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PΓotectingPaΓadise

Opportunitiesfor insurancetosupportmarine-basedandcoastaltourismintheCaribbean

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PRBLUE

HEALTHYOCEANHEALTHYECONOMIES·HEALTHYCOMMUNlTES

2ProtectingParadise

?2024InternationalBankforReconstructionandDevelopment/TheWorldBank

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ProtectingParadise

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Acknowledgments

ThisreportwasmadepossiblebytheprovisionoffundsfromthePROBLUEMulti-DonorTrustFund,administeredbytheWorldBank.

ThisreportwaspreparedundertheguidanceandsupervisionofYiraMascaro?(PracticeManager,Finance,CompetitivenessandInnovation,LatinAmericaandtheCaribbean),ItwasdevelopedundertheleadershipandcoordinationofSamanthaCook(SeniorFinancialSectorSpecialist),withinputsfromRenataKochAlvarenga(Consultant,ELCFN)andBrianOwens(SeniorInsuranceConsultant,ELCFN).

Thereportcontentdrewondatafromcountry-specificandregionalreportsofAxcoInsuranceInformation,aswellastheCaribbeanCatastropheRiskInsuranceFacilitySegregatedPortfolioCompany(CCRIFSPC).

ThereportalsobenefittedfromcommentsandguidancefromMonicaParraTorrado(SeniorEconomist),JulianaCasta?o-Isaza(MarineNaturalResourcesManagementSpecialist),andBrendenJongman(SeniorDisasterRiskManagementSpecialist).

Coverphoto:TomPerry_WorldBankFlickr

ThereportwaseditedbyAnneHimmelfarbanddesignedbyX-TempoCommunications.

