PCRAFI Insurance Program
The Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) insurance program provides climate and disaster risk insurance to member countries in the Pacific region. Its primary aim is to provide a quick injection of cash to help participating governments deliver relief efforts as quickly as possible after a disaster. The PCRAFI insurance program provides parametric earthquake and tropical cyclone insurance solutions that increase the financial response capacity of Pacific Island Countries, helping them to meet post-disaster funding needs without compromising their fiscal balances and development. The insurance provides cash payouts to insured governments within 10 working days after a qualifying disaster event.
Following a successful pilot of the PCRAFI Insurance Program, the PCRAFI Facility was established by legal statute in the Cook Islands on June 10, 2016, to provide the insurance program to Pacific Island Countries (PICs) going forward. The PCRAFI Facility was established as the Pacific Catastrophe Risk Insurance Foundation (PCRIF) that own a group captive insurer, the Pacific Catastrophe Risk Insurance Company (PCRIC).
While the PCRAFI Facility has now taken full ownership of the PCRAFI insurance program, it is now also seeking to expand its product offering by working with domestic insurers in PICs to develop new products to build resilience to disasters at the household level. One such initiative is the development of a household cyclone insurance product for low-income households in Fiji.
Assignment Description
This assignment has two components:
Component 1
Provide brokerage and administration services in connection with the placement of risk transfer contracts for the PCRAFI sovereign parametric insurance program for the period 1 Nov 2018 – 31 Oct 2019.
Expected outputs:
- Advice on risk transfer strategy: The Placing Broker will liaise with the PCRIC Insurance Manager to provide feedback/advice on PCRIC’s long term risk transfer strategy to set clear objectives on risk retention, capital exposure and risk transfer.
- Procurement of risk transfer based on best commercial practices: The Placing Broker will be responsible for all aspects of risk transfer to the traditional reinsurance and/or capital markets according to the risk transfer strategy approved by the Directors of PCRIC. The underlying portfolio of insurance policies for the period 1 Nov 2018 – 31 Oct 2019 are due to be finalized in September 2018, with the risk transfer placement to be executed around mid-October 2018.
- Risk transfer administration: The Placing Broker will be responsible for all aspects of administration related to the risk transfer transaction(s), including but not limited to the following:
- Risk transfer contracts between PCRIC and reinsurers and/or capital market investors will be forwarded by the Placing Broker to the Insurance Manager once fully completed and signed, along with any endorsements, cover notes, etc. The Directors of PCRIC must approve any reinsurance / capital market contracts prior to placement.
- Collection of premiums submitted by PCRIC to the Placing Broker for the reinsurance / capital market contracts.
- Reinsurance / capital market premiums posted to the accounts of reinsurers and/or capital market investors and paid in accordance with terms of trade extended to the Placing Broker.
- In the event of a payout, the Placing Broker will act on PCRIC’s behalf to expeditiously collect amounts due contractually, and post amounts into the account of PCRIC.
- Collection of market intelligence and other market monitoring: including development, implementation and monitoring of reinsurance and/or ART Buying Guidelines relevant to PCRIC.
- Monitoring of reinsurer / capital market investor ratings: The Placing Broker shall continuously monitor the ratings of reinsurers or capital market investors and will promptly replace a provider if their rating falls below the minimum requirements as set out by the Directors of PCRIC.
Component 2
Produce analysis and provide support in the design of a fixed-benefit household insurance product for “bronze” category households in Fiji, working with PCRIC and domestic insurers in Fiji to develop an implementation plan for the launch of the product.
Background
Tropical Cyclone Winston highlighted a major protection gap: 94 percent of houses in Fiji are uninsured against tropical cyclones. The building stock in Fiji comprises approximately 240,000 residential homes (Pacific Risk Information System – PacRIS). With only 15,000 homes (or six percent of the housing stock) purchasing coverage against tropical cyclone, a significant gap in insurance coverage emerges.
The supply of TC coverage within the domestic insurance industry is limited because insurers are unable to secure reinsurance capacity. Insurance companies can only supply property catastrophe insurance for houses of a high construction standard and with a current engineer’s certificate, as this is required by the international reinsurers to provide reinsurance.
