Quantities of risk transfer remain "low". The catastrophe insurance market does not cater to all segments of the economy. The proportion of residential and commercial properties covered by insurance is significant in the Caribbean region. However, the vast majority of insured properties are hotels, tourism-related properties, large and medium-size private industrial and commercial businesses while many dwellings and small businesses remain uninsured. Fragile dwellings constructed in hazard-prone, low-lying coastal areas, deep river basins or valleys and along steep slopes are generally not insured. For example, a large segment of the population in Barbados, Jamaica and Trinidad and Tobago lives in vulnerable, uninsurable properties (lacking dug-in foundations, secured frames or bolted roofs) which could be easily dislodged in the event of flooding or strong winds.<sup>8</sup> In Santo Domingo, the Dominican capital, about 300,000 people live in the high-risk, flood-prone and highly polluted Ozama River Basin with no insurance against flood either. In addition, crop insurance is not generally available in the Caribbean region, which makes farmers (especially poor farmers) particularly vulnerable to natural disasters. Two companies in Barbados offer coverage on standing sugarcane crops and the produce of larger plantations. However, their coverage options do not benefit small- or medium-size farming operations. About two decades ago, Trinidad and Tobago's sugar industry purchased crop insurance on the international market but this initiative was discontinued due to few claims results and to escalating premiums. The Dominican Republic established the now defunct crops insurance program through _Banco Agricola de la Repuiblica Dominicana_ (BARD), twenty years ago. For small-scale farm workers or owners, state institutions and agencies may be the sole resort for debt relief and financial assistance in case of catastrophic occurrences. International experience suggests that crop insurance initiatives have generally been unsuccessful and that new initiatives like the creation of weather-indexed securities may not be more promising especially in developing countries (Box 2.4). In addition, the public sector does not generally insure public assets against catastrophic events under the prevailing insurance market conditions (Box 2.5).

**Box** 2.4: Weather-Indexed Securities as an Alternative to Crop Insurance?

Many observers have argued that mechanisms can be developed to bring catastrophic exposures directly to the international capital market. One such mechanism includes the development of catastrophe-indexed securities which make payments to the holders based on the trigger of an index. Such index may be based on the magnitude of a hurricane using the Saffir-Simpson scale as declared by the National Hurricane Center located in Miami, Florida, or indices compiled by Property Claims Service (PCS), the authoritative insurance industry statistical agent that reports on catastrophes. The World Bank is also considering the development of weather-indexed securities to protect agncultural producers located on the hurricane-prone East coast of Central America.

Indexed-based instruments have not taken off as expected. The Chicago Board of Trade (CBOT) introduced futures and options linked to the PSC index in 1992. However, the future contracts failed to generate sufficient interest and were withdrawn in 1995. Option contracts based on nine indices currently trade on the CBOT: a national index, five regional indices, and three state indices (for Califomia, Florida and Texas). The Bermuda Commodities Exchange (BCE) currently trades contracts based on a US homeowners catastrophe index developed by Guy Carpenter. However, the development of these markets has not generated the interest that had been initially expected. The main reason seems to be that the existing indexes remain poorly correlated with individual losses. Hurricanes typically hit the areas of a country very differently and have different impacts depending on landscape characteristics, for example. To serve as good insurer hedges, indices will need to be developed for small geographic areas, ideally at the level of the farm owner. However, establishing such indices would pose considerable technical difficulties, especially in developing countries.

7 In most Caribbean countries, property owners are required to purchase a catastrophe insurance to access mortgage financing. However, once outstanding mortgages have been paid off a large number of property owners either undennsure or do not insure their properties at all. The requirement to buy catastrophe insurance only applies to those who have access to the formal mortgage market, leaving out the poor. See also Pollner, 2001, p. 37 8 These are called "Chattel" houses; they are properties made of timber and generally moveable.

11