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.
Community-based catastrophe insurance (CBCI) requires the support of many different stakeholder groups. An interested community will need to engage, likely repeatedly, with these groups. First, CBCI will require understanding of the need from the potential insureds. Such support may need to be developed through education, and outreach campaigns that inform residents about the disaster risks to the community, and the financing options to build resilience and to prepare for such events. Second, CBCI will require support from a willing insurer or reinsurer. Research interviews indicated that it may be challenging to convince traditional reinsurers and investors to allocate capital to a new product that is unproven, perhaps not well understood, and potentially not well diversified.
The community will thus have to identify an insurer partner interested in innovating and piloting a new concept to enhance resilience. Interviews identified interest from some reinsurers in CBCI as a portfolio of risks that could supplement/complement their natural catastrophe business. The risk assessment, pricing, and product structuring could leverage existing reinsurer capabilities and approaches, which would be informative to communities as they consider CBCI options.