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a reinsurer's standpoint. Both the blanket portfolio reinsurance premium rate and the reinsurance commission being commonly priced on all ceded premiums do little to promote overall risk quality in a reinsurer's accepted portfolio of risks. There are some profit commission arrangements, very limited for 'catastrophe' reinsurance specifically, whereby the earned reinsurance commission rate varies by the loss ratio experienced - i.e. from the claims incurred. Such arrangements still, do not directly address portfolio risk quality improvement.

The adaptation of the working of reinsurance premium pricing and reinsurance commission mechanisms is feasible to meet the objective of encouraging improvement in risk quality of portfolios and hence allowing discriminatory premium pricing for vulnerability reduction measures by policy holders. What is first required is a set of meaningful and workable risk quality criteria mutually agreed by an insurance company and reinsurers. The implementation of risk-based premium pricing, to be successful, would therefore require a comprehensive hazard mapping effort, the inventorying of all typologies of structures and contents with respect to vulnerability, and certification by engineers of individual risk characteristics. Coupled wvith the actuarial estimates of event probabilities and intensities, and identifying market values which can be used to calculate probable losses, such an exercise would thus set the base for a more accurate catastrophe risk accounting methodology in the Caribbean insurance industry. This would include classifications of:

- i. Hazard mapped locations

- ii. Building type & structure vulnerability characteristics

- iii. The same as above for building contents

- iv. Engineering certification for individual risk characteristics - needed to retain discipline and deter discounts being given for 'sales' reasons.

- v. Application of the above to actuarial/statistical distributions of event probabilities and intensities.

- vi. Deterrnination of fair market value of properties to combine the above factors in establishing expected loss amounts.

To implement such a process which reflects preconditions for improvements in the insurance markets, it is recommended that a Caribbean privately funded insurance services office be established. Such an institution which could operate at a regional or sub-regional level, would be well positioned to develop insurance plans by asset class and advise on prospective loss costs taking into account individual risk characteristics. This would permit primary insurers, at their option, to use such standardized class plans and loss costs in pricing their products. At the request of insurers, such an office would also provide reinsurers with pertinent data which could facilitate the negotiation of reinsurance contracts. Additionally, functions such as inspections of individual properties would be conducted when requested by individual insurers. A key function would also be to maintain updated insurance and risk data on the local industry.

# _Factors Affecting Catastrophe Insurance Demand_

Insurance policies cover the 'natural' catastrophe perils of earthquake, volcano and storm; the last embraces declared hurricanes (>75 mph sustained winds), windstorm, flood and stormn surge. Volcano and flood cover is practically unattainable in some areas recognized as particularly prone to these events (e.g.: Montserrat).