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ProtectingParadise

TableofContents

ABBREVIATIONS6

EXECUTIVESUMMARY7

Keyfindings 9

BACKGROUND10

INSURANCEINTHECARIBBEAN12

IndemnityversusParametricInsurance 14

DomesticInsuranceMarketsinCaribbeanIslands 15

ProductChallengesandOpportunities 20

TheReinsuranceMarket 22

BIODIVERSITYINTHECARIBBEAN24

BiodiversityandtheTourismIndustryintheCaribbean 25

ConnectingInsurancetoBiodiversityProtection 28

InsuringRiskfromCoastal-BasedTourism 30

EXAMPLESOFINNOVATIVEINSURANCE

INSTRUMENTSFROMAROUNDTHEWORLD32

Nature-BasedInsurance 34

Forecast-BasedInsurance 36

CommunityParticipationInsurance 36

InsuranceforTargetedBeneficiaries 36

Bonds 37

Conclusions 38

KEYFINDINGSANDRECOMMENDATIONS39

KeyFindings 39

Recommendations 42

ANNEXES44

Annex1–ListingofSelectedLargerLocal&RegionalInsurersOperatingbyCountry 44

Annex2–OverviewofCaribbeanInsuranceOfferings 46

Annex3–TheSixCCRIFSPCInsuranceProducts 59

Annex4–TypesofInsuranceintheCaribbean 50

Annex5–AnalysisofPerilInsuranceCoverageintheCaribbean 51

REFERENCES52

ProtectingParadise5

TABLES18

Table1.ComparisonofKeyInsuranceMarketStatistics 18

Table2.PotentialReasonsforLimitedNon-LifePropertyPremiumsand

PenetrationinCaribbeanCountries 20

Table3.RecentEventsandReinsuranceinSelectedCaribbeanCountries 23

FIGURES22

Figure1.TransferringRiskintheReinsuranceMarket 22

Figure2.EmploymentintheTourismSectorasaPercentageofTotalEmploymentin

CaribbeanIslands(2022) 26

Figure3.LevelofDisasterPreparednessamongCaribbeanTourismIndustryFirms 28

Figure4.InsuranceCoverageofTourismFirmsintheCaribbean 30

Figure5.DesignoftheRISCOProduct 35

BOXES12

Box1.TheInsuranceProtectionGap 12

Box2.CaribbeanCatastropheRiskInsuranceFacility 14

Box3.TheBlueEconomyintheCaribbean 16

Box4.RiseofEcotourism 26

Box5.Nature’sRoleinDisasterRiskReduction 29

Box6.ImpactsofDisastersontheCaribbeanTourismIndustry 31

Box7.AHybridInsuranceProductBasedonMangroves 33

Box8.ReefProtectionInsuranceandtheTourismIndustry 34

Box9.TheClimateRiskAdaptationandInsuranceintheCaribbean(CRAIC)project37

PHOTOCREDIT:VILLEMAIN,UNEP

ProtectingParadise

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Abbreviations

BI

CATBond

CATXOL

CCRIF

CRAIC

GDP

LPP

NFIP

RISCO

SIC

SIDS

SPC

XCD

BusinessInterruption

CatastropheBond

CatastropheExcessofLossReinsurance

CaribbeanCatastropheRiskInsuranceFacility

ClimateRiskAdaptationAndInsuranceintheCaribbeanGrossDomesticProduct

LivelihoodProtectionPolicy

NationalFloodInsuranceProgram

RestorationInsuranceServiceCompany

StateInsuranceCompany(AntiguaandBarbuda)

SmallIslandDevelopingStatesSegregatedPortfolioCompanyEasternCaribbeanDollar

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ExecutiveSummary

PHOTOCREDIT:FREYAMORALES,UNDP

Highlydependentontourismforitseconomicdevelopmentandfinancialhealth,theCaribbeanregionurgentlyneedstoprotectitsnaturalecosystemsandbiodiversityfromclimatechangeimpactssuchasincreasinglyfrequentandintensenaturaldisasters.Majorfloods,storms,andhurricanesinrecentyearshaveshownthatdisastersleadtotremendouslosses,notonlyinthenaturalworld,butamongmultiplebusinessesandindustries—especiallythosethatrelyonthehealthoftheenvironment,suchastheCaribbeantourismindustry,whichdependsoncoastalecosystemsandmarineresources.IntheEasternCaribbean,tourismaccountsfor50percentofregionalgrossdomesticproduct(GDP)andabout40percentofemployment(WellensteinandConnors2022).

TheeconomicandfinanciallossesthatresultfromnaturalhazardshaveleftCaribbeanislandswithmultiplechallengesandlimitedfinancialcapacitytocopewithclimateshocks.Someofthemainimpactsofclimatechange,suchas

beacherosion,sea-levelrise,andintenseflooding,disproportionatelyaffectcoastalcommunitiesandthreatentheblueeconomyofthetourismsector.Climatechangeimpactshaveaffectedbothinfrastructureandthenaturalresourcesthatenabletourismtocontinueandthrive.

Thereisuntappedpotentialtoutilizeinsuranceproducts,andinparticularinnovativenature-basedsolutions,toreducedisasterriskandincreaseclimateresilienceintheregion.CoastalareasintheCaribbeancanserveasnaturaldefensesystemsforprotectionagainstclimatechange,andtheinsuranceindustrycouldleveragesuchsystemsaspartofintegratedsolutionsthatprotectbusinessesamiddisastersandthatfostersustainabletourism.Somesmallpilotsalreadylaunchedaroundtheworldshowcasehowinnovativeinsuranceproductscannotonlyreducethefinancialriskofdisastersbutalsoengagelocalcommunitiesinprotectingandrestoringnaturalhabitats.

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parametricinsurancepolicycombinedwithasovereigndebttransaction(abluebond)wasplacedonthemarketforUS$364million.ThebluebondwasarrangedbyCreditSuisse,andthe“catastrophewrapper”wascreatedbyWillisTowersWatson(withriskcapacityprovidedbyMunichRe)asinsuranceprotectionforBelize’sloanrepaymentsafterhurricaneevents.Thecatastrophewrapperhelpssafeguardthecountry’s20-yearsovereigndebtstructure,whiletheparametrictransferofriskstrengthensBelize’ssustainabilityandresiliencetoclimateshocks,therebyhelpingtopreventcreditratingdowngradesandreducingthetimeittakestheeconomytorecoverfollowingashock(CookandHolliday2022).

