Parametric Insurance: A door of opportunity?

Less than a fornight after an earthquake devastated Port Vila on December 17, the Chief Executive Officer of the Pacific Catastrophe Risk Insurance Company (PCRIC) was on a plane to the Vanuatu capital, a US$1.2 million cheque in hand.

PCRIC boss Aholotu Palu says when he arrived, Vanuatu’s Prime Minister told him: “You are the first organisation to arrive here with cash. There are two planes sitting on the tarmac, they flew in with in-kind [support], but this cash is going to assist with our relief effort.”

At the time, Palu noted that although the scale of the physical and financial devastation caused by the earthquake was vast, the cheque “did represent a payout over 73 times the Government’s contribution to the earthquake component of the policy – an outcome for which the government should be applauded”.

In contrast in Tonga, some businesses affected by the Hunga Tonga-Hunga Ha’apai eruption and tsunami of January 2022 are still awaiting insurance payouts.

These experiences have prompted PCRIC and the Pacific Tourism Organisation (SPTO) to agree to work together to improve the tourism sector’s access to insurance.

“We’re providing another door of opportunity,” said SPTO CEO Chris Cocker at the signing of an MOU between the organisations this month.

PCRIC’s work was discussed at a recent tourism roundtable in Tonga, where interest was high, he said. “It was an eye opener” for the Tongan tourism sector to learn this type of insurance was available, Cocker added.

“Many of them are still struggling to get payments, and some of them don’t get payments. So at least there is an option here that they will be able to get some funding, but through Tonga’s premium cover, in this case as a nation, as long as there is commitment from the government that there will be an allocation for the tourism sector.”

PCRIC is legally obligated to provide a macro or sovereign product, which means individual businesses or sectors must work with national governments – more specifically, ministries of finance.

Palu says while that model “works for now”, there is continued refinement and diversification of policy types. “The company started only with two policies, for cyclone and earthquake. Now we have five: flooding, a tsunami standalone policy, and we are rolling out drought with Tonga before the end of the year, and other countries that have expressed interest, especially in the north, because they’re prone.”

PCRIC is also looking at the feasibility of a policy for extreme heat at the request of some nations.
Cocker noted the need for tourism sectors to get agreement between the ministries of finance and tourism, to ensure that when a policy is taken out with PCRIC, there is a specific allocation for tourism.

At the time of writing, Niue—with its one hotel—was the only state that had a policy with a tourism component. Palu says “it is completely up to the Niue government how they calculate the proportion to pay out” in the event of a disaster.

He said the agreement with SPTO is not just a commercial opportunity but is also about education and capacity building. “We were in Solomon Islands a few weeks ago and also in Vanuatu, and we have heard some of the local insurers left … because the cost was too high, and the risk is too high. “That’s on a micro level. So, who is going to provide it? No one is going to serve the countries when disaster strikes.
“I owe it to our Ministers of Finance back in the day that they had very good foresight in creating this sort of facility to respond to this.”

While PCRIC was set up with World Bank backing, the United Nations is the primary backer of the Pacific Insurance and Climate Adaptation Programme (PICAP) launched in 2020. Krishnan Narasimhan and Sheldon Chanel from the UN Capital Development Fund recently wrote that “PICAP’s investments have already begun reshaping the Pacific’s insurance landscape and driving new innovations. 37 new or improved versions of parametric products have been introduced across eight Pacific countries, reaching 44,813 households.”

Last year, PICAP launched a market-driven scheme in Fiji that delivers 20% of the total sum insured before a cyclone hits, “helping households prepare by securing supplies or strengthening homes in advance.” A similar product has just been introduced in Samoa.

However, they acknowledge the ongoing challenges faced by the insurance industry. “To further ‘de-risk’ Pacific markets, UNCDF is working with partners on an insurance guarantee and premium financing
facility that will aim to ease the burden on insurers, stimulate demand by pre-financing insurance premiums through concessional loans, and improve access,” they wrote.