Community-based catastrophe insurance (CBCI) solutions have the potential to enhance the financial resilience of communities and their residents, provide affordable and reliably available disaster insurance, and create incentives for community-level and individual risk reduction.
Accessing insurer, reinsurer or capital market capacity can present varying benefits and efficiencies depending on the characteristics of each risk transfer solution, including the peril covered, the specific geography and the degree of risk concentration. Just as there is an expanding community role across the spectrum of four CBCI models, there are varying levels of efficiency in accessing these alternative forms of capacity. Balancing the risk appetite and budget with the foundational authorities to act at the community level will help in selecting the appropriate model and structure.
Four broad institutional structures for CBCI illustrate the different roles and responsibilities of the community and other partners:
- A facilitator model
- A group policy model
- An aggregator model
- Purchase through a community captive
With the facilitator model, the insurer will allocate capital and reinsurance costs as a component of the premium; whereas with the captive model, the community managers will need to make decisions about reinsurance and could potentially leverage capital and administrative efficiencies to tailor a solution.
Fundamentally, the efficiency in potential premium or administration cost of the CBCI program will hinge on the risk characteristics and product design to provide the most targeted relief to concentration risk.
Read about “Possible Structures” for CBCI, described in detail in the report, Community-Based Catastrophe Insurance: A Model for Closing the Disaster Protection Gap, from Guy Carpenter, Marsh McLennan Advantage and the Wharton Risk Management and Decision Processes Center.