November 20, 2015 by Sara Tatelman
The Republic of Vanuatu, an 83-island archipelago in the South Pacific, gets more trouble than if Job started his own country. Within a month this past winter, the island of Ambrym alone was shaken by a 6.4-magnitude earthquake, saw a volcano erupt for the first time in a century and finally lost most of its subsistence crops to tropical cyclone Pam, one of the worst storms to ever hit the southern hemisphere.
Despite that track record, residents can insure both personal and commercial buildings. Jason Thomas, general manager of QBE Insurance in Vanuatu, told Top Broker that “the highest levels of insurance penetration are concentrated mainly around the urban centres of Port Vila and Santo.” Property coverage in Vanuatu automatically includes earthquake cover, but not for tsunamis. Cyclones are also usually excluded, though extensions for cyclone cover is available if a building meets certain engineering standards.
Homeowners can’t buy coverage for every type of building, however, even without the cyclone extension. “Structures made of traditional materials and informal dwellings cannot be insured,” says Tess Newton Cain, founder of Devpacific Thinknet, a think tank on Pacific island development and a Vanuatu resident. She says other buildings are uninsurable because of their location. “Unfortunately, many structures in Vanuatu are not built to withstand strong cyclones. The insurance industry needs to collaborate with local authorities and businesses, and strengthen efforts to minimize losses by promoting enforceable building standards.”
But not all Vanuatu residents agree with the industry’s view. “Currently, these houses found on the island do not suit the proper way of building,” 80-year-old Simeon Massing told the Vanuatu Daily Post. He believes traditional houses built from wild cane and with deep foundations survive cyclones well and, as more people switch to building modern homes, they’re more likely to be clubbed during a storm by a flying chunk of concrete.
After Cyclone Pam hit, QBE received more than 700 claims, and Thomas says more continue to come in. So far, the insurer has paid more than 260 of them.
Although insurance penetration in Vanuatu is quite low, the national government joined four other island countries in the Pacific Catastrophe Risk Insurance pilot, led by the World Bank. The pooled risk program launched in 2013 and offers immediate financial assistance when a member country experiences devastating earthquakes or tropical cyclones. After Pam, Vanuatu received $1.9 million U.S., the pilot’s second payout. Tonga received $1.4 million U.S. to help recover from Cyclone Ian in January 2014.
The catastrophe-modeling firm AIR Worldwide developed an exposure database for the insurance pilot, which maps what areas of member countries are residential, commercial, agricultural and industrial. After a catastrophe, AIR determines “information such as wind speeds, storm surge inundation and rainfall totals, and overlays it onto the exposure information so they [can] see the value of [what’s] impacted,” says Megan Linkin, a natural hazards expert at Swiss Re, one of the reinsurers backing the project. “And it’s actually the value of this exposure that’s impacted and the estimated damage that determines if the trigger is hit and if so, what the value of the payout is.”
When joining the insurance pilot, each of the member countries chooses their attachment points, or how severe a catastrophe must be in order to trigger payouts, says Olivier Mahul, the World Bank’s head of disaster risk financing and insurance program. While each country’s choice is confidential, they can choose to protect themselves from disasters that typically occur every 10, 15 or 20 years.
On average, annual premiums have been $400,000, says Mahul. Other than the Cook Islands, which paid its premium in full, member countries contributed $20,000 in the second season of the pilot and $40,000 U.S. in the third, and Japan subsidized the rest. Moving forward, Japan will continue to contribute technical assistance and some money to the program, but the countries will still use World Bank financing and make co-payments of $40,000 U.S. to make up the difference.
Both Mahul and Linkin emphasize the program targets immediate disaster relief, not long-term development. “I think the real takeaway from Pam is that the cyclone impacted Vanuatu on March 14 and the government had a payment in less than three weeks,” says Linkin. “So they were able to get an immediate injection of liquidity when they really needed it, which is in the several days and weeks after the event, when recovery is most key.”
While aid organizations and other countries provided in-kind donations, the $1.9- million payout was one of Vanuatu’s first cash injections after Cyclone Pam. The government was free to use the money as it saw fit “because it’s not a pure indemnity structure, where the funds are meant to replace exactly what’s been lost,” says Linkin. Member countries can use the payout to fund overtime medics and police officers, repair damaged infrastructure and buy emergency supplies.
“There are no strings attached to the payment,” says Mahul. However, he explains, when member countries signed up for premium co-financing, they agreed to engage and work with the World Bank on broader risk management and a disaster risk financing strategy. So Vanuatu and other member countries are sharing risk mitigation strategies and developing a post-disaster budgeting execution manual.
But not every member country was satisfied with the insurance pilot. When the Santa Cruz earthquake hit the Solomon Islands in 2013, the country didn’t qualify for a payout, and flooding caused by a tropical depression in March 2014 didn’t lead to help from the insurance pool either. The country later withdrew from the program. “The Solomon Islands are particularly prone to floods,” says Mahul. “The product we are offering right now—tropical cyclone and earthquake—does not exactly respond to their needs. So now the team is working on new products to better assess and better respond to their needs.” While the Solomon Islands’ departure could suggest the program is a failure, Mahul stresses the pilot allowed the country to learn more about disaster risk management and make an informed decision about what insurance programs suited its needs.
“To be truly resilient,” says Linkin, “you need to embrace and understand your catastrophe risks and be ready to address them immediately after they occur.”
4 Reinsurers involved in the Pacific Catastrophe Risk Insurance pilot (Sompo Japan Insurance, Mitsui Sumitomo Insurance, Tokio Marine & Nichido Fire Insurance and Swiss Re)
4 Brokers working in Vanuatu (Aon, Marsh, Willis, Chartered Pacific Insurance Brokers)
1987 Cyclone Uma hit Vanuatu and two New Zealand insurers withdrew from the country
$15.6 million U.S.: total non-life insurance premium in Vanuatu
$67 premium per capita (compared to $342 in Cook Islands and $24 in Solomon Islands)
20% of loss: average cyclone deductible
Sources: World Bank and Pacific Catastrophe Risk Financing Initiative
Copyright 2015 Rogers Publishing Ltd. This article first appeared in the November 2015 edition of Canadian Insurance Top Broker magazine
This story was originally published by Canadian Insurance Top Broker.