Case Study: Caribbean Catastrophe Risk Insurance Facility and Anguilla Electricity Company

 Project Rationale

The aftermath of severe weather events in the early 2000s prompted a need for a multi-national facility that could transfer risk and provide rapid liquidity relief to sovereign countries in the Caribbean. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) was founded and capitalized in 2007 by a consortium of sovereign countries and multinational entities. To maximize the speed of payouts, CCRIF developed a parametric insurance model funded by traditional and capital markets. Unlike indemnity insurance, parametric insurance distributes funds based on pre-established triggers, which significantly reduces the time needed to distribute relief funds (see Figure 5 and Figure 6 below for more information). CCRIF’s earliest policies focused on earthquakes and tropical cyclones.^[i]

Over the next decade, CCRIF provided nearly $200 million in rapid liquidity to Caribbean member states. CCRIF also adapted its parametric insurance model to develop new offerings for other types of weather events, such as excess rainfall. In 2014, CCRIF restructured by separating its policy offerings into different portfolios, which reduced risk across offerings, and began to offer products to Central American countries in 2015.^[ii] CCRIF’s vision to offer rapid liquidity for other entities set the stage for its development of an electrical utilities policy.

In 2017, Hurricane Irma hit the British island territory of Anguilla with class 5 force, damaging public and private buildings, closing schools, and making most roads impassable. The hurricane almost completely destroyed the electrical transmission and distribution networks of the island’s sole electricity provider, Anguilla Electricity Company (ANGLEC), producing cascading failures across other basic services such as the hospital and the island’s vital desalination plant.^[iii]

With the assistance of international aid, ANGLEC was able to restore power to hospitals and a few other critical facilities on the island within a few days. Most Anguillans remained without power for weeks or months. Although the power restoration was accelerated by sound leadership and international support, ANGLEC leaders noted that the lack of rapid access to funding hindered the speed of the recovery process and strained its recovery.^[iv] ANGLEC quickly burned through its $5.9 million USD reserves. Total recovery costs exceeded ANGLEC’s reserves by almost fourfold.^[v]  

ANGLEC’s experience following Hurricane Irma demonstrated the need for utilities to develop a source of rapidly deployable funds to accelerate financial assistance following a major hurricane. There were no insurance options or other financial instruments to cover ANGLEC’s risk at an acceptable premium, however.^[vi] Rapid funding also may have enabled ANGLEC to rebuild to a higher standard across its networks. Following Hurricane Irma, for instance, ANGLEC was granted a loan by the Caribbean Development Bank and a grant from the European Investment Bank to rebuild its distribution system to international standards.^[vii]

Project Development

Although Anguilla was not the first island to sustain significant power outages, experiences like ANGLEC’s helped to prompt CCRIF and its partners to develop a risk transfer policy that utilities could not purchase on traditional insurance markets. CCRIF partnered with the Caribbean Electric Utility Services Corporation (CARILEC), a group of electrical providers and other stakeholders across the Caribbean, for technical expertise and guidance.^[viii]  CCRIF and CARILEC had been discussing the possibility of developing a policy for electrical utilities several years prior to Hurricane Irma. The Irish government provided more than $1 million to support the policy’s development.^[ix]

Determining an appropriate trigger played an important role to ensure that the policy achieved a risk transfer that made good financial sense for the insurer and the purchasing utility. Given historical damages to utilities like ANGLEC, the policy focused on transmission and distribution components of the electrical network. Based on input from CCRIF, CARILEC, and other partners, the models developed for this trigger indicated a strong relationship between wind speed and damages (See Figure 5).^[x]

CCRIF borrowed its most current hurricane model to determine impacts. During the early stages of development, CCRIF held several meetings with its partners, including the World Bank, to determine which electric utilities would be eligible for the policy (public, private, etc.). Following a determination that the facility would offer the policy to public and private utilities, ANGLEC quickly became a candidate for a pilot policy, as ANGLEC had expressed interest in purchasing coverage. CCRIF’s model required that utilities provide data on their transmission and distribution assets to determine the utilities’ exposure to the hazard, which ANGLEC provided over several months. After determining exposure, CCRIF developed exceedance probability curves to determine expected losses. From these models, CCRIF created several coverage options for ANGLEC. ANGLEC ultimately opted for higher frequency coverage that did not cover all its assets (for a lower premium), effectively using the policy as a replacement for its reserve fund.

