A Case for Disaster Risk Management & Mitigation

This article was inspired by the quoted words of Eugene Skerritt: “There is a need for a new economic model for small island states with small populations. We are one major storm away from possible total evacuation if we do not have adequate funds.”

Introduction

Natural disaster occurs when an extreme event of nature overwhelms a country or a region and seriously affects social conditions, economic infrastructure, and business activities in the surrounding society. Natural disasters can cause human casualties and economic losses in private assets and public infrastructure.

The economic losses of natural disasters are both direct and indirect. The direct losses arise from physical destruction of economic assets; including private dwellings, small business properties, industrial facilities, as well as public infrastructure assets such as roads, bridges, harbors, airports, telecommunication networks, power plants, hospitals, schools, and administration. The indirect losses arise from the disruption of business activities in the wake of natural disasters due to resource shortages, production stops, weakened demand, broken distribution channels, and failing business interactions.

The Latin American and Caribbean region is highly exposed to natural disasters. The social and economic impact of these events has been historically very significant and it is showing an increasingly growing trend. As recent as September 2017, the spate of category five (5) hurricanes, namely Irma and Maria, created catastrophic effects on Antigua and Barbuda, Dominica, French and Dutch St Martin/ St Maarten, Anguilla, the British Virgin Islands, US Virgin Islands, Puerto Rico and the Turks and Caicos Islands just to name a few.

Montserrat has had its fair share of natural disasters with the Great Flood in the early 1980s, Hurricane Hugo in 1989, and the Volcanic Crisis which started in 1995 coming immediately to mind. Therefore, there is a need for Montserrat to adopt a new economic and financial model to mitigate the financial effects of natural disasters.

While natural disasters such as hurricanes, earthquakes and volcanic eruptions cannot be prevented, certainly there are steps which Montserrat as a country can take to mitigate the effects of natural disasters. The following represents a non-exhaustive list of disaster financial risk management practices that Montserrat as a small island state can undertake to mitigate, and or respond to disasters:

• Caribbean Catastrophe Risk Insurance Facility (CCRIF)

There is an old saying that says; “god helps those who help themselves”.  The CARICOM countries in 2007 decided to assist themselves in terms of disaster financial risk management in 2007, with the formation of the Caribbean Catastrophe Risk Insurance Facility (CCRIF). CCRIF is the first multi-country risk pool in the world, and was the first insurance instrument to successfully develop parametric policies backed by both traditional and capital markets.

CCRIF was designed as a regional catastrophe fund for Caribbean governments to limit the financial impact of devastating hurricanes and earthquakes by quickly providing financial liquidity when a policy is triggered. CCRIF offers earthquake, tropical cyclone and excess rainfall policies to Caribbean and Central American governments.

CCRIF helps to mitigate the short-term cash flow problems small developing economies suffer after major natural disasters. CCRIF’s parametric insurance mechanism allows it to provide rapid payouts to help members finance their initial disaster response and maintain basic government functions after a catastrophic event.

The members of CCRIF are Anguilla, Antigua & Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, Nicaragua, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, Trinidad & Tobago, Turks & Caicos Islands. Strangely, Montserrat is not a member of the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

The fact that Montserrat is not a member of CCRIF leaves the country exposed, and at the mercy of the UK Government and other regional and international aid donors in terms of funding to respond to natural disasters. This fact creates a state of dependency in terms of responding to disasters. It is therefore advisable for the Government of Montserrat to explore membership of Caribbean Catastrophe Risk Insurance Facility, which would entail the payment of an annual premium which could be factored into the GoM annual financial budget.

Of great note in the recent payouts of CCRIF in September 2017 alone,  in response to the catastrophic damages created by Hurricane Irma and Maria on CCRIF member countries.

1. 1. St. Kitts and Nevis – Tropical Cyclone Irma -US$2,294,603
   2. Anguilla- Tropical Cyclone Irma –US$6,529,100

• Anguilla – Tropical Cyclone Irma -Excess Rainfall policy- US$158,823

1. Antigua & Barbuda – Tropical Cyclone Irma- US$6,794,875
2. Turks & Caicos Islands – Tropical Cyclone Irma –US$13,631,865
3. Turks & Caicos Islands – Tropical Cyclone Irma -Excess Rainfall policy -$US1 232,767
4. The Bahamas – Tropical Cyclone Irma -Excess Rainfall policy -$US234,000
5. Dominica – Tropical Cyclone Maria – $US19,294,800

• The Government of Montserrat Contingency Fund

My research suggests that in financial year 2013/ 2014 the Government of Montserrat in conjunction with DFID established what is known as a ring-fenced Contingency Fund (of EC$2.5m) following a series of in-year calls on additional DFID funds by GoM to meet unexpected, unbudgeted liabilities (such as from legal pay-outs). The use of the Contingency Fund was governed by a protocol that requires pre-approval by DFID, before draw-down takes place.

