Expanding hurricane insurance coverage for individuals in the Caribbean
Parametric policies designed for lower-income consumers could help bridge the disaster insurance gap.
Globally, uninsured damages from disasters add up to over US$160bn per year, with 96% of this protection gap affecting emerging economies. Parametric disaster insurance can help by offering protection to many of those who are most vulnerable to natural hazards.
The Yokahu insurance company offers small-scale parametric insurance policies against hurricanes in the Caribbean – typically covering individual households that would otherwise be uninsured.
Parametric insurance insures policyholders against the occurrence of a specified event, paying a set amount triggered by predefined parameters for that event. This allows a much quicker pay-out than traditional indemnity insurance that is based on the assessed value of damages.
PreventionWeb spoke to Yokahu CEO Tim McCosh about how this approach to disaster insurance could help to improve resilience.
Parametric insurance for lower-income consumers
“The initial offering is very much for consumers,” McCosh says, noting that there is a gap in the market for those with modest incomes, whose assets and livelihoods would otherwise not be insured against disasters.
“In order to buy this themselves, they've got to have some sort of disposable income, so it's probably not for the very bottom segment of the market.... We think that we can have a meaningful impact for people… who can't afford [traditional] home insurance with hurricane cover.”
“They're in this in-between segment that has a lot of exposure, but not very many ways to deal with it,” he says.
Traditional indemnity insurance, based on the assessed value of losses incurred, is often out of reach of individuals in this segment of the market. To qualify, they would need to have a solid, concrete house and the premiums would be based on a percentage of the house’s value.
“Their home is probably made of wood and therefore wouldn't be insurable in the first place,” McCosh says.
In addition, when a claim is made the insured individual has to wait for an assessment of the damages before they see any benefits. Those who are worst affected, typically, live in less resilient houses and do not have a savings safety net; so when disaster strikes, they need to be able to access funds quickly.
“We've done surveys – 90% of people in the Caribbean who responded to that survey had less than $250 to spend on hurricane protection,” McCosh says.
A parametric model, in contrast, can pay out immediately. The premiums are relatively low, and the pay-outs fixed. If a hurricane with windspeeds of 74mph strikes the area where the insured house is located, a payment is automatically triggered. The entire process is data driven, and therefore transparent.
“The specific way we do it is that a customer will give us the GPS location of their home and if that location experiences hurricane-strength winds then we make a payment,” McCosh says.
“It's transparent – it has an agreed threshold, and when the threshold is met, the payment should be made. But equally, for the same risk, it should produce a cheaper premium.”
“Parametric insurance typically has lower transaction costs [than indemnity insurance], since there is no need for costly and time-consuming loss adjusting,” Kousky, Wiley & Shabman note in the journal Economics of Disasters and Climate Change. “Underwriting costs are lower since often all that is needed is a location; and claims management can be lower, since there tend not to be difficult legal disputes.”
Employers and employees benefit
While the coverage is relatively inexpensive – policy premiums start at around US$60 per year, giving a US$800 payment in the event of a hurricane – McCosh acknowledges that even this may be out-of-reach for the poorer segments of the population. But he believes that employers may step up to the mark.
“We hope that well-meaning employers will seriously consider offering this to their staff, as a way of both retaining staff and providing a meaningful impact on the local economy. It would work as a kind of perk: you'd give your employees a personal policy each… exactly like they might get health insurance, they’d also get hurricane insurance,” McCosh says.
“Different industries will have different reasons for offering it, but if you look at hospitality in the Caribbean, for example, significant hurricanes result in closures of hotels … so those people are suddenly out of work. This happens when the economy is on its knees, so there aren't other jobs to go to.”
“When they receive a payment, they can therefore look after their families, at least until new jobs open up … or the hotel reopens in a few months and they can go back to work.”
“There's a vested interest for any business in the region because they all suffer from these events in slightly different ways, but if the bulk of the population receives a payment after these events, they will spend that money on making their circumstances better. As a result, the whole island or region will come back to life and recover faster, which means that businesses will re-open and profits will return. It's really just a way of paying forward and actually managing some of their risk,” McCosh says.
“What to us in more developed economies might seem like a small amount of money will make significant difference to their well-being after these events, and to their future prospects as well.”
Building trust and resilience
McCosh believes that this model can help build consumer trust in insurance products.
“Parametric insurance has the capacity to […] make people see [insurance] as a valuable service. It just needs to be done well and needs to deliver on its promises. We're at the very start of that journey as an industry,” he says.
“Currently it is being used to complement existing disaster insurance and provide an option where more traditional solutions aren’t affordable or aren’t accessible,” he says.
For now, Yokahu operates across nine Caribbean countries, but the company has ambitions to expand its cover globally.
Parametric micro-insurance could be part of a larger disaster risk reduction strategy. The coverage offered is not expected to entirely compensate for all damages, but it can provide a buffer to facilitate quicker recovery.
“The insurance industry needs to start stepping up and leading in this space,” McCosh says. “The climate emergency is here, and these events are becoming more frequent.”
Tim McCosh is CEO of Yokahu.