Hurricane Beryl: Record parametric payouts underline the evolution of CCRIF’s role in the Caribbean
Author: Conor Meenan
Workers load sandbags into a truck in preparation for the arrival of Hurricane Beryl in Bridgetown, Barbados on June 30, 2024. Photo: Chandan Khanna / Getty Images
Hurricane Beryl developed on 1 July 2024 to become the earliest Category 5 storm ever observed during a hurricane season. It serves as an unfortunate data point for climate scientists and risk modellers grappling with the challenge of understanding hurricane risk in a changed climate. As is often the case when large disasters happen, Beryl provides an important window on the current state of disaster management, and the disaster risk financing strategies of countries which have been developed to deal with just such an event. Our new blog series develops three case studies, which aim to provide insights into the current landscape of financial preparedness in the Caribbean and draw lessons about how pre-arranged financing should evolve to meet the ever-increasing costs of preparing for and responding to future climate shocks globally.
This first blog reviews the record payouts from the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which highlights just how widespread the uptake of CCRIF insurance policies is now throughout the Caribbean, as well as how its applications and products have evolved since its inception. The second blog investigates Jamaica’s layered risk financing strategy, which instruments triggered, which didn’t, and how we can look towards Jamaica’s experience to understand what risk layering looks like in practice. The last blog in this series will examine a relative newcomer to the disaster risk financing toolkit: the Climate Resilient Debt Clause (CRDC). Developed in the Caribbean, it has now been tested for the first time in response to Beryl.
Beryl impacts the windward islands of Grenada and St. Vincent and the Grenadines
On 1 July 2024, Hurricane Beryl passed directly between Grenada’s and St. Vincent and the Grenadines’ main islands as a Category 4 storm. While the majority of the populations were spared from the worst effects of the storm, Grenada’s northernmost island of Carriacou and St. Vincent and Grenadine’s southern Union Island experienced catastrophic levels of damage.
It is notoriously difficult to make fast and accurate assessments of disaster damages, and the full effects of disasters are often only understood much later in the recovery process. However, in this case, Beryl’s impacts were largely concentrated in a few islands, and new satellite-based technologies, together with preliminary damage observations, help provide initial insights into the scale of impacts.
Rapid damage assessments carried out by the World Bank using satellite and locally generated damage data estimated that total economic damage in St. Vincent and the Grenadines was of the order of US$230 million, or 22% of GDP. In Grenada, this figure was $219 million, or approximately 16.5% of GDP. These estimates underline the significance of Beryl’s impacts. Many of those affected by this storm continue to experience the effects of this as a humanitarian crisis, and its impacts will reverberate for years to come.
As Beryl progressed through the North Atlantic, it grew to Category 5 strength, impacting multiple other small island states and making further landfalls in Mexico and the US.
Reported track location and wind footprint (generated using reported NHC storm data and StormR package).Record CCRIF payouts in response to Beryl
CCRIF’s parametric insurance payouts to member countries were fast. On 9th July, just eight days after Beryl had made landfall, CCRIF issued a press release to confirm that the governments of Grenada and St. Vincent and the Grenadines were due payouts of US$44 million and US$1.8 million respectively.
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Following a devastating hurricane season in 2004, the Heads of Government of the Caribbean Community and Common Market (CARICOM) requested assistance from the World Bank to design and implement a cost-effective risk transfer programme for member governments. This marked the beginning of what would become the Caribbean Catastrophe Risk Insurance Facility (CCRIF) which was founded as a regional risk pool in 2007.
CCRIF is a not-for-profit insurance company, and it was the first of four regional risk pools which were created to help countries access insurance and capital markets on competitive terms in pursuit of development objectives. CCRIF now offer parametric insurance policies for tropical cyclone, earthquake, and excess rainfall events, and since its inception has made total payouts of around $360 million.
In total, CCRIF issued $85 million in payouts to governments and non-sovereign policyholders in response to Beryl, through 12 individual parametric insurance policies across five countries. This headline statistic alone provides a clear indication that CCRIF has evolved since its inception in 2007 to become a core part of the disaster risk financing strategies of member countries throughout the Caribbean.
CCRIF payouts for Hurricane Beryl
CCRIF payouts for sovereign and non-sovereign policies including *ADC payments (totals may not sum due to rounding).To put these CCRIF payouts in perspective, a basic rule of thumb for estimating government related emergency response costs is to multiply total economic damages by around 15-25%. Based on this guideline, we can estimate that Grenada’s CCRIF payout provided a significant level of funding against its total government financing needs, while St. Vincent and the Grenadines likely only provided a relatively much smaller proportion of what was needed. The notable differences in payout sizes relative to the initial damage estimates between the two islands are likely due to a combination of factors relating to the details of the insurance policies and the customisation of the parametric triggers and associated modelled loss estimates for each island. Both countries have other pre-arranged financing instruments available, but in this case St. Vincent and the Grenadines will have to have found much of is financing for response separately, whereas Grenada’s CCRIF payout probably did a lot of the heavy lifting.