Following several years of development, ANGLEC purchased the first electrical utilities policy in 2020, marking the first purchase of a CCRIF policy by a private entity.^[xi]  The utility policy was based on CCRIF’S standard parametric insurance policies. The triggers, premiums, and payouts were adapted to meet the needs of an electrical utility company (see Figure 6). CCRIF asserted that the facility could payout $5.46 million in the facility’s standard time of two weeks or less.^[xii]

Following a successful year of insurance coverage, ANGLEC increased its utility policy in 2021. ANGLEC did not receive a payout since Anguilla did not experience significantly bad weather during the policy period.^[xiii]  As of this writing, no other electrical utility has purchased CCRIF’s utility policy. CCRIF and other key stakeholders expect that several utilities will follow ANGLEC’s lead in the near future, particularly given the policy’s promotions by CARILEC and other major entities.^[xiv]

Timeline

Lessons Learned

This case also demonstrates the importance of assistance from multi-national entities to enhance infrastructure resilience. CCRIF met ANGLEC’s needs by developing a competitive insurance option that ANGLEC could not outsource to the private market or develop in-house. Key lessons learned include:

• Parametric insurance is a relatively simple, adaptable, and flexible solution. CCRIF’s history of iterating parametric insurance policies enabled the facility to adapt its parametric models into its electric utility policy. In the future, CCRIF or another insurer could offer parametric insurance to cover a range of hazard scenarios for electric utilities, such as earthquakes, or other utilities, such as water/wastewater or transportation. In addition, speed of funding may enable owners to rebuild to higher standards due to the immediate availability of funding.

• Collaboration and partnerships played a key role in developing a robust electrical utility policy. CCRIF outsourced some of the technical knowledge of electrical utilities to CARILEC and relied on the utilities, ANGLEC in this case, to provide data on their assets to determine exposure. CCRIF collaborated with ANGLEC to determine which coverage option would best meet ANGLEC’s needs, which required direct collaboration between CCRIF and its utility clients.^[xviii] The collaboration enabled CCRIF to adapt the policy more effectively to the client’s exposure and needs.
• Insurance policies necessitate the continual improvement of risk analysis and design standards. Engineers like CARILEC and climate scientists play a critical role in continuing to update models and designs. This work benefits investors and utilities by enhancing understandings of risk (or at least risk priorities) and by developing ways to reduce it. Standardizing designs and assessments on an international level also could encourage investment.^[xix] CCRIF demonstrates a way for investors to incorporate new knowledge by actively including these stakeholders in policy design and by building in periods for revision and review (annual policies).

• The speed of insurance payouts could aid in ‘build back better’ efforts. Following Hurricane Irma, ANGLEC expressed a desire to rebuild its transmission and distribution assets to higher international standards. The utility noted that lack of immediate funding hindered this effort, as some of the interventions required to build back better were more costly than the baseline solution to return power to the electric grid. Although CCRIF did not develop the policy with a requirement to build back better, rapid liquidity could allow utilities like CARILEC to do so.

• Stakeholders need to be educated on the benefits and pitfalls of insurance products. Despite a multitude of benefits, it may be best for utilities to incorporate CCRIF products with other financial risk mechanisms, if possible, since CCRIF policies cover a specific range of scenarios and often do not cover total damages. Consortiums, such as the Insurance Development Forum, are exploring ways to expand coverage and increase inclusion, which will help entities like ANGLEC increase risk coverage in the future.^[xx] Increasing education on the function and limits of parametric insurance could also help purchasers better understand their coverage.

[i] Caribbean Credit Risk Insurance Facility, 2021. “Payouts.” CCRIF (Accessed August 2022). https://www.ccrif.org/about-us

[ii] Ibid. Although CCRIF’s current acronym is “CCRIF SPC,” this case study uses CCRIF throughout for consistency.

