A centre for Caribbean risk


Milo Pearson

A centre for Caribbean risk

In choosing a home for its captive the Caribbean Catastrophe Risk Insurance Facility opted for Cayman’s welcoming shores. We discover the reasons and its significance to the natcat coverage of the region.

When did you establish your captive?

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) was formed in February 2007.

Why did you opt for Cayman as your captive domicile?

CCRIF, an insurance entity whose aim is to provide a risk transfer mechanism to assist the governments of the major Caribbean countries in addressing natural catastrophes, opted initially for a domicile from within the region. We researched Bermuda, the Cayman Islands and Saint Lucia, before deciding on Cayman. It is a seasoned captive insurance jurisdiction with a robust infrastructure, and proved its resilience following Hurricane Ivan in 2004.

What sets Cayman apart from other jurisdictions?

Not only is Cayman readily accessible by air, it possesses a range of high quality accommodation and restaurants. Allied with this is a very user-friendly working district where the majority of offices are within a reasonably short drive or walking distance. Usually a domicile has either strong tourism or a business-conducive infrastructure, but rarely both. Furthermore, there is a great sense of partnership between the insurance regulator and insurance managers, whereby they both pullin the same direction in the mutual interest of the sound governance of those captives under management. This is not commonly seen in other jurisdictions.

How important have recent tax information exchange agreements been in strengthening the value proposition of the domicile?

Recent tax information exchange agreements (TIEAs) do not directly affect CCRIF but they are evidence of Cayman being perceived as a leading example of cross-border transparency regarding probity in fi nancial affairs. This directly addresses the media and entertainment industry-fuelled perception of Cayman as a tax haven. It is important that Cayman continues to see fi nancial transparency as a longterm commitment in view of the scrutiny of CCRIF by a wide array of stakeholders from the Caribbean Community and Common Market (CARICOM), the World Bank and the international donor community.

Can you tell us a little about the bench of captive expertise that is available in Cayman?

The key thing we tell our service providers is that CCRIF is unlike any other captive and has to be managed accordingly. All ourservice providers understand this, and we are particularly pleased with the relationship built up over time with CCRIF’s Cayman service providers, in particular Sagicor Insurance Managers, the auditor PricewaterhouseCoopers, EFG Bank, which manages one of CCRIF’s investment portfolios, and Alan Craig, who provides legal counsel. All these service providers have demonstrated a consistent quality of service to CCRIF, not only in their own work but also in cooperation with each other. We are also encouraged by the depth of expertise in all these fields to be found in Cayman.

What is the regulatory environment in Cayman and how accessible is the regulator?

The approach to insurance regulation by the Head of Insurance Supervision is distinct from that of other regulators. While performing the duty of ensuring the captives are meeting their statutory obligations, he seeks at the same time to build a partnership with CCRIF. We derive particular comfort from the fact that the regulator takes such an interest in the success of CCRIF, given the facility’s role in mitigating the financial effects of natural hazards in the Caribbean region.

What lines of business do you write through your captive? How has this developed over time?

"The loss model methodology has developed from initially using an american model tailored to the Caribbean landscape, to now being CCRIF's own caribbean-specific loss model."

CCRIF writes parametric earthquake (PE) and tropical cyclone (TC) cover for the governments of 16 Caribbean countries. The uniqueness of the parametric policy is that it is index-based and uses loss data based on recorded storm/earthquake activity in the Caribbean since such records were first kept, which are put into a loss model and updated annually. These data are then applied to the location of the economic assets of a particular country location and a loss value is calculated. Unlike traditional insurance policies, which depend on postevent loss assessment, in CCRIF’s parametric policies, when a claim is filed the model calculates the loss, which is verified independently, and the full payout is made no later than 14 days after the event.

Although the number of participating countries remains at 16, the loss model methodology has developed from initially using an American model tailored to the Caribbean landscape, to now being CCRIF’s own Caribbean-specific loss model. This Caribbean model has contributed significantly to a greater reduction in what we term ‘basis risk’, which is the difference between the actual payout and what the expectation of the payout would be, given the severity and location of a claim event.

Are you considering taking on additional lines of business? Which ones and why?

During 2012 CCRIF began slowly to roll out a new parametric excess rainfall insurance product (XSR) to pay out to countries following a period of intensive rainfall. Several Caribbean countries are mountainous and are therefore susceptible to rivers bursting their banks and causing flooding, and to rainfall causing landslides.

These events can seriously disrupt and damage government infrastructure, including buildings, roads and bridges, and the countries’ agricultural output. The XSR product is seen as complementary to the existing TC cover in that tropical cyclones often carry intensive rain. Therefore, if the event does not trigger under the TC cover—which is based on wind and storm surge—countries may receive a payout under their XSR cover should they choose to purchase the product. We will continue to roll out this product through mid-2013.

As a consequence of XSR we envisage new countries such as Guyana and Suriname, which are not particularly prone to hurricanes, taking out policies with CCRIF, thus expanding CCRIF’s geographical reach.

What is the ongoing value proposition of your captive to your parent company?

CCRIF is owned by a special-purpose trust and therefore its value proposition is to those participating countries which have policies with CCRIF. In our mind, the ongoing value proposition of CCRIF for its policyholders is as expressed in the CCRIF Mission Statement “to assist Caribbean governments and their communities in understanding and reducing the socio-economic and environmental impacts of natural catastrophes, by providing immediate liquidity through a range of affordable insurance products, innovative and dynamic tools and services, and in a way that is financially sustainable and responsive to the needs of the region”.

Specifically, CCRIF promises to:

1. Fill a gap in available insurance offerings in natural catastrophes;

2. Give peace of mind and confidence regarding financial support;

3. Supply tools for enhanced disaster risk management;

4. Charge lowest possible premiums consistent with long-term sustainability as a joint reserve mechanism;

5. Ensure speedy payout when a policy is triggered; and

6. Be transparent and accountable.

Milo Pearson is executive chairman of the Caribbean Catastrophe Risk Insurance Facility. He can be contacted at: milo@isginsuranceconsulting.com

Caribbean, captive, insurance, CCRIF, property cat, Cayman

Captive International