipationofHaiti. Haiti’s premium is currently financed by the World Bank through an International Development Association (IDA) Grant. The Grant was designed to finance only 50 percent of Haiti’s premium during the third year. Considering Haiti’s economic situation, it is unlikely that the country will be able to finance continuous payment of its premium by itself. The Report recommends that after consultations with the Haitian authorities, the World Bank approach donors to seek additional grants to ensure Haiti’s participation in the CCRIF.

A Review of CCRIF’s Operation After its First Season 1

1

This report, published 18 months after the inception of the Caribbean Catastrophe Risk Insurance Facility (the “CCRIF” or the “Facility”) is based on a review of the Facility’s first year of operation (June 1, 2007 – May 31, 2008).

The report is addressed to the Board of Directors of the Facility1 but it has also been drafted with the aim of informing other interested parties such as participating governments, donors and actors in the disaster risk management community. As a result, the report includes background information on the establishment and operations of the Facility.

The report provides an assessment of the operations of the CCRIF; reviews the Facility’s institutional, financial, and risk management strategy; and examines pos-sible future endeavors. The review evaluates the performance and sustainability of the CCRIF and makes recommendations to address identified challenges.

This review also intends to contribute to future adaptation (replication) of the CCRIF model in other regions by documenting the establishment and operations of the Facility. The CCRIF is the world’s first insurance facility of its kind and offers one of the least-expensive catastrophe insurance products currently available.

The report was carried out between July and November 2008 by a multidisci-plinary team2, and is based on a document review, interviews with stakeholders, a visit to the office of the Corporate Secretary of the CCRIF, and an analysis of the financial models used by the CCRIF.

1 The CCRIF operates as an independent legal entity controlled by a Board of Director made of representa-tives of member countries, the donors and technical experts. After playing a facilitating role during the establishment of the Facility, the World Bank is now providing technical assistance and fiduciary control of the funding provided by donors and held in a Multi-donor Trust Fund (MDTF).2 The team consists of: (i) a legal expert with a wide experience in World Bank operations and in the private financial sector; (ii) a qualified actuary with a research background in insurance; and (iii) an expert in meteo-rology and risk management.

2. Introduction

2 Caribbean Catastrophe Risk Insurance Facility

The documents reviewed include the background documents, the minutes of the Board of Directors of the CCRIF, the Operations Manual, the financial and technical quarterly reports, the event reports, the contracts of the service providers, the participa-tion agreements, and the policies. See Annex 1 for a full list.

Interviews were held with government officials of four member countries, all mem-bers of the Board of Directors, the various contractors of the CCRIF, donor representa-tives, the Cayman Islands Monetary Authority, and the financial auditors of the CCRIF. See Annex 2 for a list of people interviewed.

Finally, the Dynamic Financial Analysis (DFA) model was used to verify the appro-priateness of the model and the level of financial risk to which the CCRIF is exposed.


3

3. Background on the CCRIF

TheCaribbeanCatastropheRiskInsuranceFacility(CCRIF)wasestablishedin2007toprovideafinancialsolutiontotheshort-termliquidityneedsofCaribbeangovern-mentsintheaftermathofnaturalcatastrophes. Following the 2004 hurricane season, the Caribbean Community (CARICOM) Heads of Government requested World Bank assistance in improving access to catastrophe insurance. The CCRIF is the result of two years of collaborative work among the region’s governments, key donor partners, and a team of experts from the World Bank and external contractors. Preparatory studies for the establishment of the CCRIF were funded through a grant from the Government of Japan and with support from the World Bank’s own resources. These included the development of hurricane and earthquake risk models, using state-of-the-art risk modeling techniques, to assess potential monetary impacts, the structuring of a risk financing strategy, and the legal and organizational design of an insurance vehicle to structure and pass excess risk to the international reinsurance and capital markets. The CCRIF itself benefits from the backing of various donors, including Bermuda, Canada, France, Ireland, the United Kingdom, the Caribbean Development Bank, and the International Bank for Reconstruction and Development (IBRD)1.

TheCCRIFwaslegallyestablishedinMay2007,asanexemptedcompanyin-corporatedunderthelawsoftheCaymanIslands,holdingaClassBinsurancelicenseundertheInsuranceLaw(asrevised)2. The CCRIF Trust is governed by a Trust Deed and is administered by a Trustee. The sole purpose of the CCRIF Trust is to own 100 percent of the Facility, and the main purpose of the Facility is to provide catastrophe insurance coverage to participating countries, who are the beneficiaries of the CCRIF Trust. An Enforcer has been appointed to oversee the Trust.

1 A contribution from the European Commission has been agreed and is currently being processed.2 Cayman Islands Special Trusts (Alternative Regime) Law, 1997. The CCRIF STAR Trust, Declaration of Trust made 16 May 2007, with Q & H Corporate Services, Ltd as the Original Trustee, and acknowledged by Mr. Richard Carpenter in his capacity as Enforcer.


TheCCRIFisajointreservemechanismthatprovidesparticipatinggovernments3

withcoverageakintobusinessinterruptioninsurance.The CCRIF works as a mutual insurance company controlled by the participating governments. Each government pays a premium related to its own risk exposure and can buy coverage up to an aggregate limit of US$100 million. The speed of payout and low cost of coverage to participating governments are made possible by combining modern insurance instruments that do not require assessment of losses on the ground and sophisticated financial engineering.

AnimportantfeatureoftheCCRIFpolicyisthespeedofclaimssettlement,madepossiblebytheuseofparametricinsurancetriggers. Payouts from the CCRIF are de-rived from catastrophe risk models designed during the development phase. A typical catastrophic risk model is based on five modules (see Box 3.1) that are updated based on emerging information. Coverage under the CCRIF is capped at 50 percent of total estimated direct losses, a proportion believed to be sufficient enough to cover partici-pants’ immediate liquidity needs until other sources of funds can be mobilized.

3The following CARICOM members are members of the CCRIF: Anguilla, Antigua & Barbuda, the Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St Kitts & Nevis, St Lucia, St Vincent & the Grenadines, Trinidad & Tobago and Turks & Caicos Islands.

Box 3.1. Catastrophic Risk Models

Hazard module: The hazard module defines the frequency and severity of a peril, at a specific location. This is done by analyzing the historical event frequencies and reviewing scientific studies performed on the severity and frequencies in the region of interest. Once the hazard parameters for each peril are established, simulated stochastic event sets are generated that define the frequency and severity of thou-sands of simulated cyclone or flooding events. This module can analyze the intensity at a location once an event in the simulated set has occurred. This module models the attenuation/degradation of the event from its location to the site under consideration and evaluates the propensity of local site conditions to either amplify or reduce the impact.Exposure module: The exposure values of “assets at risk” are estimated either from available secondary data sources or are derived from the distribution of population. This “proxy” approach is used when the preferred specific site-by-site data are not available. Based on these data, the module computes the value for all types of exposures as a product of multiplication of the area of total building inventory and the average replacement cost per unit of inventory.Vulnerability module: The module quantifies the damage caused to each asset class by the intensity of a given event at a site. The development of asset classification is based on a combination of construc-tion material, construction type (say, wall and roof combination), building usage, number of stories, and age. Estimation of damage is measured in terms of a mean damage ratio (MDR). The MDR is defined as the ratio of the repair cost divided by replacement cost of the structure. The curve that relates the MDR to the disaster (earthquake or hurricane) intensity is called a vulnerability function. Each asset class and building type will have different vulnerability curves for each peril.Damage module: To calculate losses, the damage ratio derived in the vulnerability module is translated into a dollar loss by multiplying the damage ratio by the value at risk. This is done for each asset class at each location. Losses are then aggregated as required. Government assets or assets that are likely to be fi-nanced with government resources can be easily isolated and an assessment of financial needs for recon-struction calculated. Based on the likely timing for reconstruction, these costs can be ventilated between short-, medium-, and long-term financial needs.Loss module: The module estimates the losses from the damage distribution. When dealing with gov-ernment losses, this module estimates relief and recovery costs and tax revenue losses.


5

TheCCRIFprovidesparticipatinggovernmentswithaccesstocatastropheinsuranceatverycompetitivecosts. The CCRIF works as a mutual insurance company, charging premiums to its members at a level that covers expected losses, operating costs, and reserve growth (net of inflation). To lower the cost of insurance for its members, the Facility benefits from two main assets. First, it has sufficient reserves to retain some of the risks transferred by participating governments. Second, the Facility functions as a risk aggregator enabling individual governments to transfer their risks into one, better-diver-sified portfolio. These two features allow the CCRIF to access the international capital market where it is most efficient. See Box 3.2 on the benefits of risk pooling.

Box 3.2. The Benefits of Risk Pooling

To understand the CCRIF, one could consider a system through which several countries would agree to combine their emergency reserve funds into a common pool. If each individual country were to build up its own reserves to sustain a catastrophic event, the sum of these country-specific reserves would be much larger than the actual needs of the pooled countries in a given year. Considering that, on average, only one to three Caribbean countries are affected by a hurricane or an earthquake in any given year, a pool holding only the reserves for three potential payouts should be sufficient for the entire group of coun-tries participating in the pool. Each year, as the pool is depleted, participating countries would replenish it in proportion to their probable use of the funds in the pool.

The CCRIF works in a similar manner by combining the benefits of pooled reserves from participating countries with the financial capacity of the international financial markets. It retains some of the risks transferred by the participating countries through its own reserves and transfers some of the risks to rein-surance markets where this is cost-effective. This structure results in a particularly efficient risk-financing instrument that provides participating countries with insurance policies at approximately half the price they would obtain if they approached the reinsurance industry on their own.

TheFacilitybenefitsfromastrongreservebasethatallowsittoretainsomeoftherisktransferredbyparticipatinggovernments;theexcessriskthatcannotberetainedistransferredtothecapitalmarkets.Reinsurance is essential to the success and long-term sustainability of the CCRIF, allowing it to secure enough financial capacity to ensure the full payment of claims in the event of a major disaster. However, chronic overdependence on reinsurance is neither desirable nor sustainable over time. It is common practice in the reinsurance market that the insured party retains one third of its risk and transfers the rest to the reinsurance market. Given the pricing structure, it is usually cost-effective for the insured party to retain small but recurrent losses and to transfer large but infrequent losses to the reinsurers.

TheCCRIFisbackedbydonorfundsheldbytheWorldBankinaMulti-DonorTrustFund(MDTF). Bermuda, Canada, France, Ireland, the United Kingdom, the Caribbean Development Bank, and IBRD contributed to a Multi-Donor Trust Fund approximately US$50 million. These funds complement the Facility’s own reserves to cover some of its operating expenses. These additional resources help reduce the


CCRIF’s dependence on the reinsurance market, allowing for a larger share of the premium collected to help build its reserves, as depicted in Figure 3.1.

ThefinancialcapacityoftheFacilityissecuredthroughitsownreserves(backedbytheMDTF)andexternalriskcapital. External risk capital to cover excess losses has been secured on the reinsurance market, with the help of a reinsurance broker, and on the capital markets through a catastrophe swap (see text below) with the as-sistance of the World Bank Treasury.

TheCCRIFallowsparticipatingcountriestopooltheircountry-specificrisksintoone,better-diversifiedportfolio.The cost of catastrophe insurance depends on the variability of the risks that are being insured. Since it is very unlikely that all Caribbean islands are hit by major hurricanes or earthquakes in any given year, pooling country-specific risks within a regional portfolio generates risk diversification benefits. Therefore, the cost of coverage through a regional portfolio is less than the sum of individual costs of coverage. In the case of the CCRIF, the pooling of country-specific risks allows for a reduction of individual insurance premiums by almost half, compared with the cost of coverage a participating government would pay if it had to approach the reinsurance market independently.

Figure 3.2 illustrates the benefits of risk pooling by comparing the sum of the individual policy limits and the CCRIF aggregate limit under the 2008–09 CCRIF in-surance portfolio. The analysis shows the CCRIF aggregate limit, which is estimated to sustain a 1-in-1,500-year event, is 74 percent lower than the sum of individual policy limits.

TheCCRIFhasachievedahighleveloffinancialsecuritywhilemaximizinglong-termsustainability. The Facility’s risk manager is faced with the need to balance survivability—minimizing the probability of bankruptcy—against the desire to offer value for money to policyholders. A strategy under which the Facility transfers most of its risk portfolio to the reinsurance market would ensure very high survivability

Figure 3.1. The CCRIF Multi-Donor Trust Fund: Flow of Funds Contributed by Partners

Initial donor contribution



Multidonor Trust Fund

• Relations with CCRIF are driven by a Grant Agreement

• Expenditures financed have to follow procedures established in Operations Manual

• Funds are released as required

• World Bank reports to donors on the use of funds

Caribbean Catastrophe Risk Insurance Facility

Reserve Needs

• Initial Reserves

Operating Expenditures

• Facility Supervisor

• Reinsurance Broker

• Reinsurance Premium

• Insurance Payouts

• Financial Audit


7

but compromise its ability to offer value for money, since policyholders would be charged high premiums in order for the Facility to afford to pay a high reinsurance premium. On the other hand, a strategy under which the Facility retains a larger part of the risk could reduce survivability.

TheCCRIF’sfinancialstructureisdesignedtoprovidestableinsurancecoststopartici-patinggovernmentsovertime. Catastrophe insurance prices are known to be highly vola-tile, creating particular difficulties in the planning and execution of insurance programs. Figure 3.3 illustrates this point by providing an analysis of catastrophe insurance pricing in the U.S. financial markets over the last 20 years. The problem became particularly acute after the 2004/05 hurricane season, which led to a 100 percent increase in the cost of some reinsurance layers for catastrophe risk in the Caribbean. As its reserve base grows, the CCRIF is able to retain more of the risk and thus smooth the cost of risk transfer and pro-vide greater stability to insurance premiums than in the commercial market.

The CCRIF provides flexibility to allow countries to adapt the insurance policy to their own catastrophe risk financing strategy. The terms and conditions of the insur-ance policies are tailor-made for each country. Countries can make decisions on the characteristics of the coverage that they want and the premium they are willing to pay (see Box 3.3).

Policiesarepricedindividuallyaccordingtothecharacteristicsofthecoveragethateachparticipatinggovernmentchooses. Once the country has decided on the kind of coverage to purchase, the CCRIF model is used to calculate the average expected loss (AEL). Countries are then charged a multiple of the AEL, in order to cover the com-bined cost of AEL, the operating costs, and the reserve growth. The multiple was 2.25 for the 2008/09 season after a 10 percent price cut compared to the 2007/08 season.

Figure 3.2 CCRIF, Value of Risk Pooling

600

100

200

300

400

500

0

US$

Mill

ion

74% reduction for 1,500-yr loss

Individual Policy Limits CCRIF Aggregate Limit

Source, CCRIF 2008


Box 3.3. Flexibility of the Insurance Policy

Participating countries can decide on coverage as follows:

• Perils covered: Hurricane (protection against hurricane wind damage) and earthquake (protection against ground-shaking damage).

• Coverage Limit: The maximum possible payout for all claims in any one policy period, not to exceed US$100 million and specified for each insured peril.

