Haiti Earthquake Highlights Climate Change Insurance Mechanism

CCRIF payout to Haiti shows how regional risk management can work for natural disasters related to global warming

Haiti’s earthquake was not caused by global warming. At best, the link between future earthquakes, their increased frequency, and global warming is tenuous. But what’s important about global warming and Haiti has more to do with natural disaster response scenarios. Natural disasters will happen with increasing frequency and developing countries are especially vulnerable.

There is growing recognition amongst risk managers that global warming in the form of climate change will require significant consideration by business managers in future strategic objectives. This includes insuring against climate change. Climate related insurance products can be written into NAPAs (National Adaptation Plan of Action) and NAMAs (Nationally Appropriate Mitigation Actions) for developing countries under the UNFCCC treaty process. Climate change insurance, whether in the form of crop insurance for farmers in developing countries to larger livelihood and disaster planning, still come in pilot project and episodic form.

CCRIF, Caribbean Catastrophe Risk Insurance Facility, is one such mechanism. It is a regional arrangement for 16 countries in the Caribbean to share the costs of rebuilding after natural disasters, like the earthquake in Haiti. The fund was not necessarily meant to combat climate change, but it will help Caribbean countries mitigate and adapt to it in the future. Koko Warner, at UN University in Bonn, said that regional reinsurance facilities like CCRIF are being considered for funding by developed countries to help developing countries face the threat of increased incidence of extreme weather events related to future climate change.

Regionally pooled funds like CCRIF can provide quick finance for disaster recovery, rebuilding, and preventative measures. Post-disaster support is unpredictable and has to do with how long a disaster stays in the public eye. For example, the Tsunami that swept Asia received more coverage by the German press 666 to 66 reports, than the Earthquake in Pakistan in 2005. The aid result is staggering: the Tsunami aid totaled $178 million, while Pakistani Earthquake aid totaled just $8 million.

Oxfam, for example, estimates that they have received enough donor support to fund almost 3 years of work in Haiti. Haiti will likely not run short on aid to rebuild and relieve. But in future, most countries will probably not be as lucky. A recent documentary on Channel 4 (UK) about Haiti’s earthquake explains that most of the world’s urban population live in developing countries in high earthquake risk zones, risk that is documented but has not been sufficiently prepared for. Istanbul, for example, is at high risk for a major earthquake sometime in the next 10-30 years. That’s why CCRIF is important-- it provides a prototype arrangement that can be extended at a international or national regional level.

CCRIF operates on a parametric basis: it establishes a historical record both for hurricanes and earthquakes and calculates a country’s premium based upon that data, and in the case of hurricanes, weighted for 20-30 year Atlantic Ocean temperature variance (i.e. recognizing El Niño and La Niña type phenomenon). The data comes is collected from the US Geologic Survey for earthquakes and National Ocean Atmospheric Association. The models so far do not recognize climate change scenarios because the scenarios are so varied.

Countries chose their level of coverage-- their risk portfolio is distributed between natural disaster events, the minimum option insuring against a 1 in 20 year event. Haiti’s earthquake was a 1 in 150-200 year event and earthquake coverage represented 15% of their CCRIF risk portfolio; in aggregate CCRIF can annually deal with 1 in 1,000 year events. Haiti purchased insurance against 1 in 75 year catastrophes, effectively their premium totaling $385,500, based upon historical record, if the parametric data exceeds 1 in 75 year events, Haiti gets a full payout. For earthquakes, this is the severity of the quake as measured by the moment magnitude scale.

Once the 7.0 magnitude quake struck Haiti on 12 January, CCRIF initiated a parametric verification procedure using data from the USGS and used the data to make initial loss estimates. CCRIF transfered $7,753,579 to the Haitian government on 26 January, after a mandatory 14 day waiting period in which the exact magnitude and location were verified. 14 days is sufficient time for the survey data to “stabilize;” that is, earthquakes can appear at different depths an magnitudes initially. The Haitian government, according to Dr. Simon Young, CEO of Caribbean Risk Managers, spends the funds in a way that it “deems to be of prime importance at this time.”

But CCRIF doesn’t only work as money machine: adapting and mitigating climate change requires a comprehensive approach. A major barrier to implementing parametric insurance for earthquakes, hurricanes, and cyclones is that many developing countries lack historical weather and seismic data.

Dr. Young explains (via email), “independence and transparency in the collection and reporting of the hazard parameters is critical to accessing the most competitive areas of the global markets. It is also important to have the same data set available for some historical period so that event probabilities can be calculated. All investment in data collection for climate change needs to be based not just on following established protocols ... but also needs to include a strong element of data management and making data available.”

CCRIF is partnered with a data collection organization, Caribbean Institute for Meteorology and Hydrology (CIMH), and the Caribbean Disaster and Emergency Management Agency (CDEMA) which will help assess habitat changes that resulted from the earthquake: areas where there are now increased risk to flooding and landslides. These organizations are important, according to Dr. Young because “Collecting data on current climate hazards and impacts, as well as reconstructing data for past hazard events and impacts/losses, is critical for the successful implementation of climate change adaptation risk management.”

CIMH and CDEMA will collect data and monitor conditions in future and make that data available (to other countries) so that Haiti can rebuild it’s infrastructure to withstand future disasters.

Young says (via email) that a lot more work needs to be done, “We did a very quick review of NAPAs completed to date, and only a few (can’t remember exactly how many) refer to risk transfer – and then only in a generic way – so its something that needs to be developed.”

CCRIF by itself is by no means adequate for disaster recovery. When asked if Haiti was adequately insured, Young answers, “No.” The Inter American Development Bank estimates that rebuilding Haiti will cost $14 Billion. The UNFCCC process will need to include mechanisms like CCRIF as part of a larger, comprehensive and transparent adaptation and mitigation strategy.