Insuring the Pacific neighbourhood
19 Feb 2013|

Last month Cyclone Evan pummelled Fiji and Samoa, leaving a trail of destruction. This month in the remote Santa Cruz Islands province of the Solomon Islands ten people died in a tsunami triggered by a magnitude eight earthquake.

These types of natural disasters have resulted in an average direct annual loss in the South Pacific region of around $300 million. That’s a large sum for a region of small island countries that are economically fragile. The stability of the South Pacific region is naturally of interest to Australia, as evidenced by the emphasis we’ve placed on it in recent years. So we should welcome a recent positive development, which has seen the Marshall Islands, Samoa, Solomon Islands, Tonga and Vanuatu last month become part of a pilot catastrophe risk insurance program, launched to provide their governments with immediate funding if a major natural disaster occurs.

As part of this program, Japan, the World Bank and the Secretariat of the Pacific Community have teamed up with the five island states to launch the Pacific Catastrophe Risk Insurance Pilot. It’ll test whether a risk transfer arrangement modelled on an insurance plan can help Pacific island states deal with the immediate financial effects of disasters. The pilot is the first Pacific scheme that links immediate post-disaster insurance pay outs to specific events. This joint effort will allow Pacific island nations to access earthquake and tropical cyclone catastrophe coverage from reinsurance companies at an attractive price.

Island governments have struggled to arrange national insurance coverage of the magnitude that natural disasters can require. So the World Bank is acting as an intermediary between the pilot countries and a group of insurance companies selected through a competitive bidding process. And while AusAID isn’t funding the pilot itself, it provides support to the organisation responsible for managing the pilot, the World Bank’s Global Facility for Disaster Reduction and Recovery.

It seems that Pacific Island states have learnt from the Caribbean experience: launched five years ago, the Caribbean Catastrophe Risk Insurance Facility is a parametric insurance scheme. In terms of the scheme, payments of claims aren’t based on actual losses or damage following natural disasters. Instead, they’re calculated according to predefined indeces based on the intensity, period and location of a disaster. Countries can buy coverage limited to specific events and specific areas, and for a specified amount of time.

When the devastating Haiti earthquake struck three years ago, Haiti’s claim was assessed within 24 hours. It was determined that the earthquake was strong enough to trigger the full earthquake coverage. Preliminary calculations suggested that Haiti would receive just under $8 million (about twenty times Haiti’s premium for earthquake coverage), which was made after fourteen days.

Countries can alter the amount they allocate for each disaster, so in the aftermath of the Haiti earthquake many Caribbean countries reviewed their earthquake coverage—they had previously placed more emphasis on hurricane coverage. This built-in flexibility might suit Pacific economies with low growth or where natural disaster assessments have changed.

A Pacific regional disaster insurance scheme will require region-wide coverage to spread the insurance risk, identification of the magnitude of a disaster as a trigger point for payments, and speedy cash flows to countries so that they can begin rebuilding as quickly as possible after a disaster.

As part of international climate negotiations states have agreed to provide finance to poor countries for loss and damage from climate change. Climate Change Minister Greg Combet has said Australia will pay for climate loss to developing countries from our aid budget. One academic has suggested that a fair share for Australia to contribute to the global funding effort would be about $2.4bn a year by 2020.

The Australian Government’s new National Security Strategy (PDF) points out that ‘as the climate continues to warm, extreme weather events and natural disasters will increase in frequency and severity across the region’. So it’ll be important for Australia to monitor the progress of the Pacific’s recently launched disaster insurance pilot and see where we can best assist our near neighbours.

Anthony Bergin is deputy director of the Australian Strategic Policy Institute.