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The CDMA Programme:

The Principal Features of the CDMA Programme are as follows:-

Fixed Rate
The CDMA programme will insure participating states at a fixed rate, regardless of size and whether or not a state wished to cover against different hazards such as hurricane, earthquake or cyclone. The variable would be the trigger level and would be set at an appropriate point depending upon the perceived probability of an event occurring in a 50 year return period.

Further Features of the Programme
A sustainable catastrophe insurance programme will require both a sufficient spread of risk, (locally, nationally, globally) and active management to reduce losses in the future. Therefore, it could prove more efficient to coordinate the individual states’ solutions in various areas and at various levels. Such coordination could be enhanced by a pooling or mutualisation of certain risks at a regional or national level and this is a point for further discussion.

CDMA’s independent stature and strategic, cross-cultural experience will be of particular value when defining what should be managed, by whom and by what means. CDMA has developed major relationships with organisations willing and able to contribute to the development of systems, regulatory and financial frameworks that support the insurance mechanism itself, including with HSBC Insurance Brokers.

CDMA believes the insurances should be the simplest possible to implement. The perils and trigger levels may however vary according to the technical findings.

Principal Benefits
The CDMA Natural Disaster Insurance Programme would be unique and provide a range of benefits including the following:

It will make a significant, incremental source of funding available from the private insurance sector to participating states.

This will be achieved at the most competitive market price using special programme designs which provide access to the most specialised brokers, insurers and reinsurers. Over time, and as the reputation for sound risk management increases, an ever-larger market will be developed to offer increasing capacity for risk, stability and cost-effectiveness.

A longer-term, mutual-type insurance structure would provide improved risk management standards and incentives as well as further insurance efficiencies.

There will be scope to apply the same approach to other major risk issues.

International Support for CDMA Model
From the outset, CDMA has enjoyed the support of the Commonwealth Secretary General. In the final communiqué of their 2000 annual meeting in Malta, Commonwealth Finance Ministers welcomed CDMA’s establishment. Since then, progress reports have been submitted to the Small States Ministerial Group meetings prior to Heads of Governments meetings (CHOGM) in 2001 and 2003 and most recently in Kampala and the Commonwealth Climate Change Action Plan agreement makes mention of support for CDMA.

The CDMA Insurance Model
CDMA’s model offers a unique and complete answer to the major issues raised in the Joint Task Force Report and the effects of natural disasters, only too obvious in the wake of Hurricanes Ivan and Katrina, the Indian Ocean Tsunami in 2004, the Nargis Cyclone in Burma and the Sichuan province earthquake in 2008. These events illustrate particularly the vulnerability of developing nations to these devastating events, in terms both of loss of life and of the fragility of infrastructure.

With the help of the London and international insurance underwriting markets, CDMA has been able to create a new form of insurance based on an innovative remodelling of Catastrophe Insurance. “Loss exceedence” is the normal type of catastrophe methodology, designed to calculate the annual average and probable maximum loss of a portfolio of risks within the same hazard environment (most commonly earthquake and windstorm), and is purely based on claims for physical and material damage. In addition, this methodology requires a number of loss adjustment teams which by the very nature of this type of insurance claim would take several months to determine the level of loss and the underwriters’ liability.

This would not be the case under the CDMA model as the primary objective is not compensation for physical damage per se, but economic recovery and adequate financing for post-disaster rehabilitation and reconstruction and emergency relief. CDMA’s model works on the unique premise that a storm or other natural hazard which has a magnitude in excess of a previously defined trigger level will necessarily have such an adverse impact on the economy of the Insured Country that indemnity is immediately payable. Under the proposed terms, a payment of $50 million would be available within days of a qualifying disaster.

Trigger Levels
The trigger levels would be established and agreed by the insured(s) and HSBC Insurance Brokers with the help of meteorological and seismological experts and the governments of the different small states themselves who examine the historic pattern of natural disasters to which each country or region of larger countries is exposed. This team of experts (drawn together by CDMA on the advice of the Advisory group of the UK Natural Disaster Reduction Committee, a national committee of the UNISDR) then establishes what are referred to as “trigger levels”. Should the severity of the insured event or disaster exceed these trigger levels, the CDMA programme is designed to pay the previously agreed insured sum.

CDMA believes that parametric triggers are the most appropriate method for determining whether an insurable event has occurred. More importantly, the underwriters agree and are entirely content with this methodology, which has been developed with them over several years. They would envisage parametric trigger mechanisms being set for each state as it joined a CDMA programme.

The CDMA model is therefore designed to ensure prompt payment within days of a disaster. The afflicted state would receive a capital sum of sufficient significance to assist restoration of key lifeline infrastructure, shelter and livelihoods following a disaster. The beauty of this approach is that it allows substantial sums to be paid simply upon agreement that a trigger event has occurred, and makes no attempt to differentiate between states. Each state would pay the same premium and receive the same payment. This approach allows for sustainable economic growth and poverty reduction, and is ideal in its administrative simplicity.

Geographical Spread
Underwriters are not concerned by the number of countries who first apply to join the programme for insurance purposes. They are concerned about the possible concentration of risks. They would seek a balance between the Caribbean, the Indian Ocean and the Pacific, of both Commonwealth and other small states.