Thisreportexploresthecaseforintroducinginnovativeinsuranceproductsforbusinesseswithinthetourismindustrythatleverageandconservecoastalandmarineecosystems.ItpresentsanoverviewoftheinsurancemarketintheCaribbean,ananalysisofthepotentialofinsuranceproductstoprotectnaturalassets,andaconsiderationofinternationalexamplestobeappliedintheregion.Insurancehasgreatpotentialtomitigatedisasterrisk,butrealizingthispotentialwillrequireinvestingineducationtoexpandinsuranceuptake,drawinglessonsfrompriorexperiences,minimizingfinancialburdens,exploringnewproductsandtypesofinsurance,ensuringthatsolutionsarescalable,andimprovingquantitativetoolsanddata.

ThetourismindustryisakeysourceofincomeintheeconomyoftheCaribbean,andtourismactivitiesthatdependonnatureareparticularlyimpactedbyhazardevents,whichhaveimmediateharmfuleffectsonthenaturalenvironment,thispresentsacasetoexploreBIinsuranceinthissector.WhileInsurancecoverageintheCaribbeantourismindustryisquitehigh;thecovervariesbycountry(Rozenbergetal.2021).GrenadaandSt.Luciaaretheislandswiththemosttourismfirmscoveredbyinsurance.Mostfirmsintheregionhaveassetlossinsurance,andveryfewhaveliabilityinsuranceorincomeloss(BI)insuranceinplace.

Nature-basedfinancialsolutionscanbeaninnovativewaytoprotectmarinebiodiversityinlightofclimatechangeimpactsandinsurancecan,andhasbeendesignedtosupportmarineconservation.

Insurancetiedtoecosystemsiseffectivebecausethesefinancialsolutionscannotonlymitigateriskstotheenvironmentbeforeadisasterhappens,butalsorepairdamagetonaturalassets,bringingpositiveoutcomesfornatureandtheCaribbeanpopulation(TheNatureConservancy2024).Someexamplesofriskmitigationbynaturalassetsincludecoralreefsandmangroves.Coralreefsreducealmost100percentofwaveenergy,andthuscandecreasethedamagecausedbystorms.ThepresenceofmangrovesavoidsaroundUS$65billioninannuallossesfromfloodsandstorms,mostlyrelatedtotropicalcyclones(EarthSecurity2022).

Someinnovativesolutionshavealreadybeenlaunched,suchastheBelizeBlueBond,apioneeringinitiativeformarineconservationthroughdebtrestructuringandinsurance.InDecember2021,a

ProtectingParadise9

KEYFINDINGS

Thisreportfindsthatinsurancecanbedesignedtoincentivizenature-basedadaptationandhelprepairnaturalassets,presentinganopportunityfortheCaribbeantourismindustrytoadoptinsuranceasakeystrategytoreducedisasterriskandmeetpostdisasterfundingneeds.Todate,themainfocusofinsurersintheCaribbeanhasbeenontraditionalassets(residential,commercialindustrialbuildings).However,Insurancemarketsintheregionareslowlygrowing,butgiventheincreasingintensityofhurricaneseasonsintheCaribbean,innovationwillbeanimportantstrategytosafeguardthefutureofCaribbeansmallislanddevelopingstates.

Morehigh-qualitydataandriskmodelsareessentialtodevelopinsurancepoliciesthatsupportthedevelopmentofinsuranceproductsforcoastalandmarineecosystemsthatfostersustainabletourism.Theuseofmoreaccuratehistoricaldatatodevelopnewproductsiskeynotonlytoincreasingefficiencyandeffectiveness,butalsotoprovidingmorereasonablypricedinsurance.Thisisbecauselessaccuracy(duetolackofdata)willgenerallyincreaseinsurancepremiumstocompensateforuncertainty(MunichClimateInsuranceInitiative2020).Parametricproductscouldincludeecosystemsandprioritizeconservationandrestoration,orhybridinsuranceproductsthatincludeaparametrictrigger(tosatisfytheparametricinsuranceguidelines)andalsorequireproofofactualloss(basedonaclaimliketraditionalinsurance)couldandshouldbeexplored.

Communitiesplayanimportantroleinbuildingclimateadaptationandresilienceandinreducingdisasterrisk,andtheirparticipationininsurance

productscanbringmanybenefits,includingtheincreaseofinsurancepenetrationacrosstheCaribbean.

