# Catastrophe Insurance Market in the Caribbean Region: Market Failures and Recommendations for Public Sector Interventions

The Caribbean region suffers from a high degree of economic volatility. A history of repeated external and domestic shocks has made economic insecurity a major concern across the region. Of particular concern to all households, especially the poorest segments of the population, is the exposure to shocks that are generated by catastrophic events or natural disasters.

This paper develops a conceptual framework for risk management and shows that the insurance market for catastrophic risk in the Caribbean region remains a "thin" market characterized by "high" prices and "low" transfer of risk (Section A). Section B analyzes the possible market failures which could explain the lack of development of the catastrophe insurance market. Finally, Section C concludes by summarizing the market failures that prevail in the Caribbean region and outlines a set of recommendations for public sector interventions.

## _A. Risk_ **_Management:_** _A_ **_Conceptual Framework'_**

**Risk management** means reducing risk to an acceptable level and coping with the consequences of risk once it materializes (Figure 2.1). Risk management can be broadly divided into **riskreduction activities** (that focus on reducing the effects of disasters should they occur) and **riskcoping activities** (that focus on reducing the negative effects of natural disasters once they have occurred).<sup>2</sup> **Risk-reduction activities** include risk identification, mitigation and preparedness: **Risk identification** is the most important component of risk management, since risk mitigation and preparedness directly depend on the original assessment of risk. Risk identification involves a risk assessment, which quantifies the spatial and time evaluations of natural hazards and whose objective is to forecast the location, frequency, duration and magnitude of natural hazards.<sup>3</sup> **Risk mitigation measures** involve reducing human and asset vulnerability to risks. They include the construction of dams or re-channeling of rivers to regulate river flows and to limit probabilities of floods downstream while reforestation of watersheds and stabilization of unstable slopes can prevent the occurrence of landslides and floods. Risk mitigation measures also include investing in hazard-resistant technology such as retrofitting of infrastructure using hazard-resistant techniques, building mitigation infrastructure such as retaining walls, and resettling population at risk. This may be complicated by the fact that many households in high-risk areas have low income and limited relocation alternatives. Risk mitigation measures also include non-structural instruments such as land-use planning, building codes and other regulatory instruments. Risk mitigation also includes the diversification of income sources through diversification of the types of crops cultivated in terms of harvest seasons, resistance to flood, strong winds and other natural

X This **Section** draws on Charvenat (2000), Chapter 3.

**2** Some authors use the term nsk-transfer instead of nsk-coping but both terms refer to the same phenomenon. See for example, World Bank, 2002(b).

3Risk-identification can be complemented with vulnerability assessments which are based upon information about the presence of population and assets exposed in the hazardous zones as well as their vulnerability to damages.

4