• Attachment Point: Level of government loss that triggers the policy when it is reached or exceeded. It is the equivalent of a deductible. It can also be expressed in terms of the return period of experiencing that level of loss or more. It cannot be set at loss levels with return periods of less than 15 years. (For CCRIF insurance purposes, the only valid method to calculate the amount of government loss is the parametric loss model speci-fied in the policy itself.)

Figure 3.3 U.S. Catastrophe Reinsurance Price Index

400

0

50

100

150

200

250

300

350

Ind

ex (

1990

= 1

00)

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

2008

p

1990

World Australia & New Zealand USA Japan EQ Mexico


9

4. Review of the 2007/08 Season

The CCRIF began operating on June 1, 2007, in time for the 2007 hurricane season. Sixteen Caribbean economies joined the Facility and purchased coverage from June 1, 2007 to May 31, 2008—the 2007/08 season. Four important tropical cyclones and eight earthquakes were registered during the season. One of the earthquakes triggered payouts for two countries, demonstrating the Facility’s operational effectiveness, in-cluding the processing of payments within two weeks of the event.

The following sections discuss in more detail the establishment and operations of the Facility during its first season.

4.1 Establishment of the Facility

Table 4.1 presents the main milestones in the establishment of the Facility.

Table4.1.TimeFrameoftheEstablishmentoftheCCRIF

Date Action

February 28, 2007 A donor meeting took place in Washington, D.C. Donors, includ-ing Bermuda, Canada, France, Ireland, the United Kingdom, the Caribbean Development Bank, and IBRD agreed to contribute to a Multi-Donor Trust Fund managed by the World Bank to which they contributed approximately US$50 million.

April 2007 A Board of Directors comprised of technical experts was appointed. The Insurance Manager of the Facility was contracted.

April 2007 Operations Manual adopted by the CCRIF Board. The Operations Manual establishes the procedure for the most important operations of the Facility and the roles and responsibilities of the Board and the service providers of the Facility.


Date Action

May 16, 2007 The CCRIF was legally established as a Star Trust domiciled in the Cayman Islands. The CCRIF was placed under the administration of a Trustee. An Enforcer was appointed to oversee the Trust. A company, 100% owned by the Trust, was formed and received a general insur-ance license from the Cayman regulator.

May 2007 Participating economies paid their insurance premium and their participation fee. The CCRIF participating governments are: Anguilla, Antigua & Barbuda, the Bahamas, Barbados, Belize, Bermuda, the Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St Kitts & Nevis, St Lucia, St Vincent & the Grenadines, Trinidad & Tobago, and Turks & Caicos.

May 2007 US$110 million external risk capital is secured on the reinsurance and capital markets with the help of a reinsurance broker, Benfield.

Totalparticipationfeeandpremiumcontributionfrommembercountriesforthe2007/08seasonreachedUS$39million. Participating countries purchased US$364.9 million of hurricane coverage for an aggregate premium volume of US$14.2 million, and US$129.9 million of earthquake coverage, for an aggregate premium volume of US$5.2 million.

Tocoveritsriskfinancingneeds,theCCRIFsecuredexternalriskcapitalofUS$110millionfromthereinsuranceandcapitalmarkets. The CCRIF purchased ag-gregate excess of loss reinsurance and transacted a risk swap, which together provided full reinsurance for losses above US$10 million and up to US$120 million. Under the agreed risk transfer strategy, the CCRIF retained first losses up to US$10 million and transferred the next US$110 million to the reinsurance market. Losses in excess of US$120 million were also retained by the Facility. The probability of the CCRIF de-faulting during its first season was estimated to be less than 0.01 percent, which made the CCRIF one of the strongest catastrophe insurance pools in the world. More detail on the CCRIF risk financing strategy is provided in Chapter 7.

4.2 The 2007/08 Policy Year

The2007/08seasonwasrelativelyactive,producing17tropicalcyclonesandanumberofseismicevents.Fourcyclonesandeightearthquakeshadthepotentialtotriggerpaymentsduringthe2007/08season. Hurricanes Dean and Felix reached Category 5 intensity. Hurricane Noel caused some damage, although it only reached Category 1. Event Briefs were produced for each significant hurricane and earthquake reported in the Caribbean Basin. Specific documents were prepared for Hurricane Dean and Felix and for the earthquakes of September 13 and November 29 (see Figure 4.1).

Two events required particular attention during the 2007/08 season and are further described below.


11

Box 4.1. The Operational Cycle of the CCRIF

The operational cycle of the CCRIF can be summarized as follows:

A. Starting early in the year (around February), member countries are contacted by the CCRIF to renew their insurance policy for the next season. Guidance, information, and cost estimates for different insurance alternatives are provided.

B. Policies are negotiated with the members in April. The signature of the policy and the payment of the premium should be done before the end of May in order to obtain coverage during the full season (from June 1 to May 31).

C. Reinsurance negotiation starts early in the year and reinsurance treaties are finalized when the CCRIF insurance portfolio is confirmed.

D. The insured period starts on June 1.E. During the entire season, the CCRIF Supervisor monitors hurricane and earthquake events as

reported by the National Oceanic and Atmospheric Administration (NOAA) and the United States Geological Survey (USGS).

F. Any event that may produce damages in an insured country is run through the parametric loss model. A report is sent to the affected country and a payout procedure is initiated if the index value (estimated government loss) is above the attachment point (deductible) chosen by the country.

G. Claims can also be presented by a country without having been previously detected by the CCRIF. In that case, the validity of the claim is confirmed using the parametric loss model, and the country is informed of the payout value.

H. When a payout procedure is initiated, the external financial auditor of the CCRIF, acting as an in-dependent party, runs the parametric loss model to confirm claim validity and payout amount.

I. The claim is settled within 14 business days after the calculations finish, and no more than a month after the event.

J. The CCRIF submits a reinsurance claim to its pool of reinsurers if the event triggers any of the rein-surance treaties.

K. Policies lapse on May 31 of each year if not renewed

HurricaneDean

HurricaneDeancrossedtheCaribbeaninAugust,2007reachingCategory5.Dean was the first and most powerful hurricane of the season and the most powerful storm recorded in the Caribbean since Hurricane Wilma of 2005. Although Hurricane Dean caused damage in the Caribbean, particu-larly to Jamaica, it did not trigger a payout by the CCRIF. Dean passed to the south of Jamaica but only the extreme south of the island faced devas-tating winds. Total losses were estimated at US$300 million and losses to the government due to winddamage were estimated by the CCRIF model at US$30 million, well below the attachment point

Figure 4.1. Tracks of hurricanes Dean and Felix taken from an Event Briefing prepared by the Facility


(deductible) selected by the Government of Jamaica in its insurance policy (US$226 million).

TheaccuracyoftheCCRIF’slossmodelwasverifiedthroughsubsequentdamageassessmentsthatwereratifiedbyanindependentauditor. Dean was the first real test for the Facility. It called for detailed calculation and verification with the Government of Jamaica. The independent auditor ratified the calculations and all inquiries from the Government of Jamaica were addressed. A subsequent damage assessment per-formed by the Planning Institute of Jamaica (PIoJ) confirmed the relative accuracy of the CCRIF model. Following the methodology developed by the United Nations Commission for Latin America and the Caribbean (ECLAC), PIoJ estimated the total economic impact on Jamaica at US$327 million. Of this figure, the short-term loss for the government—insured by CCRIF—can be estimated to be between 10 to 15 percent of the estimated total losses. That is between US$33 million to US$49 million, confirming that these were below the attachment point (deductible) chosen by the Government of Jamaica in its insurance policy (US$226 million).

EasternCaribbeanEarthquake

OnNovember29,2007anearthquakeofmagnitude7.4strucktheCaribbeanregion,triggeringpayoutstoDominicaandSaintLucia.The event was felt as far north as Anguilla and as far south as Guyana; significant damage occurred in Martinique and some damage also occurred in Saint Lucia and Dominica. An Event Brief was released within 24 hours. The claim process initiated by CCRIF immediately after the event was completed within two weeks of the event. The CCRIF paid out US$419,000 to Saint Lucia and US$528,000 to Dominica.

Serious earthquake events in the Caribbean are much less frequent than tropical cy-clones. As a result, earthquake events with a recurrence of 20 years (the minimum level of frequency for attachment of a policy) will have much less impact than a cyclone with a recurrence of 20 years. Thus, an earthquake with light impact may already generate a payment to a policyholder while a storm like Dean in Jamaica (estimated to be a 10-year event) will not generate a payment.

PolicyRenewal

InJanuary2008,theBoardofDirectorsrevisedandimprovedtheinsuranceconditionstobeofferedforthe2008/09season(see Box 4.2). The CCRIF reduced the premium by 10 percent to a rate of 2.25 times the Average Expected Loss (AEL)1 (previously 2.5). It increased the maximum available coverage limit to US$100 million (from US$50 million) and set a minimum payout equal to the value of the premium. Finally, the available attachment point for hurricane coverage was lowered to losses with a return period of 15 years (previously 20 years). Such decisions respond to the client

1 The AEL is the average loss expected from a specific peril over an infinite period.


13

Box 4.2. Main Decisions of the Board for the 2007/08 Season

Learning from the first year of operation and supported by the strengthened reserves, the CCRIF Board of Directors approved an increase in coverage and a reduction in cost as follows:

1. A reduction in the available attachment point for hurricanes from 20 to 15 years;2. An increase in the available maximum coverage amount (per peril) from US$50 million to US$100

million;3. A reduction of the overall premium rate by 10 percent;4. Minimum payout to the amount of the country’s annual premium.

countries’ expectations and, given the financial strength of the CCRIF, they should not affect its financial viability.period of 15 years (previously 20 years). Such decisions respond to the client countries’ expectations and, given the financial strength of the CCRIF, they should not affect its financial viability.

Participatingcountrieswereinformedinearly2008aboutthechangesintheinsur-anceconditions. Countries were presented with premium values for different coverage alternatives, the advantages of the new insurance conditions were explained, and hypo-thetical scenarios where prepared when requested.

Allparticipatingcountriesrenewedtheirinsurancepolicyforthesecondseason,andmostofthemmodifiedtheircoverage. Six of the 16 participants reduced the attachment point to the new minimum trigger (1-in-15-year return period). Trinidad & Tobago, Grenada, and St Kitts & Nevis increased their catastrophe insurance coverage limits.

As a result, the aggregate earthquake coverage limit reached US$177.6 million (a 37 percent increase over the 2007/08 season) and the aggregate hurricane coverage limit was US$384.4 million (a 5 percent increase over the 2007/08 season), for a total premium volume of almost US$22 million (a 13 percent increase over the 2007/08 season).

ReinsurancePlacement

Forthesecondseason,US$135millionofexternalriskcapitalwassecuredonthere-insurancemarket.The CCRIF decided to retain the first insured losses up to US$12.5 million, to transfer US$135 million in excess of US$12.5 million to the reinsurance market, and to retain insured losses in excess of US$147.5 million. The CCRIF pur-chased aggregate US$105 million reinsurance and a swap from the World Bank. The probability that the CCRIF defaults during its second season continues to be lower than 0.01 percent (see Figure 7.2).



15

5. Operational Structure

5.1 Current Structure of the CCRIF

TheCCRIFismanagedbyaCaptive1Manager(theInsuranceManager)underthesupervi-sionofaBoardofDirectorscomposedofrepresentativesfromtheparticipatingdonorsandclientcountries. The Board is responsible for making strategic decisions and is supported with technical advice of a Facility Supervisor, and by other services provided by various contracted service providers—an Asset Manager and a Placement Broker (see Figure 5.1).

1 Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from their parent group or groups, but they sometimes also insure risks of the group’s cus-tomers as well. Using a captive insurer is a risk management technique where a business forms its own insur-ance company subsidiary to finance its retained losses in a formal structure. The term “captive” comes from the fact that the policyholder owns the insurance company, that is, the insurer is captive to the policyholder. If the captive only insures its parent and affiliates it is called a pure captive.

Figure 5.1 Operational Structure of the Facility; Alternative Risk Transfer (ART) Solutions (e.g. catastrophe bonds, catastrophe swaps)

Board of Directors(Donor / Client)

Asset Manager(Reserves)

Insurance Manager

Reinsurance/ARTReinsurance Broker

WB Treasury

Facility Supervisor(Risk Manager)


ThedutiesoftheBoardmembersaremandatedunderCaymanlaw,andadditionalresponsibilitiesaresetoutintheOperationsManual. The Executive Chairman’s duties include deciding on which matters need to receive full Board attention, subject, how-ever, to advise on regulatory/legal aspects from the Insurance Manager. The duties of the other Board members include but are not limited to: (a) ensuring that the CCRIF is operating within the mandate of the business plan as approved by the Cayman Islands Monetary Authority; and (b) reviewing and approving the annual budget, changes to the CCRIF Operations Manual, the selection of the service providers, the annual risk transfer placement and the financial structure, any changes to the coverage provided in the terms and conditions of the parametric insurance policy and annual premiums charged to member countries, annual financial statements, and annual audit results.

InsuranceManager/CorporateSecretary

UnderCaymanlaw,theInsuranceManagerhasoverallresponsibilityforrunningtheCCRIF.This responsibility includes ensuring that proper legal, accounting, and compli-ance processes are followed by the CCRIF. In addition, the Insurance Manager is the Registered Agent and Office for the CCRIF and provides Corporate Secretarial func-tions, including management of the Board’s meetings and operations.

Sagicor Insurance Managers Limited is currently fulfilling the function of Insurance Manager for the CCRIF. The company was hired through a competitive process in March 2007. Sagicor’s contract was renegotiated at the end of the 2007/08 season to reflect its actual role and responsibilities after one year of operation.

FacilitySupervisor

TheFacilitySupervisormanagestheday-to-dayoperationsoftheCCRIFandreportsdirectlytotheBoard. The responsibilities of the Facility Supervisor include risk man-agement (including monitoring the risk structure of the CCRIF and advising the Board on risk transfer strategies), financial planning, participant interface (including partici-pant policy/claims administration), and management of the day-to-day functions of the Reinsurance/Placement Broker and the Asset Manager.

Caribbean Risk Managers Limited (CaribRM), a specialized firm member of the CGM Group (selected competitively during the design phase of CCRIF), is currently performing the role of Facility Supervisor of the CCRIF. CaribRM’s contract was re-negotiated at the end of the 2007/08 season to reflect its actual role and responsibilities after one year of operation.

Reinsurance/PlacementBroker

The Placement Broker is responsible for obtaining the best reinsurance terms and con-ditions for the CCRIF and reports to the Facility Supervisor, under the overall direction of the Board. In addition, the Placement Broker is responsible for all aspects of risk


17

transfer to the traditional reinsurance market and/or alternative risk transfer markets, including but not limited to the following: (a) reinsurance placement according to the risk transfer strategy approved by the Board; (b) reinsurance administration including reinsurance premiums collection and reinsurance claims settlement; (c) collection of market intelligence and other market monitoring; and (d) assistance to the Facility Supervisor in developing reinsurance placement and other risk transfer strategies.

Benfield Limited was selected for this role through competitive tender in January 2007.