AsseenintheNFIPintheUnitedStates,communitiescanbeincentivizedtocollaborateineffortstoreduceriskandfosterclimateresilience.TheNFIPnotonlyprovidesfloodinsurancetoat-riskcommunities(specificallypropertyownersandbusinesses),butitinvitesthemtobecomeactiveparticipantsinimplementingfloodprotectionactivitiesthroughtheCommunityRatingSystem.Thistypeofarrangement,whichoffersdiscountstocommunitiesthatworktoreducerisk,couldbepartofvariousinsuranceproducts,eveniftheyfocusondifferentperilsorareas.

InsuranceregulatorsshouldworkwithgovernmentsandindustryacrosstheCaribbeanregiontostimulategrowthinthecommercialandindustrialinsurancesectorsandputinplacekeyregulations.Financialincentivescouldbeusedtoencourageinvestmentinnewproductsandenhancecompetition,whileindustryassociationsandgovernmentcouldcollaborateonproductpromotion.Additionally,industryandregulatorsshouldseizethechancetobebold.

Innovationisneededtopioneerinsuranceproductsfornature-basedsolutionsandbiodiversityprotection.Innovativeinsuranceproductsaroundtheworldareprovingeffectiveinreducingdisasterrisk,andtheycouldbeadoptedintheregiontomitigatetheimpactsofdisastersonbiodiversityandnaturallandscapesandtoallowthetourismsectortobuildresiliencetoclimatedisasters.Thereisanuntappedopportunitytogrowthecommercialandindustrialinsurancemarketshorizontallythroughundersoldandinnovativecoveragesandproducts.

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ProtectingParadise

Background

Asnaturaldisastersandextremeweathereventsbecomemorefrequent,intense,andcostlyaroundtheworld,climate-vulnerableregionsliketheCaribbeanareespeciallyaffected.TheCaribbeanisthesecondmostdisaster-proneregionintheworld,withrecurrenthurricanes,flooding,andmanyothertypesofdisasters,anditisnowatthecenteroftheclimateemergency.ForcountrieswithhighlevelsofindebtednessliketheCaribbeansmallislanddevelopingstates(SIDS),climate-relateddisastershaveonlydeepenedfinancialvulnerabilityandoverallrisk,inturnimpactingtheinsurancesector.

Biodiversitylossisdirectlyassociatedwithclimatechange,andeachhasimplicationsfortheother:increasingclimatechangeimpactswillresultinmorebiodiversityloss,andthislosswill

PHOTOCREDIT:TOBINJONES,UN

haveasignificantimpactontheclimatecrisisasnaturalassetsdisappear.TheCaribbeanisabiodiversityhotspot,hostingmanyspeciesthatareendemictotheregion.Ithosts10percentoftheplanet’scoralreefsandaround1,400speciesofmarinemammalsandfish(NOAA2024).Climate-relateddisastersacrossCaribbeanislandsareincreasinglythreateningtherichanduniquebiodiversityofthispartoftheworld(BahamasDepartmentofStatistics2015).

Biodiversityplaysacriticalroleintheregionaleconomy,anditslosslimitstheservicesthatecosystemscanprovidetotheeconomy,includingmarineandcoastal-basedtourism.Forexample,tourisminTheBahamas(whichreliesinlargepartoncoastalareas)isestimatedtocontributetoaround50percentofthecountry’sgrossdomesticproduct(GDP),and

ProtectingParadise11

Thisreportexploresinsurance’sroleinsupportingmarine-basedandcoastaltourismintheCaribbean.Thefirstsectionpresentsadetailedanalysisoftheinsurancemarketin10Caribbeancountries,basedondatafromAxco,andidentifieschallengesandopportunitiesintheregionalanddomesticinsuranceindustry.Thenextsectiondiscussestheimportanceofnaturalassetsandbiodiversityfortourismandtheeconomyasawholeintheregion,andlooksattheroleofinsuranceinprotectingthesenaturalresources.ThethirdsectionreviewsinnovativeglobalproductsandconsiderstheirrelevancefortheCaribbean.Finally,thelastsectionpresentskeyfindingsoftheresearchandmakesrecommendationsforCaribbeangovernmentsandthetourismandinsuranceindustries.

itemployshalfofthecountry’sworkforce(USDepartmentofState,2020).Changestomarineareascoulddamagethisvitalindustrybydecreasingthenumberoftouristswhovisitanaturallandscape.Thesechangescanalsoimpactthenaturalresourcesavailabletothosewhorelyoncoastalareasfortheirwork,forexample,duetotheincreasedvulnerabilityoffoodproductionsystemsandtheclimateimpactsontheavailabilityofmarinefisheries.

