- **_<mark>The Facility transfers the risks it cannot retain to the international financial markets.</mark>_** <mark>CCRIF was able to secure US$110 million of claims paying capacity on the international reinsurance and capital markets. The reinsurance structure consists of four layers: CCRIF retains the first layer of US$10 million; reinsurers underwrite the second (US$15 million) and third layers (US$25 million); the top layer (US$70 million) is financed with reinsurance (US$50 million) plus US$20 million coverage through a catastrophe swap between the World Bank (IBRD) and CCRIF. IBRD hedged its risk through a companion cat swap with Munich Re.  The US$20 million swap between IBRD and CCRIF is the first transaction to enable emerging countries to use a derivative transaction to access the capital market to insure against natural disasters. It is also the first time a diversified pool of emerging market countries’ catastrophe risk is placed in the capital markets.</mark>

- **_<mark>The Facility develops a financial strategy for surviving 1-in-1000-year events.</mark>_** <mark>Should the total insured losses exceed its claims-paying capacity, payouts will be prorated based on the total amount of expected claims compared to the remaining available funds.  The CCRIF will then seek donors’ contributions and/or private capital for its recapitalization.</mark>

<mark>•</mark> **_<mark>The CCRIF is established as an independent legal entity.</mark>_** <mark>It will be created as an Insurance Captive Special Purpose Vehicle (SPV) owned by a trust. Both entities will be registered in the Cayman Islands, a market leader in Insurance Captives. The CCRIF will be managed by a Captive Manager under the supervision of a Board of Directors composed of representatives from the donors and client. This Board will be supported by the technical advice of a specialized Facility Supervisor. The Bank will not sit on the Board, but will retain control in the initial phase through a financing agreement with the Facility defining how donor funds can be used.</mark>

- **_<mark>The Facility could serve as a pilot program to be extended or replicated to other small states (such as the Pacific Island states)</mark>_** **<mark>.</mark>** <mark>Extending the pool to small states beyond the Caribbean that face similar natural hazards would provide further opportunities for risk diversification, thus lowering the cost of insurance. This extension would require the development of sophisticated probabilistic risk models for the regions involved (Pacific and Indian Ocean).</mark>

- _<mark>Source:</mark>_ <mark>Ghesquiere and Mahul (2007).</mark>

The Facility allow CARICOM governments to purchase coverage akin to business interruption insurance that would provide them with an immediate cash payment after the occurrence of a major earthquake or the passing of a hurricane. Because of the speed at which a claim payment will be processed, the instrument will be particularly useful to finance the immediate post-disaster recovery, giving the affected government time to mobilize additional resources for longer-term reconstruction activities. This insurance instrument does _not_ intend to cover all losses faced by the governments, but just to address the liquidity crisis governments may face in the aftermath of a disaster.

Government deficit losses due to natural hazards are estimated using state-of-the-art catastrophic risk modeling techniques. They include: damage of government buildings; reduction of annual tax revenue due to loss of commercial facilities, business interruption, loss of import taxes and tourism taxes, damage of infrastructure and government relief expenditures. Each of these loss components are estimated first and then combined to find the overall deficit loss for a country.

_Loss due to damage to government buildings_ . These are direct damage to government buildings.

_Reduction of annual tax revenue due to loss of commercial facilities, business interruption, loss of import taxes and tourism taxes_ . The reduction of tax revenue is estimated from the damage degree of commercial buildings in the country using a piecewise-linear relationship of annual tax reduction with the damage ratio of commercial buildings. Tax revenue values are the total national tax revenue less the property tax.

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