Digging deeper into CCRIF’s payouts for Beryl
CCRIF was established to fill the ‘liquidity gap’ faced by governments in the aftermath of tropical cyclones and earthquakes, but both CCRIF’s products and the use of pre-arranged financing in the Caribbean have evolved over the past 17 years. CCRIF’s payouts for Beryl underline how its role has grown to meet new demands and an expanding mandate. In addition to the record levels of payouts, three aspects of CCRIF’s response to Beryl stand out:
Parametric payouts for cash transfers – most instruments in the disaster risk financing toolkit are ‘liquidity’ instruments, which provide general budget support rather than protection for specific contingent liabilities. These liquidity-type instruments are crucial, especially for responding to large and complex government disaster costs – this is what CCRIF was initially developed to provide. However, there is also an opportunity for linking payouts from pre-arranged financing directly with pre-arranged response plans. This model for linking payouts to specific response costs was at play in response to Beryl, where WFP partnered with the Jamaican government and paid for and used payouts from a CCRIF policy to fund cash transfers to affected households. The benefits of this type of approach are twofold: firstly, there is a coordination benefit, whereby a government can arrange in advance with line ministries (or, in this case, humanitarian agencies) to plan for and respond to crisis impacts together – this planning provides additional funding certainty for the implementer of the response. Secondly, this approach introduces a clear line of sight between parametric payouts and benefits to affected populations. As the use of pre-arranged financing by governments increases, it will be increasingly important to start defining and costing specific contingent liabilities ahead of time, so that the right levels and type of protection are aligned against the expected financing needs.
Arranging insurance for utilities and critical sectors – the government of Grenada received $43 million from its sovereign insurance policies for tropical cyclone and excess rainfall, but in addition CCRIF also made three specific payouts totalling $12.6 million for Grenada’s electric and water utility companies and for its fisheries sector. The development of these utility and sector-specific policies reflects the fact that risk ownership for critical services is often shared between public and private entities, and as such, insurance policies like this can both clarify responding roles and help to ensure that services such as water and electric can be restored quickly following a disaster. These sector-specific insurance policies provide a useful test case at a global level as a demonstration of how pre-arranged financing can prove useful even in situations where risk ownership structures are more complicated, such as where public and private responsibilities intersect.
Managing basis risk in parametric triggers – parametric triggers have proven invaluable in supporting the expansion of risk transfer and other disaster risk financing instruments into situations where fast allocation decisions are needed, or where there is otherwise limited information about actual event impacts. By design, they only approximate financing needs, and so there is a possibility that the parametric index doesn’t align exactly with damages observed and associated costs on the ground, resulting in situations where parametric payouts are less or greater than what a policyholder expects given observed impacts and their understanding of the coverage provided by the insurance. Responding to previous experiences with basis risk, CCRIF has developed specific trigger conditions which aim to address this issue by incorporating secondary event information from ReliefWeb to activate small payments in cases where the modelled loss-based parametric index doesn’t reach the minimum attachment level. This ‘aggregate deductible cover’ (ADC) feature introduced in 2017 came into play for Trinidad and Tobago and the Cayman Islands in response to Beryl. Parametric triggers will continue to play a huge role in the expansion of pre-arranged financing, so it is critical that they are designed with suitable failsafes to mitigate and manage potential issues of basis risk. The ADC feature from CCRIF serves as an important proof of concept which provides a potential blueprint for the development of hybrid parametric instruments globally, particularly for more complex risks.
Facing the climate crisis
Beryl wasn’t an unusual storm by most impact measures. Caribbean islands have experienced significant damage from storms before, but it was unusually early and might yet prove to mark the onset of a new paradigm for a longer and more unpredictable hurricane season under a changed climate.
In this context, it is essential to reflect on the huge progress made in terms of improved levels of financial protection and be ambitious about how products such as CCRIF insurance can improve the quality and quantity of coverage for risk-affected countries.
This year’s hurricane season is coming to an end, and so governments will be looking towards coverage for next year’s hurricane risk, and CCRIF, donors, and other providers will be looking at how best to ensure there is enough high-quality coverage in place.
In the face of the urgency presented by the climate crisis, the immediate approach needs to be simple and scalable: countries need more pre-arranged financial protection, provided through instruments that are responsive and reliable, providing a combination of budget support and financing for specific response costs. Beryl has highlighted how CCRIF has evolved to provide at least partial solutions for each of these needs. In the Caribbean much of the hard work of product development for pre-arranged financing has been done over the past years and decades. The financing tools are now available and working for countries in the Caribbean; it’s time to shift the bulk of disaster response financing into pre-arranged formats.