Inthelast70years,theCaribbeanregionhasexperiencedover400largedisasters,mainlyfloodsandtropicalstorms,whichareintensifyingyearlyduetoclimatechange.1Recently,CaribbeanislandshavefacedseveralCategory5hurricanes,includingHurricanesIrmaandMaria(2017),HurricaneDorian(2019),andHurricaneBeryl(2024).Theregionitself,composedofsmallislands,hasspecificphysicalcharacteristicsthatincreaseitsvulnerabilitytotheseextremeevents;itspopulation,especiallypeoplelivinginlow-lyingareasclosetosealevel,islikewisehighlyvulnerable.TheincreasedfrequencyofdisastersasaresultofclimatechangehasdeeplyimpactedCaribbeancountries’populations,businessesandkeyindustries,ecosystems,andeconomies.

Giventhiscontextofvulnerability,theCaribbeanislandscannotaffordtorelyonlyonpost-disasterfinancingstrategies.Withoutpre-arranged(exante)financinginstrumentssuchasinsuranceandpre-financingfacilities,vulnerablecountriesareoftenforcedtoreallocatetheirbudgetstodealwiththeaftermathofadisaster,thusshiftingfundsawayfromkeysocialandeconomicdevelopmentareas.Insurance—afinancialtoolarrangedaheadofdisasterstomanagetheexpenseofrisksthatareusuallypredictable—canhelpoffsetthesepublicsectorexpenses.

PHOTOCREDIT:YUTAKANAGATA,UN

1-Between1970and2019,abouthalfofalldisastersaroundtheworldwereweather,climate,andwaterhazards,andclimate-relateddisastersaccountedforover70percentofallreportedeconomiclosses(WMO2021).

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InsuranceintheCaribbean

PHOTOCREDIT:STUARTPRICE,UN

Insurancehasakeyroletoplayinmitigatingandadaptingtothechallengesposedbyclimatechangeandisanimportantfinancialprotectionmeasurefordisaster-proneregionssuchastheCaribbean.Insurancecanhelpincentivizeriskreductionbyensuringthatassetsmeetminimumstandardsandbypromoting“buildbackbetter”policiesafteranevent.Parametricinsurancecanbeanefficienttoolforquickpayoutsafteranemergency,whenfundsareneededmosturgently.BydeliveringimmediateliquiditytoCaribbeangovernments,parametricinsurancesupportsreliefandreconstructioneffortsandmitigatestheoftenlargefinancial impactsofclimatedisasters.

InsurancehasbeenintheCaribbeansincethe1960s,butseveralfactorshaveledtostructurallimitationsintheinsuranceindustry,includingthehigh

costsofpremiums,relativelyhighexpenseratios,limitedproductofferings,andhighdependenceonreinsurancetomanagecapital,earnings,andtheimpactsoflosses.

Consequently,theinsurancemarketsintheregionarenotfullydeveloped.However,theydoofferasignificantopportunityfornewproductdevelopmenttodriveadditionalgrowth.

Reducingthenumberofuninsuredassets—alsoreferredtoas“closingtheinsuranceprotectiongap”—isavitalwayofbuildingclimateresiliencethroughtheinsuranceindustry.Thefinancialgapbetweeninsuredanduninsuredlossesisafocusoftheinsuranceindustryandregulatorsaroundtheworld,givenitshighcostandstrongimpactinapost-disasterscenario(SwissRe2018).Seebox1fordetails.

ProtectingParadise13

Box1.TheInsuranceProtectionGap

Theinsuranceprotectiongapmeasuresthedifferencebetweentheactualinsurancecoverageinacountryandtheoptimalinsurancecoverage;itprovidesinformationonuninsuredlossesinthecontextofadisaster.Duetovarioussystemicfactorsdescribedinthisreport,insuranceonlypartlycoverseconomiclossesfromrecurrentdisastersintheCaribbean.