[iii] Wärtsilä Caribbean Inc., 2020. “Wärtsilä hand on hand with Anguilla Electricity Co. after Hurricane Irma.” Wärtsilä Caribbean Inc. (accessed August 2022). https://www.wartsila.com/latinamer/media/13-10-2017-wartsila-hand-on-hand-with-anguilla-electricity-co-after-hurricane-irma; Government of Anguilla London Office, 2017. “Anguilla & Hurricane Irma Recovery, Resilience and Prosperity.” Government of Anguilla London Office (Accessed August 2022). https://westindiacommittee.org/wp-content/uploads/2017/11/White-Paper-Anguilla-Hurricane-Irma-.pdfhttps://www.iom.int/sites/g/files/tmzbdl486/files/situation_reports/file/Caribbean_SR_20170913.pdf

[iv] The Anguillan, 2018. “After Hurricane Irma: ANGLEC Celebrates Power Restoration, Teams & Awardees.” The Anguillan (Accessed August 2022). https://theanguillian.com/2018/03/after-hurricane-irma-anglec-celebrates-power-restoration-teams-awardees/; OCHA, 2017. “GPL deploys network technicians to hurricane-affected Anguilla.” OCHA Services (Accessed August 2022). https://reliefweb.int/report/anguilla/gpl-deploys-network-technicians-hurricane-affected-anguilla

[v]Jonathan Spencer Jones, 2022. “Novel natural disaster recovery insurance for Caribbean utilities.” Smart Energy International (Accessed August 2022). https://www.smart-energy.com/industry-sectors/business/novel-natural-disaster-recovery-insurance-for-caribbean-utilities/

[vi] CCRIF, 2020. “CCRIF Expands Coverage to the Private Sector… Launches Insurance Product for Electric Utilities in the Caribbean.” CCRIF (Accessed August 2022). https://www.ccrif.org/news/ccrif-expands-coverage-private-sector-launches-insurance-product-electric-utilities-caribbean?language_content_entity=en

[vii] Caribbean Development Bank, 2020. “CDB approves funding to restore electricity and build climate resilience in Anguilla.” Caribbean Development Bank (Accessed August 2022). https://www.caribank.org/newsroom/news-and-events/cdb-approves-funding-restore-electricity-and-build-climate-resilience-anguilla

[viii] CCRIF, “CCRIF Expands Coverage to the Private Sector;” Caribbean Credit Risk Insurance Facility, 2021. “Payouts.”

[ix] CCRIF, 2021. “CCRIF Welcomes Grant of €1 million (US$1.16 million) from Irish Aid, Allowing Five Additional Caribbean Countries to Access Fisheries Insurance.” CCRIF (Accessed August 2022).  https://www.ccrif.org/news/ccrif-welcomes-grant-eu1-million-us116-million-irish-aid-allowing-five-additional-caribbean?language_content_entity=en

[x] CCRIF, 2020. “Electric Utilities Policy.” CCRIF (Accessed August 2022). https://www.ccrif.org/node/12272?language_content_entity=en

[xi] Ibid.

[xii] Jones, 2022. “Novel natural disaster recovery insurance;” Anguilla Electricity Company Limited. Financial Statements: December 31, 2019. ANGLEC (Accessed August 2022). https://www.anglec.com/documents/ANGLEC%202019%20Signed%20Financial%20Statements.pdf

[xiii] Isaac Anthony, 2021. “CCRIF members cede over $1bn for second successive year.” Bermuda: Re+ILS (Accessed August 2022). https://www.bermudareinsurancemagazine.com/news/ccrif-members-cede-over-1bn-for-second-successive-year-6959

[xiv] Jones, 2022. “Novel natural disaster recovery insurance.”

[xv] Country Governments: (Funding for development) Japan, Canada, France, German, Ireland, (later) Mexico, U.K., Bermuda, (later) the U.S.; Original Member Countries: Anguilla, Antigua & Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines, Trinidad & Tobago and the Turks & Caicos Islands.

[xvi] CCRIF, n.d. “CCRIF SPC MOUs and Partnerships.” CCRIF (August 2022). https://www.ccrif.org/ccrif-spc-mous-and-partnerships?language_content_entity=en

[xvii] Ibid.

[xviii] Expert interview.

[xix] Elizabeth Losos And Robert Fetter, 2022. “Setting higher standards for the G-7 infrastructure (re)launch.” The Hill (Accessed August 2022). https://thehill.com/opinion/international/3536112-setting-higher-standards-for-the-g-7-infrastructure-relaunch/

[xx] Insurance Development Forum, n.d. Website. Insurance Development Forum (Accessed August 2022). https://www.insdevforum.org/