The alignment with community-level risk reduction is a potential benefit of community-based catastrophe insurance (CBCI). Because standard disaster insurance policies apply at the level of individual properties, using insurance to incentivize mitigation of community scale hazards, such as levees or ecosystem-based interventions, for example, restored wetlands¹, creates inherent difficulties. Yet community-level risk reduction can often be the most effective and cost-efficient means of managing a given risk. Additionally, such interventions can create a variety of co-benefits that support other community goals.
Unlike property-level coverage, a CBCI program creates a mechanism to provide financial incentives for community-scale mitigation. This is important, since monetization of avoided losses is otherwise difficult to achieve or warrant in an open market system.
A new report from Guy Carpenter, Marsh & McLennan Advantage, and the Wharton Risk Management and Decision Processes Center, Community-Based Catastrophe Insurance: A Model for Closing the Disaster Protection Gap, sets out an innovative model to deliver insurance and help communities close the disaster protection gap.
There is enormous flexibility in the structure and design of CBCI, allowing it to be tailored for various types of communities and to meet a range of needs. Drawing on research and learnings from interviews with key leaders and stakeholders, this report outlines four delivery models, with varying roles and responsibilities for the community and other implementation partners:
The community’s role and responsibility increase from lowest to highest moving from the first to the fourth model.
- In the first model, the community is more of a facilitator and a negotiator.
- In the second model, the community takes on a role in distribution, choosing insurance options and collecting premiums.
- In the third model, the community has a dual role: as the insured on a community contract with a reinsurer and as the disburser of claims funds.
- The fourth model harnesses an existing institutional structure — an insurance captive — that enables the community to provide disaster policies.
- For more information, see: The value of coastal wetlands for flood damage reduction in the northeastern USA