AssetManager

TheAssetManagerinveststheCCRIFfunds,consistentwiththeStatementofInvestmentPrinciples&PolicyandInvestmentGuidelinesapprovedbytheBoard.In the day-to-day execution of its duties, the Asset Manager reports to the Facility Supervisor, under the overall direction of the Board. The responsibilities of the Asset Manager include but are not limited to the following: (a) allocating assets in confor-mity with the approved Statement of Investment Principles & Policy and Investment Guidelines; (b) identifying, establishing, and maintaining appropriate third-party custo-dial arrangements for all investment assets; and (c) providing monthly summary state-ments of investment performance, as well as quarterly detailed reports to the Board, including performance of underlying managers and performance attribution.

London & Capital Asset Management Limited was selected by the CCRIF Board from among five shortlisted candidates in March 2008.

OperationsManual

AnOperationsManualsetsoutallCCRIFoperatingprocedures.The CCRIF Operations Manual, drafted by the Insurance Manager, was approved by the Board of Directors at the inception of the Facility, and is to be reviewed annually. The Operations Manual reflects current policies and procedures that are consistent with conditions set out in agreements with the Service Providers, and with the require-ments set out in the CCRIF Grant Agreement from the Multi-Donor Trust Fund1. The Operations Manual also sets out policies and procedures concerning planning and reporting, regulatory framework, and money laundering, and has a detailed section on insurance administration. It sets out financing arrangements, including details of a financial management system, and details of procurement arrangements, including a procurement plan. Finally, it includes a Code of Conduct, enumerating basic principles and covering legal requirements, conflicts of interest, issues relating to honesty and in-tegrity, and the reporting of irregularities.

The Insurance Manager is responsible for the application and updating of the Operations Manual. To ensure that the Operations Manual reflects current policies and

1 As a result, the Operations Manual reflects World Bank requirements, including World Bank practices re-lating to antifraud and corruption, financial records, and procurement of goods and services.


promptly incorporates new ones, each Service Provider is responsible for formulating drafts of basic policy changes in areas of its responsibility. The drafts are formally pre-pared and referred to the Insurance Manager, who circulates the approved drafts to the Board for final approval and incorporation into the Operations Manual. Any changes are communicated to the affected parties and relevant authorities.

5.2 Performance of the Operational Structure

ThestrategyofoutsourcingallservicesrequiredbytheCCRIFhasproveneffective.The decisionmaking process was effective at both the Board level and the manage-ment level. The operational processes also run smoothly; issues like procurement, accounting, reporting and, in particular, claim processing, worked in a timely manner. This is reflected in the successful operation of the CCRIF during its first year of opera-tion, including the timely payouts following the earthquake of November 29, 2007, and the renewal of the insurance policies for the second season.

Certainaspectsofinternalcontrolscouldbetightened. The review team found several instances where the procedures set out in the Operations Manual were not entirely respected. In some instances, contracts were issued prior to formal approval of the Board. In at least two instances, the language of some contracts reviewed by the team did not provide clear information on the maximum budget of the contract, and the Insurance Managers issued payments exceeding the initial budget approved by the Board (these contracts were either expressed in a daily fee or did not clearly cap admin-istrative and travel expenses). While these issues are minor and can be ascribed to the actors in the Facility learning their respective role, they should be addressed in future phases.

5.3 Recommendations

As the CCRIF moves from the establishment and start-up stages into a day-to-day and operational stage, several aspects will require closer attention by the Board and the Service Providers.•TheOperationsManualneedstobekeptupdatedandmorecloselycoordinatedwithotherdocuments. A single document as the reference document for all ac-tions of the company allows for the standardization of CCRIF business opera-tions. All key processes should be carefully documented to facilitate internal controls, improve the performance of the Facility, and reduce dependency on the Service Providers. The Board should consider requiring each Service Provider to review the sections of the Manual that are under their responsibility and update those sections, if needed, by drafting changes and sending them to the Insurance Manager so that the changes can be communicated to all the parties and relevant


19

authorities. All Service Providers should be mentioned; the current version of the Operations Manual refers to only four Service Providers (Box 5.1).

•TheBoardshouldconsidertightersupervisionofInternalControls. The Insurance Supervisor must adhere to the Operations Manual or request changes to the Operations Manual if the procedures described do not allow for efficient running of the Facility. The language of a particular contract should be revised to ensure that contractual responsibilities are clear and contract amounts capped. This last point is particularly important because it will allow for more predictability on budget engagement and better control of Operating Expenses.

•Atestrunforalargeinsurancepayoutshouldbeperformed. So far, insurance payouts have been managed using CCRIF bank accounts. In cases where a large payout is due, immediate activation of the reinsurers and the MDTF will be re-quired. A test run would help prepare all parties to respond promptly when such a case occurs.

•TheBoardshouldprepareforthere-tenderingoftheInsuranceManager’scontractandconsidernegotiatingthecommissionontheReinsuranceBroker’scontract. The Insurance Manager’s contract is renewed annually. The CCRIF Operations Manual foresees that the Insurance Manager’s contract would be re-tendered after two years or during the 2009/10 season. The Board should request the Facility Supervisor to provide documentation for the Board’s consideration that sets out the selection criteria for the Service Providers (this task is part of the Facility Supervisor’s Terms of Reference). The Board may also consider renego-tiating the commission of the Reinsurance Broker. The review team suggests that the Board examine how, in line with market practice, the percentage fee could be negotiated given that the CCRIF portfolio is now well understood and accepted by the reinsurers, thus facilitating the reinsurance placement of the CCRIF portfolio.

Box 5.1. Main Recommendations about the Operational Structure

• Update the Operations Manual on a regular basis• Ensure adherence to the Operations Manual• Clarify the language and cap the budget of all contracts• Perform a test run for a large insurance payout• Consider re-tendering the contract of the Insurance Manager• Renegotiate the commission of the reinsurance broker.



21

6. FinancialManagement

Asanefficientreservemechanismforparticipatingcountries,CCRIF’ssuccessresidesinitsprudentmanagementofitsreservefundandstrictcontrolofitsoperatingcosts.In the following section, the review team looked at the approach adopted by CCRIF to manage its financial reserves and control operating expenses.

6.1 The Reserve Funds

TheCCRIFhasaccesstoreservesheldinaMulti-DonorTrustFund(MDTF)andtheCCRIF’sownreservefunds.The MDTF is financed by donor contributions and is managed by the World Bank. As of May 31, 2008, (the end of CCRIF’s first fiscal year), the total income of the MDTF was US$52,392,793. Income from donations was US$50,469,600 (Canada, CAD$20.0 million; United Kingdom, US$7.5 million; France, EURO 5.0 million; Caribbean Development Bank US$ 5.0 million; Ireland, US$2.4 million; Bermuda, US$0.5 million; IBRD, US$10.0 million). Income from investments was US$1,923,192. Disbursements made from the MDTF during its first fiscal year were US$10,278,552. This includes the administrative cost of the fund (US$809,392) and payments to the CCRIF (US$9,369,160). These payments are for eligible expenses that followed the procurement rules of the World Bank. This includes insurance payouts, reinsurance expenses, and payment to some of the service providers.

TheCCRIFisslowlybuildingitsownreserves. These were originally constituted with the participation fees of the Facility’s members and grow each year with the net income of the Facility. As of May 31, 2008, the CCRIF’s own assets were estimated at

US$52,190,103. A relatively mild first season (in terms of disasters) has resulted in the fast growth of the CCRIF reserve, reducing the amount of reinsurance needed and thus contributing to the reduction of the insurance premiums. In addition, this growing level of reserves increases the viability of the Facility and reduces its risk of default.

Atthebeginningof2008,theCCRIFcontractedtheservicesofafundmanagerandadoptedanInvestmentPolicy. The Investment Policy restricts CCRIF to investing in specific classes of assets and specifies performance objectives for the Asset Manager. The Investment Policy requires that reserves be invested in a diversified portfolio of fixed and variable rate debt instruments, although it allows the Asset Manager to invest indirectly or use derivatives for portfolio management purposes. The performance objective is to outperform the one-month U.S. dollar London Interbank Offer Rate (LIBOR) by at least 75 basis points. The performance of the fund compared to this ob-jective is presented at Board meetings every quarter. Performance is not explicitly tied to investment management fees or re-tender decisions.

6.2 Operating Costs

TheCCRIFusesoutsourcingasakeystrategytokeepoperatingcostsaslowaspos-sible. The operational structure of the Facility is outsourced with contractors selected from competitive bids and for fixed periods. For the first operational season, the Board of Directors established a cap that limited operating costs at 5 percent of the insurance premium income or US$974,436 for the fiscal year 2007/08. Table 6.1 presents oper-ating costs for the fiscal year.

CCRIFauditorsissuedacleanletterofopinioncoveringtheFacility’sfirstyearofoperation. Cayman law and the CCRIF establishment documents require CCRIF to conduct annual audits, although there is some flexibility as to the standards to be employed. The CCRIF commissioned an annual audit to be prepared according to U.S. Generally Accepted Accounting Principles (GAAP) accounting standards and financial statements for the first season, covering the period from February 27, 2007 to May 31, 2008 (see Annex 3 for the Audited Accounts). The U.S. GAAPs appear to be thor-oughly appropriate for CCRIF because they are robust without imposing the significant compliance costs of International Financial Reporting Standards. The Report and Accounts commissioned by the Board were completed in September 2008 and circu-lated to member countries and other stakeholders as part of the CCRIF Annual Report. As part of their due diligence, the auditors confirmed that the Investment Manager is complying with his/its terms of reference. As of May 31, 2008, the end of the policy year, the CCRIF had no outstanding liabilities from insurance policies.


A

Review

of CC

RIF’s O

peration After its First Season

23

23

Table6.1O

riginalandFinalBudgetsofthe2007/2008Season

CCRIF BUDGET REVIEW, FY07108, end of year

TI\J$tl'_ PrDles~1OO31 Trwee En!lIIter

CCRIF Regullt/ll'f F_ ueense Fee Reglsl.erea ome e Fee GovelOOlM Fjitog fee A l ng ree. new al~~

CCRIF ~t8t1 F_ Mi~ l egal lees

CCItIF C" ........ c. Fon OIre[""" Fees

CCRIF.""JtF_

Insurance MlnaJ"

PIUtfnMttBroll:er

FUIlI1ySup«'ol,.,r

F ... 5upAddnWOlti

e:.ce'CutJ\re dUtle~ ror Olr!<tors

Soard E)(pen.'Ses

E>:e(lJ!/Ve <rube> ro< Dlre<-10rs

e.remal""IlJl

PrQles~1OO31 Fee.

Prctl'Ps-sional Fees

ProlesSOO31 f~U Otrlcee>+,"".'"

Travele.p~

1\t'I'OJ3101ruJari3laoait

10,000 .-'lInu" flI<ea.(ost [ontract_nn CCRIF 15,000 ArInu .. rocea,cost contract-nn CCRIF

$ 9,37~ FI,ea tee 10 CIMA 2':;00 FIKea ree 10 SIM

600 "',ea tee 10 CIMA Ftxea tee 10 CIMA.IR@giwar

S B,OOO Re'1I11ut$3ble b3~a on worl< 1l000e

S 36,000 3 M!fn1>ers,. m"'~ngs . 3 a;r,-s per meebng@$I ,ooCltday

s ~o _ aoo AdditIOnal r e~s at'S I,OOO'dayfare:<eC!.JlVe dUtle-s or Board members, tlasell onwcrk . 0_

20.000 Rl''nlloJf103ble lK eM! Rt!tatth &I<IOoM!lOpm@nt

$ lMOO ""nulll r\(ed.co~l contract wnh CCRIF

~o.ooo F"ea co.t.lneluQe~ '"ou01lO9 ~nd e'lJense~

$ 100,000 "',ea C1I~t IfICIUIl>1g expenlU

S 105.000 ,,'ea c~t. not ~tullng el<pense$ S 24.500 10110 ovemeM totoverrll)nt olnce e>(pen~$ 1)l F~lIIty

$ 2S.000 R.In1MJ~ble" eo51

$ 35.000 At Soard O/l.c~on, bim<lonwork atlRe Claims proce" 11'19 S B,750 FI,ea ree.lJJggeml for e.,h Cl1UT1 l<ver1q.ssume, I """nl per~ao)

NewprDl1lJe t <>lllJa',land outreach S 50,000 RO,,""'d rornew pmlt.Iets or >lgnlocantpmlt!Je t eh""'!les. b .. od ...... "'" do""

CCRIFP·R Prol~$$OO31 f~U S 25,000 ll'o~ r ll-3ClPlO'Jea preIs 8nO PUbliC relilllQIIs, preparilllon (JII e~al "'3leOIll$ elC

Imk ChUS" lInnuQ9i!'1~a

CCRIF INInAL BUDGET TOTALS

CCRIF Budget Additions

Pr ..... ct D_opmOMt KAC HLEM (0IlIra<1 $ 1 14.B2~ Board Approved

CCItIF G ........... Fon AIIllIllo Bua!l"t 20.000 Bot ed on 01 e..jMl~~nr~

CCRIF PR AISIIIIIOBua!l"1 ~O.OOO Eloard Approvlll pending

CCRIF REVISED BUDGET TOTALS

CCRiF ''Budget Guideline, 5% of Premllll1lncome

COl E 1$ 1l1~ ;nlllal bud(Je! atvaoped by Pe3rs.ln Md 'fOU,,!! 1\ Ap!11 2007 COl F 15 CCRIF e' pefldrtu'" accrued In the por1M prior to I JU,,", 1(107 Cal G IS mtlO~1 !xPMlltut'e t03 1 M .... 2008, wt'llrfi COll~\i)t~$ W1m 1M e«npany3C(Ourt$ Cal H Is-the actual ;3cc rue:lll!'xpem rure: rarttle 12 m(JnlhFY Coil( Is 1/Ie vllr1aoce Iro'" the 'bu.t

TIle upper part or the $heel rerets to t/'le In,ool bUll!l"ted Items TIle lowe< P&J1 ot me !lleel rejers to alidiDonal byaget Item, eilIIer already approve<l or pen(j ng awAIYal by t/'le Bon

...... 10.- $

If,OOO

~ $

2,.0 100

f,OOO $

..- $

~.- $

2I0.00O

tf,OOO $

I0,00O $

100,000

W.- $

M.-o ---.- $

1,750

-.--- $

121,12& ,

174_

2I0.00O

......,. 17 ... 211

81",_

're.lUnlO1 T_to3t ..... '_tIN D __ .......

