Advancing Caribbean insurance to cover climate change

The recent 2024 Caribbean Insurance Conference highlighted the need for the insurance sector to adapt to the dual challenges of digital transformation and climate change.

In Cancun, Mexico, from June 2-4, industry leaders, regulators and experts gathered to explore the pressing issues and innovative solutions shaping the future of insurance.

The conference aimed to provide a platform to address the challenges of digital transformation and climate resilience, emphasising sustainability, technological advancements and the impacts of climate change.

Embracing digital transformation

At the conference, Craig Hill of BDO Digital spoke about the transformative potential of artificial intelligence (AI) and data analytics.

He highlighted that generative AI and machine learning are revolutionising risk assessment and customer service in the insurance sector. Hill said technologies like GPT-4 have democratised AI, making it accessible and beneficial for insurers and their clients.

This technological shift is expected to streamline processes, enhance decision-making and ultimately improve customer satisfaction.

Digital transformation is a pressing necessity for the insurance industry.

Climate change and insurance resilience

The impact of climate change on the Caribbean is profound, with increased frequency and severity of natural disasters posing significant risks.

Isaac Anthony, CEO of CCRIF SPC, highlighted the critical role of parametric insurance in providing quick liquidity to governments after disasters.

The CCRIF SPC, formerly known as the Caribbean Catastrophe Risk Insurance Facility, is a regional insurance fund designed to limit the financial impact of catastrophic natural disasters such as hurricanes and earthquakes on Caribbean and Central American governments. CCCRIF SPC, formed in 2007, was the world's first multi-country risk pool and parametric insurance mechanism.

Parametric insurance is a type of contract that pays based on the occurrence of a specified disaster. The payment is triggered by the event.

CCRIF SPC helps its members manage the liquidity gap that typically arises immediately after a disaster, providing quick financial support to cover urgent needs and facilitate recovery efforts.

The model has been recognised globally for its innovative approach to disaster-risk management and its role in enhancing climate resilience in the region.

Additionally, the conference emphasised the importance of developing a sustainable insurance roadmap. This involves integrating climate-risk data into insurance models, which allows for more accurate risk assessment and pricing.

Colin Young of the Caribbean Climate Change Community Centre stressed the need for a collaborative governance framework to institutionalise climate-resilience practices across the region.

Such frameworks would enable the sharing of data, resources and expertise, fostering a unified approach to tackling climate risks.

Role of governance in insurance sustainability

Effective governance is crucial for the resilience and sustainability of the insurance sector.

Governance frameworks provide the structure through which companies set objectives, achieve goals and monitor performance.

At the conference, discussions highlighted the importance of governance in managing climate risks. For instance, establishing a governance framework that includes climate-risk data can improve decision-making and enhance resilience.

Governance frameworks should integrate risk-management practices that address climate-related risks, ensuring that financial institutions can withstand and adapt to environmental changes.

The importance of a collaborative approach was stressed, with regulators, insurers and other stakeholders working together to develop and implement effective governance strategies.

Discussions underscored the need for a decentralised governance model to manage climate risks effectively.

A hub-and-spoke model was proposed, where various entities lead specific thematic areas within the insurance sector, fostering collaboration and expertise sharing.

This model aims to build resilience by leveraging the strengths of different organisations, from technical entities to reinsurers and regulatory bodies.

Innovative insurance models and products

Innovations in insurance models and products were a focal point at the conference. Discussions around parametric insurance extended to its application beyond natural disasters.

For instance, the Nature Conservancy's launch of parametric insurance for coral reefs in Mexico demonstrates the versatility of this model.

This approach can be adapted to protect other vital ecosystems in the Caribbean, such as mangroves and wetlands, which are crucial for coastal protection and biodiversity.

Moreover, the concept of risk-based pricing was explored as a potential solution for managing insurance costs in high-risk areas.

This model, already implemented in countries like New Zealand and Canada, adjusts insurance premiums based on the specific risks associated with different geographic locations.

Such an approach could be instrumental in ensuring that those living in vulnerable coastal areas are adequately insured without disproportionately high costs being imposed on the broader population.

Financial inclusion and consumer education

One of the recurring themes at the conference was the importance of financial inclusion and consumer education.

Regulators and industry leaders alike recognised that increasing financial literacy among consumers is crucial for the success of innovative insurance products.

Programmes aimed at educating the public about the benefits and workings of insurance, such as the financial inclusion initiatives in Jamaica, were highlighted as key to closing the insurance protection gap.

Efforts to simplify insurance products and make them more accessible were also discussed. For example, micro-insurance products tailored to the needs of low-income individuals and small businesses can provide essential coverage while fostering greater financial inclusion. Such products can be instrumental in building resilience at the grassroots level, ensuring that more people are protected against financial shocks.

Collaborative efforts and strategic partnerships

The conference underscored the importance of collaboration and strategic partnerships in advancing the insurance sector’s resilience and innovation.

The role of academia, government agencies and private-sector entities in driving research, policy development and implementation was deemed critical.

Collaborative efforts can help pool resources, share best practices and create synergies that enhance the overall effectiveness of insurance solutions.

For instance, partnerships between insurance companies and climate-modelling institutions can lead to the development of more accurate and localised risk models. These models can inform better underwriting practices and product development, ultimately leading to more resilient insurance markets.

Collaborations with technology providers can accelerate the adoption of advanced digital tools, further enhancing operational efficiency and customer service.

Looking ahead

Embracing AI and data analytics, developing innovative insurance products like parametric insurance and fostering financial inclusion are critical steps towards building supportive and resilient insurance systems in the Caribbean. Collaborative efforts and strategic partnerships will be key to navigating this complex landscape, ensuring that the region is better prepared to face challenges.

As the insurance industry evolves, maintaining a balance between technological and human-centric approaches will be crucial for sustainable growth and resilience.

Dr Axel Kravatzky is managing partner of TT-based Syntegra-360 Ltd, vice-chair of ISO/TC309 Governance of Organizations and president of EUROCHAMTT.

He enables companies to flourish through integrated governance, certified management systems and transformational leadership.