09The Fac Report - Aon

CARIBBEAN RENEWAL MOVE
June sees the first renewal of the world’s first
multi-country disaster insurance facility, the
Caribbean Catastrophe Risk Insurance Facility
(CCRIF) with several measures designed to further
fill the liquidity gap for countries after a natural
catastrophe.
In a February bulletin, the CCRIF announced
a 10% reduction in premiums charged to
participating governments, a decrease in the
minimum attachment point for hurricane policies
from one in 20 year events to one in 15 year
events, an increase in limits to USD100m per peril
from USD50m and a minimum payment, when
triggered, equivalent to the relevant country’s
annual policy premium. The scheme, which
in its first year made payments to Dominica and
St Lucia in respect of the powerful earthquake
which rocked the Caribbean at the end of
November, also stated payment of legitimate
claims will be accelerated to as little as 14 days.
The CCRIF facility was structured in
conjunction with Benfield, as sole adviser, using
a mixture of aggregate catastrophe excess
of loss layers and a catastrophe swap. As a result,
the CCRIF also has the distinction of being
the first insurance facility to develop a parametric
insurance policy that is backed by both traditional
reinsurance and capital markets.
Just as important, it offers a fresh perspective
on how governments can work with the commercial
insurance and reinsurance sector. The scheme
has overcome many of the issues which have
historically hindered the development of such
government-backed initiatives – including striking
a workable balance between building capital and
imposing compulsory contributions on individuals
– by taking a far broader and more integrated
intergovernmental approach.
Critically the CCRIF provides participating
governments, rather than individuals, with
immediate liquidity if their countries are hit
by a hurricane or earthquake.
The CCRIF’s structure – which could be applied
to anywhere from Central America to China
to Africa – potentially points the way for future
inter-government natural perils initiatives.
Reflecting this, the World Bank, which provided
support and seed capital for the project, has
indicated it could serve as a pilot for similar
initiatives in other regions with small states,
such as the Pacific basin.
david.simmons@benfieldgroup.com
aidan.pope@benfieldgroup.com
TAPPING INTO A GROWTH
PROPOSITION
Insurers are increasingly turning their
attention to the possibilities offered
by Latin America and the Caribbean (LAC)
due to the current surge in infrastructure
development fuelled, in large part,
by revenues generated by the commodities
boom.
Such is the scale of current developments,
that for the first time the combined value
of the Top 50 strategic infrastructure projects
in LAC, as selected by the Sixth Annual Latin
American Leadership Forum which took place
in early April, has exceeded USD50bn.
The current focus on infrastructure
development reflects a general acceptance
that if LAC is to sustain and improve current
growth rates, the region needs to invest
significantly in all aspects of critical
infrastructure ranging from greater power
generation to better road links.
Estimates published in August 2005
in Infrastructure in Latin America and the
Caribbean: Recent Developments and Key
Challenges, a report by World Bank economists
Marianne Fay and Mary Morrison, indicated
spending would need to reach 4% to 6%
of GDP a year – as opposed to less than 2%
at that time – for infrastructure to catch
up or keep up with countries that once trailed
it, such as Korea and China. The report added
that while infrastructure had improved in
BENFIELD FACULTATIVE SOLUTIONS NEWSLETTER | SPRING 2008 | ISSUE 09 | PAGE 06
most of LAC over the last decade, a sharp
fall in investment in the sector was hindering
economic growth, poverty reduction and
the region’s ability to compete with China
and other dynamic Asian economies. Using
logistics costs (transportation and storage)
as one example, it added that while these were
about 10% of product value in industrialised
countries, in LAC they ranged from 15%
in Chile to 34% in Peru.
Current projects range from the USD15bn
plus oil and gas initiative featuring the USD5bn
Camperj Petrochemical Complex in Rio
de Janeiro and other strategic projects from
Petrobras, Pemex and Petrojam through to
USD3.2bn of ports and logistics developments
featuring the Buenaventura port projects and
including major highway and inter-modal
logistics in Colombia. A number of projects
in areas such as the Dominican Republic and
Mexico are also looking at renewable energy
generation through such technologies
as bio-diesel, solar farms and wind farms.
Against this background, demand for
construction insurance is increasing significantly,
as is demand for business interruption type
covers including advance loss of profits – for
instance, to protect against situations such
as where a power station does not come
on line as planned. In addition to the need for
significant capacity, interest in the offerings
of international markets is also being prompted
by the desire to tap into the expertise of
insurers versed in some of the state of the art
technologies which are relatively new to LAC.
Separately, the commodity boom has
also created greater awareness of the value
of insurance, partly because there have been
a number of significant business interruption
losses in the region affecting operations
in various business sectors. Recent examples
range from events impacting Brazil’s largest
steelmaker, CSN and Sadia, one of the world’s
leading producers of chilled and frozen
foods through to Chile’s giant food producing
company, Agrosuper.
Given that up to 50% of ceded premium
is being spent on facultative reinsurance,
Latin America is being seen as a growth area
for both facultative and treaty business.
Reflecting this, Benfield is in the process
of expanding its presence in the region
and intends to open further offices in the
near future.
pablo.munoz@benfieldgroup.com