''19701 ..... ""'01

3.000 $ 91 .257 l1,li7 (1B,257) 10 ,4G8 t ... .1':;32

• $ t 2,!IIIl' tlM7' • (3.562) UOO 2,.0

573 m 27 1181 lit (5~I)

lOZ.$3S $ 114 ,884 tU41 S (01,2<15)

IUOO t 32,000 tl" $ 16,700

41. $ 142,000 • '-'- $ (60.334)

43,000 0.000 $ (2s.o00) 438 -118,500 .... $ (_MOO)

15.000 $ 81 ,251 ...., (6,2~1)

7,82$ 7. $ 92.37S

~.833 $ 2St .- .,.t. $ (6.125) 4,083 2S,196 •• ttl (613) 4,111 ;<6,184 a.ot7 2.9B3

, $ 38,500 ... 13.500) 111,250 t .... (1 MOO) 4U50 ",'110 S 3,250

, $ 21,000 __ S

IiIIII - $

(695)

22' ,oee 1.0Tt,W7 , 86t •• , (t21 .2M

n.l. I

'''I1l10 $ 97.475 .. • $ 20.000

n:J. 17.., $ 12.625

t .lII01'8 $ 988.oeo $ 8.80'


6.3 Recommendations

The CCRIF’s Investment Policy and financial controls are in line with industry practice. However, the Board may consider the following recommendations when reviewing the strategy:

•TheCCRIFInvestmentPolicycouldincludeaminimumamounttobemaintainedinliquid,marketableassets.The Investment Objective chosen by the CCRIF as part of its Investment Policy is appropriate and should be maintained. This objec-tive targets capital preservation and absolute growth, and restricts investment to direct and indirect holdings in debt instruments and cash. However, claims pro-cessing and investment performance could be enhanced if the Asset Manager was specifically required to hold an amount equal to the reinsurance attachment point in liquid, marketable assets. For the 2008/09 season, this amounted to US$12.5 million. The current Investment Policy does not directly address the need for li-quidity in the CCRIF’s portfolio but does so indirectly by restricting available asset classes. Liquidity is costly (because of opportunity costs of capital) and a financial asset that can be sold quickly is expected to yield a lower return than an otherwise equivalent financial asset that cannot be sold quickly. The CCRIF needs to be able to pay any claims quickly, and therefore it is prudent for it to hold some liquid as-sets. However, as will be discussed in section 7, it is very unlikely that claims will exceed the reinsurance exhaustion point. Therefore, the Board may wish to allow somewhat less liquid investments for the rest of its fund, which would generate higher returns on investment.

•Administrativeandoperationalcostsshouldbecappedat5percentofoperatingexpenses. During the 2007/08 season, operational and administrative costs of the facility were capped at 5 percent of total premium volume. The Report recom-mends formalizing this policy. Cost-effectiveness and administrative efficiency are key requirements for the success of the CCRIF. The review team also recommends that the Board strengthen budget controls by setting a cap for all contracts of the Facility.

•TheBoardshouldbeallowedtoengagefundsforresearchanddevelopmentactiv-ities. In parallel with the formalization of a cap on operational and administrative expenses, the Report recommends the establishment of a separate budget window to be approved by the Board on an annual basis to finance research and develop-ment, and particular outreach activities linked to the expansion of the Facility. Such window should provide flexibility for the CCRIF to better serve its members while keeping strict controls on its operating expenditures.


25

Box 6.1 provides the main recommendations regarding financial management.

Box 6.1. Main Recommendations about Financial Management

• The CCRIF Investment Policy could include a minimum amount to be maintained in liquid, mar-ketable assests

• Administrative and operational costs should be capped at 5 percent of operating expenses.• The Board should be allowed to engage funds for research and development activities.



27

7. RiskManagement

RiskmanagementfortheCCRIFmainlyfocusesondecisionsaboutrisktransferandratemaking. The CCRIF takes on risk from member states, bears some of that risk, and passes the rest to international capital markets. To manage that risk, the CCRIF uses approaches developed by actuaries and financial economists for traditional insur-ance companies. In doing so, the CCRIF has to arbitrage between transferring risk and building reserves. Transferring risk by purchasing reinsurance reduces the CCRIF’s balance sheet exposure to claims risk. However, the more it purchases reinsurance, the slower it will be able to grow its reserves, with a potential impact on its future capacity to reduce insurance price to its members.

Whenchoosingamongalternativestrategiesforrisktransferandratemaking,theCCRIFaimstooffercompetitivepricingtoitsmemberswhileminimizingtheriskofinsolvency.The CCRIF quantifies the probability of insolvency under various risk management strategies using its Dynamic Financial Analysis (DFA) model. This model uses the CCRIF’s internal loss model and other probabilistic assumptions about future economic conditions to evaluate the risk of medium-term insolvency of the CCRIF. In addition to managing the risk of insolvency within a claims year, the CCRIF must also protect against the possibility that a series of bad years reduces reserves to such an extent that it can no longer sell insurance at acceptable prices. The CCRIF can manage this medium-term insolvency risk by purchasing reinsurance and setting premiums that respond to the level of reserves, inasmuch as premium volatility is acceptable to member states.

TheCCRIFhasmaintainedaconservativeriskmanagementstrategyanditsprob-abilityofinsolvencyisextremelylow. Regulated insurers in advanced economies are generally required to demonstrate that they hold sufficient capital to be able to fully pay all claims with a very high probability. For example, Solvency II, the European Union’s planned future harmonization, will require that insurers hold sufficiently pru-dent levels of capital so as to leave less than a 1-in-200 chance that capital will prove inadequate over the next 12 months. The estimated one-year probability of insolvency of the CCRIF at the start of the 2008/09 season has been estimated at less than 1 in


1,000 with an insurance multiple (that is, ratio of commercial premium to AEL) set at 2.5 for the 2007/08 season, and reduced to 2.25 for the 2008/09 season, all while of-fering competitive insurance rates.

7.1 Risk Financing Strategy

TheCCRIFmustmaintainsufficientaccesstocapitaltobeabletopayclaimsastheyfalldue. The Facility does this by holding low-risk liquid assets in its reserve fund and by purchasing reinsurance capacity. The CCRIF has been endowed with substantial reserves and is perceived well in financial markets, permitting its access to competitive reinsurance rates.

Indecidinghowmuchandwhichkindofrisktotransfertofinancialmarkets,theCCRIFtakesintoaccounttheimpactonratemakingandinsolvencyriskoftheFacility. Reinsurance provides the CCRIF with cash when the CCRIF needs it most. By transfer-ring risk to the reinsurer, the CCRIF helps limit the impact of catastrophic events on its balance sheet, thereby reducing the risk of insolvency2. However, reinsurance premiums are higher than the expected loss and so reinsurance purchase limits the capacity of the CCRIF to grow its reserves. In the long run, a lack of reserves may force insurers to charge higher premiums (see Box 7.1).

ThecurrentriskfinancingstrategyoftheCCRIFhasthreelayers(Figure7.1). The CCRIF retains the bottom layer of risk, exposing its own reserves to pay small claims. For the 2007/08 season, this first layer was set at US$10 million. It was increased to

2 Reinsurance also partially protects the CCRIF from the possibility that its loss model is too optimistic. Without reinsurance the CCRIF is exposed not only to insured losses, but also to the possibility that its loss model is too optimistic and premiums are being set at an unsustainably low level. Once reinsurance has been purchased, the CCRIF need only be concerned with the uncertainty of retained claims.

Box 7.1. Managing the Risk of Insolvency

The CCRIF has developed a parametric loss model that uses historic data and expert input to quantify the hurricane and earthquake risks insured by the CCRIF. The model estimates the probability of, and resulting payouts from, a range of events and groups of events. The model predicts higher expected payouts in the future than would have occurred in the past. This is partly to reflect evidence that extreme events are occurring more frequently.

The CCRIF uses a Dynamic Financial Analysis (DFA) model to quantify the probability of medium-term insolvency of the CCRIF. This model uses the parametric loss model and other assumptions to perform 10,000 hypothetical projections of the CCRIF’s balance sheet for a 10-year period, allowing for different economic conditions and claims experience. The 2008/09 version of the DFA model estimates the 10-year probability of insolvency of the CCRIF to be 9 in 10,000 (0.09 percent).

The real value of the DFA model approach is to help the Board choose among different dynamic strategies. The DFA model can quantify the effect of different strategies for ratemaking and risk transfer. DFA models are generally much better at helping decisionmakers choose a good strategy than quanti-fying the precise probabilities of medium-term insolvency.


29

US$12.5 million in the 2008/09 season. The Facility expects to be able to fully pay all claims using only the bottom layer of capital in about four of every five years. Were the CCRIF to increase the size of the bottom layer, the cost of reinsurance could be reduced but the CCRIF’s reserves would be more volatile.

ThemediumlayerhasbeentransferredtootherpartiestoprotecttheCCRIF’sreservesfromverylargeclaims.This layer is cov-ered by traditional reinsurance and a catastrophe swap. Munich Re, Paris Re, and Hiscox, three of the largest reinsurers, offered reinsurance cover to the CCRIF in its first season, and the World Bank Treasury assisted CCRIF in transacting a risk swap with the financial market. Swiss Re joined the group of reinsurers for the 2008/09 season. The CCRIF’s parametric loss model predicts that the capacity of this middle layer would be exceeded with a probability of less than 0.1 percent.

TheCCRIFretainsthetoplayerofrisk,whichwouldbetriggeredonlyinyearswithahistoricallyunprecedentedseriesofhurricanesand/orearthquakes. The CCRIF board has decided that this layer should be triggered less frequently than once every 1,000 years. As such, the first two layers of capital alone offer more than five times the security of a typical insurer. The financial stability of the CCRIF and scenarios in which the top layer is triggered are discussed further in section 7.3.

TheCCRIFcurrentlevelofreservesgivesitsubstantialcapacitytomanagepricevariationinthereinsurancemarkets.The amount of risk that the CCRIF can reason-ably retain depends on the size of the its reserves. The initial capitalization of the CCRIF by donors and member countries gives the CCRIF the option of increasing this bottom layer of risk significantly if needed. This gives the CCRIF the capacity to soften price cy-clicality in the reinsurance market and offer stable insurance pricing to its members.

ThedecisionontheriskmanagementstrategyoftheCCRIFismadeeveryyearbytheBoardofDirectors.Thisincludesthesizeofeachofthelayersofriskreten-tionandrisktransferandtherateofinsurancepremiumtochargethemembers. After the first year of operation in which the CCRIF’s reserves grew, the Board was able to reduce insurance premiums and retain more risk in the first layer. This situa-tion may change after a year in which payouts substantially affect the reserves of the Facility. Details of the risk management strategy during the first year are discussed in the next section.

Figure 7.1. The CCRIF Risk Financing Structure

CCRIF re insura nce structure

To

tal

an

nu

al

cla

ims,

sp

lit

by

wh

o p

ay

s fo

r w

hic

h

lay

er

Lower Layer (CCRIF) M iddle Layer (reinsurers )

Upper Layer (CCRIF)


7.2. Financial Performance of the First Season

The CCRIF is in its second year of operation and has accumulated capital from donors, sold policies for two years, made decisions about risk management, and processed and paid three claims. All figures are rounded and quoted in U.S. dollars. A summary of figures can be found in Table 7.1.

Forthe2007/08season,theCCRIFbehavedcautiouslybytransferringthebulkofitsrisktoreinsuranceandcapitalmarkets.Through its reinsurance broker, Benfield, the CCRIF purchased aggregate excess of loss reinsurance and a swap, which together provided full reinsurance with an attachment point of US$10 million and an exhaus-tion point of US$120 million (See Figure 7.2). The CCRIF’s parametric loss model estimated the probability that total claims were above the reinsurance exhaustion point

of US$120 million, and therefore the probability that the CCRIF would have to fund a payout above US$10 million, to be 0.07 percent, or approximately 1 in 1,400. The corresponding probability of receiving zero claims within the 2007/08 policy year was 43 percent and the prob-ability that total claims were below the reinsurance attachment point of US$10 million was 79 percent.

Thelossexperienceduringthe2007/08seasonwasratedasnormalandtheCCRIFwasabletohonoritscommitments. Within the 2007/08 policy year, an earthquake near Dominica and Saint Lucia triggered two small claims with total payout of US$0.9 million. No other claims were paid that year. The

CCRIF’s parametric loss model estimated that the probability of total annual 2007/08 claims being less than or equal to US$0.9 million was about 50 percent (see Figure 7.3). Because the total claims of US$0.9 million were below the reinsurance Excess Point of US$10 million, no claim were made to the reinsurers.

Forthe2008/09season,theCCRIFmaintaineditscautiousriskfinancingstrategy, increasing both the attachment point and the exhaustion point of its risk transfer strategy, purchasing aggregate excess of loss reinsurance and a swap, which to-gether provided US$132.5 million in excess of US$12.5 million and reducing premium rates by 10 percent. The CCRIF’s parametric loss model estimated the probability that total claims were above the reinsurance exhaustion point of US$145 million, and therefore the probability that the CCRIF would have to fund a payout above US$12.5 million, to be 0.07 percent, or approximately 1 in 1,400. The corresponding prob-ability of receiving zero claims within the 2008/09 policy year was 38 percent and the

Figure 7.2. The CCRIF Risk Financing Structure for 2007/2008 and 2008/2009 Seasons

CCRIF re insura nce structure

0

50

100

150

200

2007/2008 2008/2009

To

tal

an

nu

al

cla

ims,

sp

lit

by

wh

o p

ays

for

wh

ich

lay

er

($U

S M

)

Lower Layer (CCRIF) M iddle Layer (reinsurers )

Upper Layer (CCRIF)


31

probability that total claims were below the reinsurance Excess Point of US$12.5 mil-lion was 79 percent (see Figure 7.3).

Table7.1.ApproximateSummaryStatisticsforFirstTwoYears

Year 2007/08 2008/09

Number of policies sold 16 16

Total premium income US$19.5M US$21.8M

of which: Reinsurance costa US$8.9M US$9.7M

Expected claim payouts US$7.9M US$9.6M

of which: Covered by reinsurance US$4.6M US$5.5M

Retained by the CCRIF US$3.3M US$4.1M

Insurance multiple 2.5 2.25

Total reinsurance multiple 1.9 1.7

Aggregate Excess of Loss Reinsurance US$10M to US$120M US$12.5M to US$145M

Retained risk US$0M to US$10Mand US$120M+

US$0M to US$12.5Mand US$145M+

Total sum insured US$494.8M US$562.1M

Probability of no claim payouts 43% 38%

Probability of no reinsurance payouts 79% 79%

Total claims experienceUS$0.9M

US$0.9M US$6.3M to date

of which: Covered by reinsurance US$0M US$0M to date

Paid by the CCRIF US$0.9M US$6.3M to date

a. Includes cost of services provided by Reinsurance Placement Broker, Benfield.

Note: All probabilities and expected figures are based on the CCRIF’s parametric loss model.

Figure 7.3. Distribution of Total Annual Claims, as Modeled by the CCRIF’s Parametric Loss Model

2008 / 9 Annual Claims Distribution Calculated by EQECAT

79% chance that total annual claimsare below reinsurance attachment

point of US$12.5M99.93% chance thattotal annual claims

are below reinsurance

exhaustion pointof US$145M

38% chance that there are no claims

100 %

20 %30 %40 %

50 %60 %70 %80 %

100 %90 %

10 % 0 %

EQEC

AT p

rob

abili

tyth

at to

tal a

nn

ual

clai

ms

are

less

th

anth

is a

mo

un

t

Aggregate annual claims (US$ Millions)

$0 $20 $140$120$100$80$60$40 $160

7.3 Financial Stability

TwokeymeasuresofthefinancialstabilityoftheCCRIFareestimatesoftheprob-abilityofinsolvencywithintheclaimyear,andtheprobabilitythattheCCRIFwillbeunabletocontinuetowritebusinessinthemediumterm,duetoaseriesofbadyears. It is possible to understand the one-year probability of insolvency using details of the policies in effect. However, to understand the medium-term probability of insolvency, one must make assumptions about the future decisions of the CCRIF Board under dif-ferent scenarios. We restrict our discussion to the 2008/09 season because the financial stability of the CCRIF was similar in the 2007/08 season.