In fact, in the financial aid package agreed upon between the GoM and DFID for financial year 2013/2014, the quoted text was noted “Up to the lower of £0.6 million and EC$ 2.5 million ring-fenced budget support to allow the Government of Montserrat to operate a Contingency Fund”.

The nature of expenditure to be covered under the established Contingency Fund was as follows:

1. Unforeseeable and not of a repetitive nature; or
2. Unavoidable and cannot be postponed to include expenditure that is
3. Of a life threatening nature
4. Will cause severe human, material, economic or environmental suffering or loss
5. Is of a compelling need and in the public interest

I do not agree that pre-approval from DFID should be required for usage of the Contingency Fund as I believe that the Financial Secretary should be empowered to make a determination on the said matters. However, what is clear from the above proposed usage of the Contingency Fund, was that Disaster Financial Risk Management was part of the thinking behind the establishment of the fund.

Therefore, the removal of the Contingency Fund from the budgetary chart of accounts of the GoM by the PDM Administration during the 2016/2017 financial budget is reprehensible.  No explanation can suffice in this regard, given the nature of Montserrat existing with a currently active volcano; positioned in the Leeward Islands which is highly exposed to hurricanes.

As it stands at this moment the GoM is exposed, in the sense that it does not have any monies set aside in its budget to cover the preparation for, or after effects of disasters, such as hurricanes on Montserrat. There is an urgent need for this to be rectified given what we have seen in the Caribbean region in September 2017 alone.

• Insuring Government Buildings, Vehicles and Other Assets

It is my understanding that the GoM has maintained a practice over the years of not insuring its assets to include buildings, vehicles and other capital assets in its usage. It is my belief, that this practice may have been instituted as a cost saving measure,  taking into consideration the power of the state to raise or find monies to repair or replace assets. Further, the GoM may have gambled with the fact that damage to assets may be few and far between, and can be accommodated upon occurrence.

Notwithstanding, the above practice of the GoM of not insuring its assets can be viewed as an imprudent financial practice as it runs the risk of creating a charge on the public through increase taxes, or dependency on aid agencies such as DFID to provide funding either to repair or replace these assets in the event of a disaster. This is even more urgent, given the increasing and extensive damage to properties and assets created by the recent hurricanes.

• Promoting General Insurance to All Households

All the financial institutions operating in Montserrat require their members to hold general insurance coverage over assets such as property and vehicles which are financed via debt and mortgaged. That in itself represents a good thing for  Montserrat in the sense that a large proportion of the assets in Montserrat, owned by households in the country are insured.

However, there are sizable portions of the population that own assets that are not mortgaged and not insured. The Government in conjunction with the insurance companies need to find an effective and efficient way to promote insurance as a financial risk management tool for individuals who own assets in Montserrat.

• Effective Regulation and Supervision of the Insurance Sector

There have been issues locally and regionally related to the effective regulation of the insurance sector. These issues have been precipitated in part by the collapse of the CLICO/BAICO Insurance Group in 2009-2010. Locally also, the insurance sector has had its challenges with insurance companies becoming footloose as a result of the destruction created by the volcanic crisis.

In my humble opinion the local Financial Services Commission (FSC) has done an excellent job in terms of regulating and supervising the local insurance sector post the volcanic crisis error, given its limited resources. Most naturally there would be challenges in terms of supervising insurance companies locally, given that most of  insurance businesses on Montserrat operate via agents, branches or brokers of parent companies domiciled outside of Montserrat. This will present issues as it relates to cross border regulation and supervision.

In October 2014, the Monetary Council of the Eastern Caribbean Central Bank (ECCB) resolved to appoint a dedicated Steering Committee to coordinate activities leading to the establishment of a single insurance market and regulator for the Eastern Caribbean Currency Union (ECCU). The objective of the Project is to create a single, integrated, efficient and well-regulated insurance and pension fund market in the ECCU. This market will be regulated by uniform IAIS2 benchmarked Insurance legislation, and overseen by a single well-resourced regulator, which is expected to dramatically simplify and lower the cost of insurance regulation in the ECCU.

The project is expected to create a common financial space for the insurance and pensions industry. For example, a licence issued under the new law will make an insurer eligible to exercise a passport right to operate in all territories that are participating in the single market.

Peter D. A. Queeley

Economic and Financial Analyst