The Government of Fiji have requested the World Bank to work with PCRIC and domestic insurers in Fiji on the development of a new insurance product according to the following principles:
- A simple product with limited coverage (for example, up to F$10,000 cover for roof)
- Minimum (but some) construction compliance, such as roof strapping
- Low operating, underwriting and loss adjustment costs: development of a mobile App to allow for self-certification (the insured takes a picture of his roof being strapped) and self-reporting (the insured takes a picture of his damage roof)
- Simple payout structure: partial damage (e.g., F$5,000) and total damage (F$10,000)
- The Government of Fiji may make some premium subsidies available to qualifying households
In order to address the difficulties of domestic insurers securing reinsurance protection, PCRIC has recently established a dedicated cell to reinsure non-sovereign risks in the Pacific. It is the intention that PCRIC will use a proportion of its capital base to provide reinsurance to domestic insurers in Fiji who will issue the insurance policies to households.
Expected outputs:
1. Proposal with supporting analysis of different product design options including information on both product structure, indicative price, and potential capital requirements. The analysis will be based on the output of the AIR Catastrophe Model (provided by the World Bank upon contract signing), although additional factors will include the potential for premium subsidies provided by the Government of Fiji and potential uptake of the product as assessed by domestic insurers. Additional data (beyond the output of the AIR model) may be used to support this analysis.
2. Advice and supporting analysis on what retrocession protection may be available to PCRIC in the international market. In particular:
- Would PCRIC be able to secure retrocession protection for the specific terms of the proposed reinsurance contracts with domestic insurers in Fiji, and if so what pricing may PCRIC be able to achieve for a range of risk retention / risk transfer options.
- If this is not possible, indicative pricing of parametric retrocession protection using the AIR model, and an indication of the potential level of basis risk faced by PCRIC.
3. Summary note on implementation of the insurance product based on the analysis produced and following feedback from the World Bank and domestic insurers on the proposed product structure, pricing, and capital requirements. The note is expected to include required steps for a) domestic insurers to launch the product; b) PCRIC to be able to reinsure domestic insurers and secure appropriate retrocession cover.
4. Analysis of the suitability of the AIR model at the Tikina / Provincial level for this product, with a proposal for future developments to refine the proposed product. The proposal may include (although is not limited to) the development of alternative vulnerability curves for bronze category households which may be combined with the existing hazard module of the AIR model to produce more accurate loss estimates for cyclone events.
Deliverables and timing:
The Government of Fiji has requested an initial design/proposal of the product by mid/end September, to be able to make an announcement of the new product by November 2018.
Proposed milestones are:
17 Aug 2018 - Contract signed and provision of AIR hazard and loss data
31 Aug 2018 - Expected output 1
14 Sep 2018 - Expected output 2
21 Sep 2018 - Expected output 3
5 Oct 2018 - Expected output 4
Request for Expressions of Interest
The Interim and Resident Directors of PCRIC are now requesting Expressions of Interest (EOIs) for the contract of Placing Broker, to be received no later than 11.59pm (Cook Islands local time) on Tuesday 14th August 2018.
EOIs may be submitted via email. While EOIs are to be brief, the following information would be useful to PCRIC in assessing a firm’s ability to meet the requirements of the contract:
- Company background, resources, and relevant experience. Relevant information could include (i) the access and use of catastrophe risk models (ii) industry experience with sovereigns, parametric polices and risk pools (iii) market access
- Brief Examples of current/past assignments, preferably of a similar size and scope
- A statement that the company meets regulatory requirements for placing reinsurance in all of the international risk transfer markets (including traditional reinsurance and alternative / capital markets) on behalf of a Cook Islands-registered captive.
It is not necessary to provide a proposed fee as part of the EOI.
Contract negotiation
Following the conclusion of the EOI period PCRIC will assess the EOIs received and will contact the preferred firm to begin contract negotiations.
Contact
Lesley Katoa, Resident Director PCRIC
Lesley.Katoa@asiacititrust.com