CCRIF’sprobabilityofinsolvencywithintheclaimyearforboththe2007/08and2008/09seasonswassubstantiallylessthan1in1,000. For example, for the 2008/09 insurance portfolio, the CCRIF’s parametric loss model suggests that the CCRIF would need around US$106 million in capital to be able to meet its liabilities in all but 1-in-200-year events. At the start of the 2008/09 policy year, the CCRIF had access to sub-stantially more than US$200 million of risk capital, which, according to the CCRIF’s parametric loss model, would be enough to meet the CCRIF’s liabilities in all but 1-in-10,000-year events. Reinsurance prices suggest that reinsurance markets broadly agree with this 1-in- 10,000 figure. The CCRIF’s loss model may not be perfect, but the CCRIF should be reassured that private reinsurers are willing to provide risk capital at rates that broadly agree with the CCRIF’s loss model.

ScenariosinwhichtheCCRIFisunabletofullypayallclaimswithinapolicyyearareconceivablebutextremelyimprobable. There are two ways the CCRIF’s total annual claims could conceivably breach US$200 million, but both are very unlikely. The first scenario would be two or more storms leading to very high payouts for at least five out of these CCRIF members: The Bahamas, Barbados, the Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St Lucia, or Trinidad. The second scenario would be one big earthquake affecting Trinidad or Jamaica and a big multi-island storm or two in the same year. The CCRIF, quite reasonably, considers any such combinations of catastrophic events to be highly unlikely. Indeed such events would be much worse than anything witnessed in the Caribbean or similar regions since records started being kept in the late 15th century. Moreover, total claims within a year would need to be much larger than this to exhaust the CCRIF’s substantial reserves if there was time to purchase additional reinsurance midyear.

Bybeingverycautiousinprotectingitselffromone-yearinsolvency,theCCRIFalsoprotectsitselffrommedium-terminsolvency.If the CCRIF followed the strategy of charging premiums at a multiple of 2.25 and purchasing reinsurance of US$132.5 mil-lion in excess of US$12.5 million, claims would have to be substantially above US$145 million to threaten insolvency of the CCRIF. Such circumstances are highly unlikely, and the CCRIF would almost certainly be able to pay claims as they fell due and con-tinue to sell insurance on this basis. The CCRIF would bear only a small amount of risk, and over 10 years, reserves would be expected to increase by well over US$60 million.



33

Atcurrentpremiumrates,reservesareverylikelytogrowovertimeandthusfur-therimproveCCRIF’sfinancialstability. Table 7.2 quantifies the approximate annual change to the CCRIF’s reserves under three different scenarios. Under the first scenario, total annual claims equal US$145 million. In such a scenario, the CCRIF would pay US$12.5 million from its reserves and reinsurance payouts would cover the remaining US$132.5 million. However, because premiums charged to member states are prudent and reserves are invested in debt instruments, in this scenario reserves at the end of the year are approximately the same as they were at the start of the year. If there are no claims, the CCRIF reserves are expected to increase over the year by approximately US$13 million and, on average, reserves are expected to increase by US$6 million an-nually.

Table7.2.Illustrative2008/09ProfitandLossStatementinThreeDifferentScenarios(AllfiguresinUS$millions)

Scenario 1-in-1,400YearTotalClaims

AverageNetChangeinReserves

NoClaims

Total premium income

21.8 21.8 21.8

Reinsurance cost (9.7) (9.7) (9.7)

Administrative cost (1.0) (1.0) (1.0)

Investment income 2.0 2.0 2.0

Total claims (145.0) (9.6) (0.0)

Reinsurance in-come

132.5 5.5* 0.0

NetchangeintheCCRIFreserves

0.6 6.0 13.1

*If claims were exactly US$9.6 million there would be no reinsurance income. US$5.5 million is

the average reinsurance income, not the reinsurance income in an average scenario.

7.4 Projections for Hypothetical Risk Management Strategies

TheCCRIF’scurrentDynamicFinancialAnalysis(DFA)modelhasbeenusedtoes-timatethemedium-termriskprofileoftheCCRIFunderfourdifferentstrategies (see Table 7.3 and Figure 7.4). All projections and figures are based on the DFA model that


was supplied to the review team by the Facility Supervisor, dated 24 June 20083. We assume that the CCRIF begins with US$90 million in reserves, which was the approxi-mate size of reserves at the start of the 2008/09 season. All other assumptions are as used by the CCRIF unless otherwise stated.

The four strategies we consider are as follows:

1. The CCRIF retains US$12.5 million each year for the next 10 years, and charges premiums using a multiple of 2.25;

2. The CCRIF retains US$20 million each year for the next 10 years, and charges premiums using a multiple of 2.25;

3. The CCRIF retains US$30 million or a quarter of its start-of-year reserves if less each year for the next 10 years, and charges premiums using a multiple of 2.25;

4. The CCRIF retains US$30 million or a quarter of its start-of-year reserves if less each year for the next 10 years, and charges premiums using a multiple of 2.25 if start-of-year reserves are less than US$80 million, and a multiple of 1.7 if start-of-year reserves are greater than US$80 million.

Innoneofthe10,000simulationsunderanyofthefourstrategiesdoestheCCRIFbecomeinsolventwithin10years.The smallest end-of-year reserve in any year in any of the scenarios was a reserve of US$38 million at the end of year 5

3 The review team performed various tests on the DFA model and found it performing satisfactorily.

Figure 7.4. Distribution of CCRIF Reserves after Ten Years, Based on the First Three

Strategies

Distribution of Reserves at the End of Ten YearsR

elat

ive

Pro

bab

ility

50 100 150 200 100 300 350

End of ten year reserves ($USM)

12.5 M retention 20M retention30M or quarter reserves retention


35

in one of the 10,000 simulations under strategy 4. For fixed premiums, Figure 7.4 shows that as the CCRIF retains more risk, its reserves are expected to increase faster. The average reserve after 10 years increases from US$202 million to US$215 million to US$228 million as the Excess Point is increased from US$12.5 million to US$20 million to US$30 million, or a quarter of reserves, if lower.

MembercountrypremiumscouldbedecreasedbyanaverageofoverUS$5mil-lionperyearwithoutthreateningtheone-yearormedium-terminsolvencyoftheCCRIF,providedthatpremiumscanbeincreasedbacktoamultipleof2.25when-everreservesfallbelowUS$80million. The fourth strategy is the same as the third except member premiums are set to be much lower, unless reserves have fallen below US$80 million. Average reserves at the end of 10 years are much lower than under the third strategy. This is because the surplus has been passed to members through reduced premiums instead of being invested by the CCRIF. There is no insolvency under the fourth strategy in any of the 10,000 simulations despite the average reduc-tion in premiums of US$5.2 million per year.

Table7.3.SummaryofResultsfromSimulations(AllfiguresinUS$millions)

US$12.5M

Retention

US$20M

Retention

US$30M

Retention unless

Reserves Are

Low

US$30M

Retention and

Low Premiums

unless Reserves

are Low

Average retention 12.5 20.0 29.5 28.0

Average premium multiple 2.25 2.25 2.25 1.71

Average total premium 21.8 21.8 21.8 16.6

Minimum reserve in any year 56.0 52.0 39.0 38.0

Minimum end of 10-year reserve 111.0 52.0 68.0 57.0

Average end of 10-year reserve 202.0 215.0 228.0 161.0

Maximum end of 10-year reserve 323.0 373.0 423.0 303.0


7.5 Recommendations

• TheCCRIFshouldcontinuetopurchaseexcess-of-lossreinsurancewithahighexhaustionpoint. Despite progress in risk modeling, the probability of catastrophic hurricanes and earthquakes remains extremely difficult to quantify. The CCRIF should continue to protect itself from events it considers to be much less likely than 1-in-200- year events. In doing so, it protects itself from the possibility that its loss model is not precisely correct. There are many forms of reinsurance available for purchase, including excess of loss, quota share, and stop loss. The CCRIF should continue to discuss with its broker which of these forms of reinsurance offer the best value. However, excess-of-loss reinsurance is most suitable for a facility like the CCRIF, with a catastrophic risk profile, and currently appears to be available at reasonable prices.

• TheCCRIFcouldconsiderincreasingitsretentionlevelbyslowlyincreasingthereinsuranceattachmentpointorbyswitchingtoquotasharereinsuranceforlowlayers. This would expose more of the CCRIF’s reserves. As CCRIF’s reserves grow, the Facility should be able to bear more risk without fearing insolvency. In the long run, this would translate into lower premium costs and/or increase the coverage. This increase should be gradual with consideration given to long-term rate setting and the need for flexibility in hard compared to soft reinsurance years.

• Afteragoodyear,theCCRIFmightconsiderpassingsomeofitssurplusbacktothemembercountriesintheformofincreasedcoverageratherthanlowerpremiumprice. Passing surplus to the members by increasing coverage instead of by reducing premiums is more convenient since the CCRIF may need to return to the previous premium values after a year with large claims. Considering the budget appropria-tions process of most member countries, eliminating increased coverage would be simpler than eliminating reduction in premiums due to budgeting rigidity of member countries. In any case, premiums are already low compared to traditional catastrophic insurance.

• Asamatterofgoodpractice,theCCRIFmayconsidercommissioningabiannualStatementofActuarialOpinion(SAO)onitssolvencypositionandabiannualactuarialreportonitsriskmanagementstrategy.The reports should be written by members of internationally recognized actuarial associations, such as the Casualty Actuarial Society in America, and should be consistent with all relevant profes-sional guidance. An SAO would give the Board confidence in the ability of the CCRIF to pay its claims as they fall due. SAOs are required for regulated insurance companies in many jurisdictions, notably the United States, and are often volun-tarily sought by self-insured pools, residual market mechanisms, voluntary pools, and other risk-pooling entities. The SAO should be consistent with appropriate professional guidance, such as Actuarial Standard of Practice No. 36 adopted by the Casualty Actuarial Society in the United States, or GN18 adopted by the Institute of Actuaries in the U.K. The effective date of the SAO should be the first day of the policy year and should be presented as close to this date as practicable.


37

The SAO could be prepared by the Reinsurance Broker or the Facility Supervisor, although the Board may wish to investigate the costs and benefits of hiring a firm of independent actuarial consultants to prepare it.

• ThereportonriskmanagementstrategywouldassisttheBoardinsettinganap-propriatemedium-termstrategyforreinsurance,premiumsetting,andinvestment. The report should discuss and quantify the consequences of alternative strategies for reinsurance, premium setting, and investment. Medium-term outcomes of dif-ferent strategies should be discussed and displayed graphically with the intention of assisting the Board in choosing among strategies. Modeling should be formalized within a DFA model, which may or may not be based on the CCRIF’s existing DFA model. The report may make use of independent loss modeling performed for the CCRIF by EQECAT or other providers. However, the report should clearly state the approach and key assumptions; indicate the nature, degree, and sources of un-certainty surrounding the results; and discuss sensitivities to key assumptions. The report should contain detail sufficient for another suitably experienced actuary to form an opinion on the original report’s key judgments and assess the reasonable-ness of the results.

Box 7.2 summarizes the risk management recommendations.

Box 7.2. Main Risk Management Recommendations

• Continue to purchase reinsurance with a high exhaustion point;

• After low claim years, consider retaining more risk and passing some of the savings to country members

through increased coverage;

• Consider commissioning an annual Statement of Actuarial Opinion (SAO) on its solvency position and

an annual or biannual actuarial report on its risk management strategy.



39

8. Governance Structure

8.1 Performance of the Governance Structure

TheCCRIFBoardhasbeeninoperationsincethecreationoftheFacility. All activi-ties of the CCRIF are under the purview of the CCRIF Board, which has met quarterly since inception, either in person or via teleconference. The Board initially comprised three members appointed for their technical expertise, and is currently going through a gradual transition process that allows new members to acquire the necessary knowl-edge of the Facility before the original Board members step down.

Gradualtransitiontowardfullrepresentationbymembersappointedbydonorandmembereconomiesisontrack. During the 2007/08 season, the CCRIF approached donors (through the Caribbean Development Bank [CDB]), and member economies (through CARICOM) to request the nomination of two additional representatives to the Board. Two additional Board members (one representing donors and one rep-resenting members economies) are to be nominated by July 2009, at which time the Board member appointed at the inception of the CCRIF are expected to step down. The four remaining Board Members will then choose one additional (fifth) Board member and elect a Chair.

TheBoardproceedingsaregenerallytransparentanditsdecisionsareaccuratelydocumented. The CCRIF Board meets on a quarterly basis either in person or by conference call. Its first annual meeting was held in conjunction with the CARICOM annual meeting. The Corporate Secretary prepares minutes of each meeting, which are approved during the following meeting. These minutes are kept on file at the CCRIF Secretariat.

ThetermsoftheTrustDeedoftheCCRIFforeseestheappointmentofanEnforcer. The Enforcer’s duties include being alert to current or potential conflicts between operations and the Trust Deed. The Enforcer’s duties and responsibilities

are set out in detail in the STAR Trust Deed, which is the legal owner of CCRIF. The current Enforcer was appointed on an interim basis. The Board has requested the General Counsel of the CARICOM Secretariat to serve as the Enforcer and is awaiting CARICOM’s reply.

8.2 Recommendations

•TransitiontowardaBoardmadeofmembersfullyappointedbydonorsandmembereconomiesshouldbecompletedbyJuly2009. The appointment of a fully representative Board is essential to CCRIF’s credibility and long-term sustain-ability. CCRIF should pursue its dialogue through the CDB Donor Group and CARICOM Secretariat to ensure that the last two appointments are made.

•TheBoardshouldconsidertheappointmentofanExecutiveChair.While all ac-tivities required for the operation of the CCRIF are subcontracted, supervision of contract obligation remains time intensive. A number of decisions remain that also require Board endorsement, which in some cases cannot wait for the next Board meeting. To date, most of these responsibilities have been fulfilled by a de facto Executive Chair, paid on a daily basis. The review team recommends that this situ-ation be formalized, with clarification of responsibilities and remuneration of the Executive Chair.

•TheCCRIFshoulddevelopitsowncustomizedRulesofProcedurefortheBoard. The Facility is a new and unusual entity. The proceedings of its Board are currently based on the standard rules of procedure for insurance captives in the Cayman Islands. A fairly generic text could serve as the basis for specific Rules of Procedure that would address issues such as appointment terms, quorums, voting, majority, rules relating to meetings locations, and so forth (Box 8.1).

•TheappointmentofapermanentEnforcershouldbeformalized. The Board has requested the General Counsel of the CARICOM Secretariat to serve as the Enforcer and is awaiting CARICOM’s reply. The Board should further discuss this appointment with CARICOM in order to formalize this appointment.

Box 8.1. Main Recommendations Regarding Governance Structure

• CompletetransitiontowardaBoardcomprisingrepresentativesofdonorsandmembereconomies• ConsidertheappointmentofanExecutiveChair• Developcustomized“RulesofProcedureoftheBoard”• Refinethe“RoleandResponsibilitiesoftheBoard.”