InsuranceregulatorscouldplayakeyroleinclosingtheprotectiongapintheCaribbean,asthelackofaclearregulatoryframeworkinthisareaisamongthemainchallengesfacingtheregion’sinsurancemarket.Anotherchallengeisthelackofawarenessofinnovativeinsuranceproductsthatcouldhelptoreducetheprotectiongap,especiallyinthecontextofbiodiversityprotectionandnature-basedsolutions.

economicchallengesintheCaribbeanandtheconsequentlowinsurancepenetration.Thiscorrelationisalsoreflectedintheannualpremiumpercapita,whichaccordingtoAxcoiscomparativelylowintheCaribbean,rangingfromUS$136(inBelize)toUS$970(inTheBahamas).

Becausecoverforclimatecatastrophe–relatedlossesisoftenprovidedaspartofoverallpropertyinsurancepolicies,theregion’srelativelylowpropertypenetrationlimitscountries’capacitytorelyoninsuranceintimesofcatastrophe.

Inaddition,manyeconomicassetsandinfrastructurefortheCaribbeantourismsectorarelocatedinhigh-riskareasthatarepronetofloods.Thusthelackofpropertyinsurancecoverage,coupledwiththechallengesaroundhigh-riskproperties,constrainstheresponsethattheCaribbeanfinancialsectorcanofferintheaftermathofdisastersandcontributestoalackoffinancialresilience.

InmanyCaribbeancountries,thelevelofpropertyinsurancepenetrationislowtomoderate;accordingtoAxcodata,itrangesfromjustover2percentinTrinidadandTobagoto4.2percentinAntiguaandBarbuda.Ausefulmeasureoftheuptakeof insuranceinthemarketsisthetotalwrittenproperty-relatedpremiumasapercentageofthesizeoftheeconomy(throughGDP).Thisfigureisreferredtoasinsurancepenetration(seethesubsectionentitled“InsurancePremiumsandPenetrationbyCountry”formoreinformation).InsurancepenetrationandGDPareconsideredpositivelycorrelated;asacountryanditscitizensbecomericher,thenumberandvalueofprivateassetscoveredbyinsurance increases,whichcanbeassociatedwiththe

Ithasbeenaround20yearssincedisasterriskfinancingapproachesstartedemergingintheCaribbean,mainlyafterHurricaneIvan(2004)andthesubsequent(2007)launchoftheCaribbeanCatastropheRiskInsuranceFacility(CCRIF)2.WiththepresenceofCCRIFintheregion,therehavebeenincreasedeffortstopromotedisasterandclimateriskinsuranceandsomitigatetheriskfromrecurrentdisasters(MunichClimateInsuranceInitiative2020).

AstheCaribbeaneconomiescontinuetogrow,insurersoperatingintheregionhaveanopportunitytoinvestinproductinnovationtoincreasetherangeofproductsavailable.Thisisparticularlytrueinthecommercialandindustrialsegmentsofthepropertymarkets;astheyrepresent50–70percent

2-CCRIFwasrestructuredin2014asasegregatedportfoliocompany(SPC).

14ProtectingParadise

ofanevent(hurricanewindspeed,rainfallvolume,etc.)and/orthecalculatedlossoftheevent.Whentheeventmeetsorexceedsthepre-determinedparameterthresholds,thepayoutcanbereleased.Thebest-knownproviderofparametricinsuranceintheregionisCCRIFSPC;asofmid-2024,19CaribbeancountriesaremembersofCCRIFSPCandhaveparametricinsurance.

Atthesametime,theuptakeofparametricproductsbydomesticinsurersintheCaribbeanregionislimited.AccordingtoAxco,theredoesnotappeartobemuchuseofdomesticparametricproducts.Althoughmarketshaveaccesstothem,traditionalindemnityinsuranceproductsaremorewidelyusedfornonresidentialassets.Attheregionalorinternationallevel,moresophisticatedparametriccatastropherisktransferoptionsareavailable,suchascatastrophe(cat)bondsandregionalinsurancefacilities,likeCCRIFSPC.FormoredetailonCCRIF’sroleinhelpingCaribbeancountriesrespondtodisasters,seebox2.

ofthepropertymarketinanumberofcountries,theyhavethepotentialforoutsizegrowth.Althoughinsurerswouldlikenotcoverproperties