41

9. Interaction with Stakeholders

Acting as intermediary between member countries, donors, and the financial markets, the CCRIF has had to develop elaborate mechanisms to ensure appropriate commu-nication at several levels. During its first year of operation, the Facility endeavored to maintain strong communications with representatives in Ministries of Finance and Planning of member economies, representatives of the donors in the region, and finan-cial market actors providing services to the Facility. The main lesson learned from this first season is that the CCRIF needs to strengthen its communication strategy, with particular efforts to include members of the disaster community in the region.

9.1 Member Economies

InteractionsbetweenmembercountriesandtheCCRIF have taken place in four types of scenarios: (a) prior to the beginning of a new insurance season, (b) after a request from a member to modify the policy, (c) after the occurrence of an event with the po-tential to trigger a payout, and (d) after a member request for clarification on an event that caused damage but did not trigger a payout.

PotentialmembereconomiestotheCCRIFwerebriefedbytheFacilitySupervisorpriortotheirparticipation. In individual meetings, the representatives from the Facility Supervisor briefed potential member economies on policy conditions and cost. In ad-dition to receiving individual risk profiles, economies were also presented with simula-tions of relevant historical events that provided points of reference for decisions on attachment and exhaust points of individual policies.

SomemembersapproachedtheCCRIFFacilitySupervisortorequestamodifica-tionoftheindexpointsusedforthemodelingoflossesintheircontracts. Close to the end of the 2007/08 season, representatives of Belize and Turks & Caicos Islands requested additional measuring points to better reflect the geographic dispersion of risk in their respective territories. These changes were introduced in their policies for the 2009/10 season. The Bahamas recently requested that its islands be grouped in three


zones and that each zone be insured independently. This request will be addressed for the 2020/11 season.

Briefingdocumentswereprepardforeacheventwiththepo-tentialtotriggerpayouts. The CCRIF Facility Supervisor prepared and released a briefing for all important hurricanes and earthquakes that occurred during the first season. Briefings were distributed in a timely manner (usually within 48 hours), permitting members to know whether a policy had been triggered. In cases where pay-outs were triggered, the Facility Supervisor contacted the relevant member economy and provided assistance with claim processing.

Onnumerousoccasions,theCCRIFteamaddressedrequestsforinformationandclarifications. This was especially the case after Hurricane Dean, which was the first public test of the CCRIF and provided an important test of the Facility. It was clear in the aftermath of Hurricane Dean that understanding of the services provided by the CCRIF was still limited to specialized departments within the participating country administrations. It was also clear that the CCRIF did not have the necessary communication strategy to deal with such an event. Following Hurricane Dean, the Facility hired the services of a specialized firm to support a more elaborate

communications strategy. See Box 9.l for lessons learned from Hurricane Dean.

Figure 9.1. Jamaican High

Commissioner to the United

Kingdom His Excellency the

Honorable Burchell Whiteman O.J.

accepting the Reinsurance Award of

the Year on September 8, 2008

Box 9.1. Lessons Learned from Hurricane Dean

In August 2007, Hurricane Dean crossed the Caribbean, reaching Category 5. Dean was the first and most powerful hurricane of the season and the most powerful since Hurricane Wilma of 2005. Rainfall and tropical storm winds were recorded in Dominica and St. Lucia, while Antigua and St. Kitts experienced a storm surge and rainfall. In Jamaica, the most affected CCRIF economy, losses were recorded on the southernmost coast. However, the CCRIF was not triggered for any economy.

A subsequent evaluation of the damage by the Planning Institute of Jamaica confirmed that the di-rect impact of Dean on the government was not enough to trigger the policy, supporting the robustness of the CCRIF’s loss model. But in the aftermath of the disaster there were high expectations for payout of the CCRIF both by the government and by the disaster risk community in Jamaica.

It was clear from this experience that there were serious misunderstandings regarding the type of cov-erage and the level of losses required to trigger the Facility. The CCRIF team hired a specialized firm and endeavored to clarify these terms through technical meetings with country representatives, and issued various information notes to the local press to inform the general public. A communication strategy was devised to underscore the following points:

• The CCRIF provides coverage for catastrophic events that challenge the financial capacity of the economies to respond. Events with a recurrence period of less than 20 years (now 15 years) are not covered by the Facility.

• The CCRIF covers direct losses to governments resulting from wind and storm surge (in the case of hurricanes) and ground accelerations (in case of earthquakes). Losses resulting from floods are not directly included in the calculation of losses of the CCRIF model.

• The CCRIF is a joint reserve mechanism controlled by the member economies. These reserves are maintained for the benefit of the participating governments. Transparent and strict rules are required to ensure fair treatment of all members.


43

InSeptember2008,theCCRIFissueditsfirstAnnualReport. The year’s results were presented at the World Bank Annual Meeting in Washington, D.C. on October 12, 2008. The report was widely distributed by electronic mail and is available upon request. All event briefs, press releases, and the Annual Report are available on the CCRIF Web page at www.ccrif.org.

9.2 Donors

ContactswithdonorsweregenerallyhandledbytheWorldBankteambutarenowhandledbytheCCRIFteamformattersrelatedtotheday-to-dayfunctioningoftheCCRIF. Relations with donor partners originally centered on their respective contribu-tions to the Facility, which were in all cases handled through a World Bank Multi-Donor Trust Fund. World Bank staff handled and still handle many queries originating from donors. During the past season, the CCRIF Supervisor started establishing direct contact with representative donor partners to keep them informed on CCRIF matters.

Throughoutthe2007/08season,theCCRIFteamhasendeavoredtokeeprepre-sentativesofthedonorcommunityinformedonCCRIFactivities. This has not always been an easy task, in part due to the turnover of staff among local representation of donor agencies. Nevertheless, donor representatives were copied on event briefs, the CCRIF Annual Report, and press releases. The CCRIF Facility Supervisor briefed donor representatives on various occasions.

9.3 Financial Markets

TheCCRIFiswellacceptedinthereinsurancemarkets.The Facility has generated great interest in the industry as an innovative vehicle to provide catastrophe insurance to governments. The CCRIF uses a reinsurance broker, which manages its relations with reinsurers. A number of meetings were organized with reinsurer representatives prior to the placement of CCRIF’s risk, which were provided with detailed information about the Facility loss model and financial resilience. The CCRIF managed to mobilize reinsurance from the main reinsurers in the market at extremely competitive rates (see section 7.3)

AsuccessfulfirstseasonengenderedadditionalconfidenceintheworkingoftheCCRIF.The financial strengths of the CCRIF and the efficient operation of the Facility provided additional confidence to the Facility’s reinsurance partners, leading to a suc-cessful renewal of reinsurance placement for the 2008/09 season. Events following Hurricane Dean in September 2007 provided additional confidence in the integrity of the CCRIF model, reinforcing CCRIF’s position as a neutral broker between the member economies and the insurance industry.

TheCCRIFreceivedtheReinsuranceInitiativeoftheYearawardonSeptember8,2008, for the reinsurance initiative that has generated the most promising change to a significant area of business. The award was offered by the Review Worldwide Reinsurance,


the leading magazine of the international reinsurance industry, founded in 1869 (Figure 9.1).

9.4 Disaster Risk Management Community

UnderstandingoftheCCRIFamongthedisastermanagementcommunityremainsweak. The CCRIF did not initially target the broader disaster management community in the region with information on the Facility. Several people interviewed during this review ex-pressed concern that insured governments had a false sense of security and would reduce their investments in vulnerability reduction. The CCRIF has systematically underscored the need to include insurance as one component of a broader disaster risk management strategy. Renewed efforts in this direction appear indicated.

ClearopportunitiesexistfortheCCRIFtosupportthebroaderdisasterriskmanage-mentagendaintheregion. A key lesson learned from the 2007/08 hurricane season is that the CCRIF needs to strengthen awareness of and partnership with the broader disaster community in the region. Several avenues exist for such partnership, including using the modeling work done by the CCRIF to support efforts of the disaster community to better understand and address disaster risk.

TheCCRIFrecentlyinitiatedadialoguewithregionalagenciesonavarietyoffronts.The World Bank, in collaboration with the CCRIF, recently commissioned the Caribbean Institute of Hydrology and Meteorology to study rainfall in the region to support the possible development of a rainfall-monitoring product and excess rainfall insurance coverage. The CCRIF also indicated that it would provide technical assis-tance and contribute its risk model to the University of the West Indies to support the development of training on risk modeling and the publication of a risk atlas for the region. Finally, the CCRIF has included an on-time damage assessment feature in its policies for the 2008/09 season. Through this feature, member countries can obtain an immediate estimate of damage expected from an impending or just-occurred hurricane.

9.5 Recommendations

•TheCCRIFneedstostrengthenitscommunicationandoutreachstrategy. The review team recommends that the CCRIF hire a specialized firm to develop a targeted com-munication strategy. This would include the identification of adequate communication channels, and the production and dissemination of specific material. The role and duties of the Communications Manager should be included in the revised Operations Manual.

•TheCCRIFshoulddevelopdetailedcommunicationprotocolsforspecificsitua-tionsitisboundtoencounter, including a situation where a country is affected by an event but no payout is to be issued, a situation where losses are overwhelming and the country is not able to receive funds from the CCRIF, renewal season, and


45

so forth. Such protocols would lower the burden on the CCRIF team to better deal with each situation when it occurs.

•TheCCRIFneedstobroadenitscommunicationstrategytoreachabroaderaudience. It is clear from the interviews conducted during this review that un-derstanding about the CCRIF remains limited to key individuals among donor agencies and member economy administrations. While perfect understanding will remain difficult, material should be developed to help local authorities better un-derstand and explain the functioning of the CCRIF to the general public.

•TheCCRIFshoulddevelopaproactiveplantoengageandsupportthebroaderdisastermanagementcommunity. The CCRIF should pursue its offer to work with the University of the West Indies on the development of risk modeling training and the production of a Caribbean Risk Atlas. The new loss model introduced in the next chapter would provide a useful platform for such endeavor. A broader use of the CCRIF model would help the wider disaster management community in the development of a risk management strategy. It would also increase transparency and confidence in the risk model used by the CCRIF.

• In addition, the CCRIF should create opportunities to expose its projects to and get feedback from the stakeholders. It could, for example, organize a regional workshop to review the advances in the development of new products and modeling tools. The feedback will ensure that the views of users and partners are addressed, making the CCRIF products more adequate and complementary instruments.

•TheCCRIFshouldcontinuetherecentlystartedpartnershipwithregionalpartners. Current partnerships with regional institutions such as the Caribbean Disaster Relief Agency, the Caribbean Institute of Hydrology and Meteorology, and the University of West Indies should be strengthened. These local partners have invaluable knowledge, information, and experience that can be used to im-prove the quality of the future products of the CCRIF. Validation by local actors will also increase the credibility and acceptance of the CCRIF.

Box 9.2 presents a summary of the recommendations.

Box 9.2. Main Recommendations about the Relationship with the Stakeholders

• Strengthen the CCRIF’s communication and outreach strategy.• Develop communication protocols.• Develop specific material to help local authorities understand and explain the functioning of the

CCRIF to the general public.• Develop a proactive plan to engage and support the broader disaster management community.• Engage regional partners in the development of new products and concepts. This would include

the Caribbean Community (CARICOM), the Caribbean Disaster Emergency Response Agency (CDERA), the Caribbean Institute of Hydrology and Meteorology (CIMH), the University of the West Indies, and others.

• All material produced by CCRIF should be available on its Website at: www.ccrif.org.



47

10. Recommendations for Future Endeavors

In itself, the creation of the CCRIF was an impressive achievement. Now that it is es-tablished, the Facility provides a unique opportunity to assist Caribbean economies in various aspects of risk management. Current members have expressed strong interest in expanding CCRIF coverage and services. Various new economies in the region have also expressed interest in either joining the facility or receiving technical assistance for similar projects.•TheCCRIFshouldcontinuetoenhanceitsriskmodelingcapability.The CCRIF

is partnering with a specialized risk modeling firm to develop a parametric instru-ment based on modeled loss (rather than index-based loss). The parametric loss model currently used by the CCRIF considers economy assets as if they were concentrated in a few fixed points. Loss is estimated based on the wind speed and ground acceleration at those location points. Some economies are modeled by as few as one or two points. Although a good approximation, a more detailed model will provide a more accurate representation of the risk. Under the new model, each grid cell will have information about the assets exposed so that impact can be calculated more accurately. This new model will also allow for the calculation of premiums for additional economies that may want to join the Facility and are not covered by the current model. The Review Team supports the development of this new catastrophe risk model but notes the fact that the CCRIF will have to under-take rigorous validation before introducing it.

•TheCCRIFshouldpursuethedevelopmentofanexcessrainfallcoverageinstru-ment. Some member economies have expressed strong interest in a mechanism to help them assume the risk resulting from excessive rains. While catastrophic floods are relatively rare in smaller islands of the Caribbean, they occur on a recurrent basis in the larger islands. In addition, Guyana and Surinam (both members of CARICOM) are not exposed directly to hurricanes or earthquakes but would cer-


tainly benefit from some kind of flood coverage. Unfortunately, flood hazard is ex-tremely difficult to insure with parametric triggers because, among other reasons, there are no systematic historical data to calculate the risk, and because human intervention can be a large determinant in whether a flood occurs or not.

•To assist its clients in the Caribbean Region, the World Bank commissioned a study from the Caribbean Institute of Hydrology and Meteorology (CIMH) on the availability of rainfall data and possible modeling tools. A two-day workshop involving risk modelers, reinsurers, and CCRIF and CIMH teams was also orga-nized in Washington, D.C. in November 2008, to assess the available options. The meeting concluded that parametric flood insurance would be extremely difficult to implement but that the CCRIF should consider developing an excess rainfall instrument1. The CCRIF is evaluating the possibility of offering such coverage for the next hurricane season.

•TheCCRIFshouldconsiderthedevelopmentofaparametricinsuranceproductforelectricalutilitiesintheregion. The Caribbean Association of Electrical Utilities (CARILEC) recently approached the CCRIF to assess the possibility of de-veloping a parametric insurance product for its members. This instrument would cover transmission and distribution systems and be managed through a separate captive with its own reserves. Undertaking this initiative would contribute to strengthening the resilience of CCRIF member economies because it would help support quick rehabilitation of power grids when these are affected by adverse natural events. The number of members of CARILEC (29 full members) makes this initiative highly viable.

•TheCCRIFshouldapproachtheCaribbeaneconomiesnotyetintheFacility.Several economies in the region that are not members of CARICOM and had not been ap-proached prior to the establishment of the CCRIF have expressed interest in joining the Facility. Economies that are exposed to hurricane and earthquake risks and that could be approached by the CCRIF team include the Dominican Republic, the Netherlands West Indies, San Andres, and Providence. The participation of additional members would enhance the risk profile of the Facility through better risk diversifica-tion and allow for increased economies of scale. New applications would have to be considered carefully in order not to exceed the capacity of CCRIF reserves.

Box 10.1 presents a summary of recommendations for future endeavors.

1 Excess rainfall instruments are not flood insurance per se. They allow an insured party to purchase cov-erage against rains exceeding a certain threshold. The insured party is responsible for linking a level of rain in a particular area with the possibility of a flood.

Box 10.1. Main Recommendations for Future Endeavors

• Continue to approach the Caribbean countries not yet in the Facility.• Finalize and rigorously validate the new loss model. • Prioritize the development of a flood/excess rainfall coverage product. • Proceed with the request from CARILEC to offer catastrophic coverage to power utilities.


49

Annex 1. Documents Reviewed by the Review Team

•Memorandum and Articles of Agreement, 11 May 2007.•Legal Opinion of Turner and Roulstone, 23 May 2007.•Various licenses, filings, and declarations with the Registrar of Companies. •Various licenses, filings, and declarations with the Cayman Islands Monetary

Authority.•Various documents relating to the Trust and Trust Enforcer.•Various Agreements with Milo Pearson.•Contract for Consultants’ Services Lump Sum between Jamaica Social Investment

Fund and Sagicor Insurance Managers Limited, 22 January 2007.•Written Resolution of Board of Directors made on 10 December 2007 in accor-

dance with Section 61 of the Articles of Association of the Company, relating to the settlement of claims of earthquake event in St Lucia and Dominica recorded 29 November 2007.

• Insurance Company Bond and Professional Indemnity Insurance for Sagicor Insurance Managers Ltd., issuer PWS International in amount of US$2,000,000 each and every loss/claim and in the overall aggregate, in excess of US$25,000 each and every loss/claim.

•Global Custody Agreement (Isle of Man), 26 November 2007 between CCRIF and RBSI Custody Bank Limited (incorporated in Isle of Man).

•Draft Engagement Letter dated 22 April 2008 from PricewaterhouseCoopers to the Board of Directors for the audit period ending 31 May 2008, under Generally Accepted Accounting Principles.

• Insurance Manager/Corporate Secretary Contract: Captive Manager Agreement dated 1 June 2007 between the CCRIF and Sagicor Insurance Managers Ltd.

•Facility Supervisor’s Contract: Contract for Consultants’ Services Lump Sum be-tween CCRIF Limited and Caribbean Risk Managers Limited, 1 May 2007; and First Renewal and Amendment of CCRIF Contract for Consultants’ Services Lump Sum between CCRIF Limited and Caribbean Risk Managers Limited, 11 June 2008.


•Placement Broker Contract: Contract for Consultants’ Services Lump Sum be-tween Caribbean Catastrophe Risk Insurance Facility and Benfield Limited, 1 April 2007.

•Discretionary Portfolio Management Service and Custody Agreement, 26 November 2007, between the CCRIF and London & Capital Asset Management Limited.

•Enforcer Agreement between Richard Carpenter and the CCRIF, 16 May 2007.•Contract for Consultants’ Services for Hurricane and Earthquake Hazard Loss

Estimation Modeling between Kinetic Analysis Corporation and the CCRIF, 22 August 2007; and First Addendum to Contract for Consultants’ Services for Hurricane and Earthquake Hazard Loss Estimation Modeling between Kinetic Analysis Corporation and the CCRIF, 4 March 2008.

•Contract dated 12 October 2007 between the CCRIF and CGR. Communications Limited, related Schedules and Extension, 12 March 2008.

•Minutes of Meetings of Board of Directors: 27 March 2007, 28 March 2007, 13 April 2007, 17 May 2007, 28 June 2007, 5 September 2007 (plenary), 6 September 2007 (planning), 28 September 2007, 15 January 2008, 29 April 2008.

•Operations Manual, 18 April 2007 (Operations Manual).


51

Annex 2. People Interviewed by the Review Team

Members of the Board:•Gary Wilkins•Ken Blakeley•Warren Smith• Isaac Anthony

Officers of the Cayman Islands Monetary Authority•Albert Smith •Bill Hagan

External Auditors PricewaterhouseCoopers•Damian Pentney

CCRIF Contractors:• Insurance Manager: James Rawcliffe•Facility Supervisor: Simon Young•Public Relations: Andrew Rousseau, Marsha Smith

Government Officials:•Michael Nixon, Senior Assistant Financial Secretary, Cayman Islands Government• Jeffery Spooner, Climate Branch Head, Ministry of Health and Environment,

Meteorological Service, Jamaica•Vernece Braithwaite, Ministry of Finance, Barbados

Donors:•Yuri Chacalall, Senior Development Officer (Environment), Canadian

International Development Agency (CIDA)



53

Annex 3. Audited Accounts

CA RIBB EAN CATASTROPHE RISK INSURANCE FACILITY

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM

FE BRUARY 27, 2007 (DATE OF INCORPORATION)

TO MAY 31 , 2008

CARIBBEAN CATASTROPHE RISK INSURANCE FACILITY

CONSOLIDATED FINANCIAL STATEMENT S

FOR T HE PERIOD FROM FEBRUARY 27, 2007 (DATE OF INCORPORAT ION) TO MAY 31, 2008

Report of Independent Auditors

Balance Sheet

Statement of Income and Comprehensive Income

Statement of Shareho lder's Equity

Statement of Cash Flows

Notes to Financial Statements

CONTENTS

Page

2

3

4

5

6 - 14

pmCEWATfRHOusE[aJPERS fI

To The Board of Directors and Shareholder of

Caribbean Catastrophe Risk Insurance Facility

Pri cewa ll'rhouscCoopers P.O . Box :!SB Strathvale House Grand Cayman KYI-IIO'I Cayman Islands Telephone (345) 949 7000 Telecopier (345) 9·19 7352

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, shareholder's equity and cash flows present fairl y, in all material respects, the financial position of Caribbean Catastrophe Risk Insurance Facility and its subsidiary (the "Group") as at May 31, 2008, and the results of its operations and its cash fl ows for the period fTom February 27,2007 (date of incorporation) to May 31, 2008, in conformity wi th accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the tinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assess ing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

August 26, 2008

- I -

CA RIBBEAN CATASTROPHE RISK INSIiRANCE FACILITY

CO NSOLIDATEP BALANC E SHEET

ASSETS Cash and cash equivalents (Note 4) Investments (Note 5) Accrued interest Prepaid expenses

(expressed in u.s. dollars)

Amounts due from Multi Donor Trust Fund (Note 6)

Total assets

LIA BI LITIES AND SHARE HOLD ERS' EQUITY Liabilities

Accounts payable (Note 7) Premiums received in advance (Note 8) Part icipation fcc deposits (Note 9) Unrealized losses on forward and futures contracts (Note 10)

Total liabil ities

Shareholder's equity Share capital (Note I I) Share premium (Note II) Retained earn ings

Total shareholder's equity

Total liabilities and shareholder's equity

May31

2illl8.

19,363,071 30,710,645

40,684 30,418

? 045 285

$52 J90 lDl

1,007,648 11,724,78 1 19,488,512

18648

32219 589

1,000 119,000

198305 14

199505 14

$52 '90 103

Approved fo . uance on behalfofthc Board of Di rectors of Caribbean Catastrophe Risk Insurance Facility. by:

Director

5i~ ~

2,rl A--.-J .... rt 20()lr Date

Date

The accompanying notes are an integral part of these consolidated financial statements.

- 2 -

CARIBBEAN CATASTROPHE RI SK INSURANCE FACILITY

CONSOLIDATED STATEMENT OF INCOM E


Ope rating income Income from parametric contracts (Note 2) Expenses on parametric reinsurance contracts (Note 2)

Net income on parametric contracts Ceding commissions on parametric contracts

Total operating income

Operating expenses Claims paid on parametric contracts (Note 12) Brokerage and facility supervisor fees

Total operating expenses

Net operating income

Other income and expe nses Investment income (Note 13) Income from Multi Donor Trust Fund (Note 6) Administrative expenses (Notes 14 and 15)

Net income

February 27, 2007 (date of

incorporation) to May 31, 2008

$19,488,512 ( 7,947,500)

11 ,541 ,012 104,375

11,645,387

946,997 463,838

I AI 0,835

10,234,552

1,273,909 9,369, 160

( 927,107)

The accompanying notes are an integral pan of these consolidated financ ial statements.

- 3 -


CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY

Balance at February 27, 2007 (date of incorporation)

Issuance of shares Net income for the period Dividends dec lared (see Note 15)

Ba lance at May 31,2008

(expressed in U.s. dollar;)

$

Share capital

1,000

$

Share premium

119,000

$ 119.000

$

Retained earn ings

19,950,5 14 ( 120,000)

The accompany ing notes arc an integral part of these consolidated financial statements.

- 4 -

$

120,000 19,950,514

( 120,000)

$J.2,lli,lli

CARI BBEAN CATASTROPHE RISK INSURANCE FACILITY

CONSOLIDATED STATEMENT OF CASH FLOWS

Operating activi ties Net income


Adjustments to reconcile net income to net cash ITom operat ing act ivities:

Changes in assets and liabilities: Investments Accrued interest Prepaid expenses Amounts due from Mult i Donor Trust Fund Accounts payable Unrea lized losses on fo rward and future s contracts Prem ium s received in advance

Net cash used in operating activities

Financing activities Issuance of shares • Dividends paid · Participation fee deposits

Net cash provided by financi ng activities

Net change in cash and cash equivalents

Cash and cash equivalents at the beginning of period

Cash and cash equ ivalents at the end of period

• For non-cash items, sec Notes 15.

February 27, 2007 (date of

incorporation) to Muy 31, 2008

$19,950,514

(30,710,645) ( 40,684) ( 30,4 18) ( 2,045,285)

1,007,648 18,648

11,724,78 1

125,441 )

19,488,5 12

19,488,5 12

19,363,071

$ 163)U!.

The accompany ing notes arc an integra l part of these conso lidated fina ncial statements.

- 5 -

CARIBBEAN CATASTROPHE RISK INSlJ RA NCE FACILITY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM FEBRlJARY 27, 2007IDATE OF INCORPORATION) TO MAY 31, 2008

(Expressed in Uniled Slales dollars)

I. Incorporation and principal activity

Caribbean Catastrophe Risk Insurance Facility, Ltd . (the "Company") was incorporated on February 27, 2007 under the laws of the Cayman Islands and obtai ned an unrestricted Class "B" Insurer 's licence under the provisions of the Cayman Islands Insurance Law on Insurance Law on May 23, 2007. The Company's so le shareholder is the CCRIF Star Trust (the "Trust"). The Trustees of the Trust are based in the Cayman Islands.

The principal activity of the Company is to provide catastrophe risk coverage through parametric contracts, spec ifically relating to tropical cyclones and earthquakes ("Acts of Nature"), to certain Caribbean countries ("Participating Countries").

The Company also owns all of the beneficial interests in the Global Managed (7) $ Fund (the "Investment Fund" or "Subs idiary") (a Segregated Portfolio Cell of London & Capita l Satellites SPC). Accordingly, the Company consolidates the results of the Investment Fund within these financial statements. The purpose of the Investment Fund is to conduct the investment activities of the Company, The Company and the Investment Fund are referred to as "the Group" in these consolidated financial statements.

2. I>aramctric contracts

The principal activity of the Group is to provide catastrophe risk coverage to governments of Participating Countries, through parametric contracts, specifically relating to Acts of Nature that occur in close proximity of the Participating Countries. Each Part icipating Country is set individual premiums, attachment points and aggregate coverage limits in their respective contracts. There are nO limits On claims for single incidents (other than the per country policy aggregate coverage limits) , however, claims are based on calculated index values using specified terms, conditions and formulae set out in the "Claims Procedures Manual" (hereinafter the "Claim Payout") and not with reference to actual losses incurred by the respective Participating Countries. Accordingly, Claim Payouts are not triggered by actual losses but rather the occurrence of the specified Acts of Nature within the defined policy parameters. For the 2007/08 policy year (which terminated on May 3 1,2008), the combined aggregate coverage limits for all Participating Countries are $364.9 million for tropical cyclones events and $129.9 million for earthquake events, respectively.

The Group has ceded layers of this exposure to commercial reinsurers and the International Bank for Reconstruction and Development ("World Bank") arranged through a broker. The following is a summary of the coverage in the program for the period up to May 3 1,2008:

o The Group retains all losses up to $ I 0 million per annum. o The next $ I 5 million of losses are re insured with 3 re insurers with an A.M.Best rating of at least A-. o The next $25 million of losses are reinsured with 3 reinsurers with an A.M. Best rating of at least A-. o The next $70 million of losses are ceded 7 1.4% to 2 com mercial reinsurers with an A.M.Best rating of at

least A-, and 28.6% to the World Bank. o The Group retains all subsequent losses above $ I 20 million.

Notwithstanding the arrangements outlined above, currently all losses inculTed in the Group's retention limits are reimbursed to the Group by the Multi Donor Trust Fund until exhaustion of the funds available within that fund (see Note 6).

- 6 -


NOTES TO THE CONSOLIDAT ED FINANC IAL STATEMENTS

FOR THE PERIOD FROM FEBRUARY 27, 2007 (DATE OF INCORPORATION) TO MA Y 31, 2008

(Expressed in United Slates dollars)

3. Significant accounting policies

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Uni ted States of America ("US GAAP") and are stated in United States dollars. A summary of the significant accounting and reporting policies used in preparing the accompanying consolidated financial statements is as follows:

Basis of Preparation: The financial position, results of operations and cash flows of the Company and Subsidiary have been included in these consolidated financial statements. All material balances and transactions (and related gains/losses) between the Company and the Subsidiary have been eliminated upon conso lidation.

Cash and cash equivalenls: Cash and cash equivalents comprise of call accounts and deposits with maturities of three months or less on date of purchase.

Investments. investment tra nsact ions and investment income: Investments cons ist of investments in exchange traded funds, corporate debt securities, future contracts and forward exchange contracts. The Group has early adopted FASB Statement 159 "The Fair Value Option for Financia l Assets and Financial Liabilities" ("FAS 159") and concurrent with the adoption of this statement, adopted the provisions of FASB Statement 157 "Fair Value Measurements" ("FAS 157"). FAS 157 requires management to designate investments into three categories depending on how fair value is determ ined. Leve l I inputs are quoted prices in active markets for identical assets or liabilities that the Group has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level I that are observable for the asset or liability, either direct ly or indirectly. Level 3 inputs are unobservab le inputs for the asset or liability. Investments arc the only class of asset or li abi lity which the Group has made the election to early adopt FAS 159.

Investments are initially recorded at cost on trade date (being the fair value at date of acqu isition) and are subsequently revalued to fair value. The fair value of fixed income sec urities are determined based on quoted market prices, matrix prices and prices determined using generally accepted pricing models as provided by the Group's investment manager. The fair value of the mutual funds is based on the daily net asset values provided by the respective fund adm inistrators.

Unrealized gains and losses on in vestments are recorded as a change in fair value in the Consolidated Statement of Income. Realized gains and losses on investments are (and were) determined on the spec ific method idcntification and are cred ited or charged to the Consolidated Statement of Income.

Interest and dividend income is recorded on the accruals basis.

Income and expenses from parametric contracts: The parametric policies written and ceded by the Group do not limit the payment amounts to the policyholder'S incurred insurable loss (see Note 2 for details). Accord ingly, these policies are not accounted for as insurance within these consolidated financial statements.

Premiums written on parametric contracts are initially recognized as a liability (reinsurance ceded: as an asset) and subseq uently reported at fa ir value. All subsequent changes in fair va lue of the parametric contracts are recognized in eamings as income (reinsurance expenses) attributable to parametric contracts. The fair value of the contracts is determined based on management's best estimate of the discounted payouts (recoveries) resulting from the reasonably probable occurrence, magn itude and location of insured events (based on historical trends and statistics) during the unexpired period of the contracts. At May 31,2008, there was no unexpired period on either the written or ceded parametric contracts; accordingly, the fair value of these instruments was $nil.

Losses are determined in accordance with the formula set out in the contract (see Note 2) and are recorded as an expense on occurrence of a covered event. At May 31, 2008, there were no unpaid losses.

- 7 -



FOR THE PERIOD FROM FEBRUARY 27, 2007 (DATE OF INCORPORATION) TO MAY 31, 2008

(Expressed in United States dollars)

3. Significant accounting policies (continued)

Forward and futures contracts: The Group permits its investment manager to invest, within prescribed limits, in financial exchange traded futures contracts and to se ll securities not yet purchased ("Short Selling") for hedging purposes and for managing the asset allocation and duration of the fixed income portfolio. Initial margin deposits arc made upon entering into futures contracts and can be made either in cash or securities. During the period the futures contracts are open, changes in the va lue of the contracts are recognized as unreali zed ga ins or losses by "marking-to-market" on a daily basis to reflect the market va lue of the contracts at the end of each day' s trading. Variation margin payments are made or received, depending upon whether unrealized losses or gains arc incurred. When the contracts are closed, the Group records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Group's basis in the contracts.

The Group also permits its investment manager to invest in forward fore ign exchange contracts to hedge against foreign currency fluctuations in its securities which arc denominated in currencies other than the U.S dollar. These contracts are also valued daily using the "marking-to-market" method and are recognized in the balance sheet at their fair value.

Realized gains and losses and movement in unrealized gains and losses on both futures and forei gn currency forward contracts are recorded as a component of investment income in the Consolidated Statement of Income.

I'articipation fcc deposits: Participation fee deposits are paid by Participating Countries to enter the program. Deposits received are recorded as a liability in the financial statements. Participation fcc depos its are recognized as income when:

• they arc no longer refundable to the Participating Countries (see Note 9) • they are required to fund losses (sec Note 9)

Deposits that are utilized to fund losses will be reinstated to the extent avai lab le from subsequent retained earnings up to the maximum amount of the initial deposits.

Foreign currencv translation: Foreign currency assets and liabilities are converted to U.S. dollars at the rate of exchange prevailing at the balance sheet date. Transactions in foreign currencies are converted into U.S. dollars at the rate of exchange prevailing at the date of the transaction . Foreign exchange differences are included in the Consolidated Statement of Income in the year to which they relate.

4. Cash and cash equiva lents

Cash and cash equ ivalents comprise:

Current and call accounts Fixed term deposits

4,286,190 15,076,881

Cash and cash equivalents are held by a bank in the Cayman Islands and managed within guidelines established by the Board of Directors.

- 8 -



FOR THE PERIOD FROM FEBRUARY 27, 2007 (DATE OF INCORPORATION) TO MA Y 31, 2008

(Expressed in United States dollars)

5. Investments

All of the Group' investing act ivities are conducted through the Investment Fund, which is managed by an investment manager under an investment management agreement (see Note 1).

The following table summarizes the Group 's investments in the Investment Fund that are measured at fai r va lue at May 31, 2008:

Mutua l funds Corporate debt securi ties Short term investments

Fair Value Measurements Determined Using: Level I Level 2 Level 3 inputs inputs inputs

3,366,960 5,685, 186

2 1 ,658,499

$ 2.Lill422 $ 2 Q~2 ,lli

Total

3,366,960 5,685,186

21,658,499

$lQ7 IQ@.

Short term investments consist of cash held with investment manager, term depos its and a margin call account (see Note 10). Also included in short te rm investments, is an amount denominated in British Pound Sterling, of $98,8 10 (£50,000). The foreign currency risk associated with this balance is hedged using a forward foreign exchange contract (see Note 10). The marg in call account represents restricted cash required to be posted with respect to the futures contracts (see Note 3 and 10).

Interest rates attaching to the fi xed income securities range from 2.05 % to 5.45 %. At May 31 , 2008 approx imately 100 % of debt securities are Investment Grade (A- or better). In accordance wi th the Group's Investment Po licy, no more than 5 % of the investments are below grade BBB.

The Unpaid Principal Balance of fixed income debt securities and their fair value at May 31, 2008 , were as fo llows:

Corporate debt securities

- 9 -

Unpaid Principal

Balance Fair

Value

CARIBBEAN CATASTROPHE RISK INSU RA NCE FACILITY

NOTES TO TH E CONSOLIDAT ED FI NANC IAL STATEMENTS

FOR THE PERIOD FROM FEBRUARY 27, 2007 (DATE OF INCORPORATION) TO MAY 31. 2008

(£Tpressed il1 Uniled Slates dollars)

6. Multi Donor Trust Fu nd

The CCRIF Trust Fund (hereinafter referred to as the "Multi Donor Trust Fund" or "Donor Trust"), was created by the World Bank as pan of a grant arrangement with the Company. Under this arrangement, the World Bank has established a grant framework to assist the Company financia lly in its operations. Costs reimbursable under the grant agreement include certain :

(a) professional service fees, administrative fees, banking initiation fee, and registration fees , including re lated travel expenses which are incurred by the Company in connection with the establishment of the program;

(b) adm inistrative fees, professional fees, audit costs, exchange rate costs, banking fees, reinsurance premiums, and remunerat ion and travel expenses of board members of the Company;

(c) insurance payouts of the Company, to the extent that such payouts are not covered by any reinsurance purchased by the Company (sec Note 3); and

(d) such other operational expenses of the Company agreed with the World Bank.

The Donor Trust has an expected life of 5 years which is extendable upon negotiations between the World Bank and the donors to the Donor Trust. At the termination of the grant arrangement, the reimbursements will cease. Any unused funding at the date of termination will no longer be available to the Group.

During the period ended May 31 , 2008, the fo ll owing costs were reimbursed andlor reimbursable by the Donor Trust:

Expenses on parametric contracts Claims paid on parametric contracts Directors' fees Fac ility management fees

At May 3 1, 2008, the fo llowing cost reimbursements were due from the Donor Trust:

Expenses on parametric contracts Directors' fee s Facility management fees

7,943, 125 946,997 118,728 360.310

1,893,281 68 ,430 83,573

At May 31, 2008, $45,068,9 18 was available from the Donor Trust to finance future reimbursable costs of the Group during the remaining period of the arrangement.

7. Accou nts payable

Accounts payable comprises:

Accruals Amounts due to broker for unsettled trades

- 10-

132,648 875,000

$,J,Oill648

CARIBB EAN CATASTROPH E RI SK INSU RANCE FACILITY


FOR THE PERIOD FROM FEBRUARY 27. 2007 WATE OF INCORPORATION) TO MAY 31. 2008

(Expressed in United States dol/a,;)

8. Premiums received in advance

Premiums received in advance represent amounts paid by Participating Countries with respect to the 2008/09 po licy.

9. Participation fees deposits

Part icipating fee deposits represent non-recurring amounts requ ired to be paid by each Participating Country to enter the program. The deposits are equivalent to the annual premiums written in respect of each Participating Country. It is Management's intent that participation fee deposits are available to fund losses in the event that funds from retained earn ings, reinsurers and the Donor Trust are insufficient. If deposits arc used to fund losses, it is also Management 's intent that any subsequent earni ngs generated by the Group will be used to rei nstate the deposits to their original carrying value. The participation fees are refundable, without interest, in the event that the Group does not renew the coverage to participating countries. Participation fees are not refundable if a Participating Country leaves the program for more than one year in any five year period, and would be recognized as income at that point. Participating Countries, who leave the program resulting in partici pation fees being voided, may, at the discretion of the Directors, be required to repay participation fees if they want to rejoin the program subsequently.

10. Forward and futures contracts

As at May 31, 2008, the Group had the following outstand ing forward foreign currency and futures contracts:

British Pound Sterling fo rward

U.S 2 Year Note future U.S 5 Year Note future

Total

Expiry date

June 3, 2008

September 30, 2008 September 30, 2008

Notional value

£400,000 (at forward rate of US$ I.9762: £ I) $2,200,000 $1,100,000

Fair Values atMay3 1,

2008

1,203

7,390) 12.461)

At May 31, 2008 , the Group had placed cash collateral on depos it of $19,852 with a third pany to meet margin requirements for futures contracts. This balance is included in short-term investments (see Note 5).

At May 3 1, 2008, the Group held a security with a fair value of $693,192 (£350,770) and cash of $98,810 (£50,000), denominated in British Pound Sterling, and used the British Pound Sterling forward contract described above to hedge against the foreign associated currency risk.

- I I -



FOR THE PERIOD FROM FEBRUARY 27, 2007 (DATE OF INCORPORATION) TO MAY 31 , 2008

(£rpressed in United States dollars)

II. Share capital and share premium

Authorized: 50,000 shares of $1 each

Issued and fully paid: 1,000 shares of$1 each Share premium

$ 5.Q,Q_00

1,000 11 9,000

$ flO OOQ

The share premium account represents the excess of the proceeds from issued share capital over the par value of the shares issued. The share premium account was established in accordance wi th the Cayman Islands Companies Law, which restricts the uses of these reserves.

Pursuant to the Company's Articles of Association, the Directors may declare and authorize payment of dividends out of profits of the Company. Payment of any dividends is subject to approval by the Cayman Islands Monetary Authority ("C IMA").

Under the Cayman Islands Insurance Law the Company is required to maintain a minimum net worth of US$ 120,000.

CIMA has statutory powers that enab le it to use its discretion to req uire the Company to conduct its operations in accordance with general or spec ific condi tions which may be imposed by CIMA or may be agreed between CIMA and the Company. Generally, such matters are set out in the Business Plan which the Company files wi th CIMA and, amongst others, inc ludes reference to the risks assumed and retained by the Company, the funding and capitalization levels, and the Company's investment policies.

12. Claims paid

Claims paid relate to the payment of claims with regards to an earthquake event that affected the Martinique Region of the Caribbean in November 2007.

13. Investment Income

Investment income comprises.

Investment income received Change in fair va lue of investments Net loss on sale of investments Net unrealized losses on forward and fu tures contracts

1,455,388 ( 86,801) ( 76,030) ( 18,648)

$ ill 9Q9

• 12·

CARIBBEAN CA TASTROPHE RISK INSU RANCE FACILITY

NOTES TO THE CONSOLIDATED FINANCIAL STA TEM ENTS

FOR THE PERIOD FROM FEBRUARY 27, 2007 (DATE OF INCORPO RATION) TO MAY 31, 2008

14. Ad ministration expenses

Administration expenses comprise:

Audit fee s Captive management fees Consultancy fees

(Expressed il1 United States dollars)

Investment management, custody and fund administration fees Directors' fees Executive Director's fees Lega l fees Government fees Meeting expenses Publicity Trust expenses (see Note 15) Startup expenses Registered office fee Sundry expenses and bank charges

IS. Related party transactions

$

Period ended May 31, 2008

58,500 65,000

177,350 66,363

100,455 104,780 114,884

14,091 12,203 62,252

101 ,725 40,000 2,500 7.004

During the period ended May 31,2008, the Group paid the fo llowing expenses on behalf of the Trust:

Trustee fees Enforcer fees

$

91 ,257 10.468

During the period ended May 31, 2008, the Company declared a dividend of $120,000, payable to the Trust. This balance was sen led against the share capital contribution of$120,000 due from the Trust.

16. Taxation

No income, capital or premium taxes are levied in the Cayman Islands and the Company has been granted an exemption until May 29, 2027, for any such taxes that might be introduced. The Group intends to conduct its affa irs so as not to be liable for taxes in any other jurisdiction. Accordingly, no provision for taxation has been made in these financ ial statements.

- 13 -

CA RIBBEAN CATASTROPHE RISK INSURANCE FACILITY


FOR THE PERIOD FROM FEBRUARY 27, 2007 (DATE OF INCORPORATION) TO MAY 31, 2008

(Expressed in Uniled Slales dollars)

17. Financial instruments

(a) Fa ir value The carrying amount of the Group's financial assets and liabilities, excluding investments, approx imate their fa ir value due to their short term maturities. Investments and forward and futures contracts are carried at fair va lue, as described in Note 3 and Note 10 respecti ve ly.

(b) Cred it risk Financial assets which potentially subject the Group to concentrations of credit risk consist of cash and cash equ ivalents, inves tments in debt instruments, futures and forward contracts , accrued interest receivable and the balance receivable ITom the Multi Donor Trust Fund. The maximum amount of loss the Group would incur if the counterpanies to the transactions do not meet their obligations, would be the carrying amount of such assets in the balance sheet. The Group's cash and cash eq ui va lents are placed with high credit quality financial institut ions. Similarly, the Group's investment policy requires that the investment manager invests in securities with a high credit quality. The ba lance due from the Multi Donor Trust Fund balance is effectively due from the World Bank, which has a AAA credit rating at May 31 , 2008. Futures and forward contracts are subject to the credit risk of the respecti ve counterpanies. The Group manages this cred it risk by transacting only with counterpanies considered highly reputable and creditwonhy.

(c) Interest rate risk The Group's term and fixed deposits are at fixed interest rates and mature within three 1110nths. The Group also invests in fixed interest securities, the fair value of which will be affected by movements in interest rates. An analys is of the Group's investment ponfol io is shown in Note 3. The fair value of the futures contracts will also be affected by movements in interest rates.

(d) Market risk Market risk ex ists to the extent that the values of the Group's monetary assets fluctuate as a resu lt of changes in market prices. Changes is market prices can arise from factors specific to individua l securities or their respective issuers, or factors affecting all securities traded in a panicular market. Re levant factors for the Group are both volatili ty and liquidity of specific securities and markets in which the Group holds investments.

(c) Foreign exchange risk In the normal course of business, the Group may hold assets and liabilities in currencies other than U.S. dollars. To reduce its ri sk to foreign exchange fluctuations the Group may enter forward on the foreign exchange contracts. The Group is exposed to currency risks to the extent of any mismatch between foreign exchange forward contracts and the corresponding financial instruments denominatcd in foreign currencies. Foreign currency forward contracts commit the Group to purchase or sell the designated fo reign currency at a fixed rate of exchange on a future date. Sce Note 10 for details of forward foreign exchange contract entered into by the Group during the period.

(I) Futures contracts risk In the normal course of business, the Group trades financ ial futures, which are carried at fai r value. These futures contracts represent future commitments to purchase financial instruments on specific terms at speci fi ed future dates. The fair value of the futures contracts will fluctuate corresponding to the fair va lue of the underlying financial instruments (see Note 10). The notional va lue of the underlying financia l instruments represents the Group 's maximum risk of loss. The Directors consider thi s ri sk to be mitigated because of the shon terms of the futures contracts and the underlying financial instruments being U.S . Treasury Notes.

- 14 -