Protecting paradise: Enhancing insurance protection with rapid payment systems
The Caribbean, renowned for its marine ecosystems and tourism, depends heavily on tourism for its economic growth and financial stability, making it crucial to protect its people, economies, ecosystems, and biodiversity from the effects of natural disasters. Recent major floods, storms, and hurricanes have caused significant losses, particularly in industries reliant on the environment, such as tourism. In the Eastern Caribbean, tourism accounts for 50% of regional GDP and about 40% of employment.
A recent World Bank workshop, funded by G2PX and Pro Blue, looked at how disaster risk financing could become more effective in protecting marine resources and economic activity by improving links with payment systems in the Caribbean. It highlighted the need to connect government insurance efforts with efficient payment mechanisms for timely disaster relief payouts. Participants included representatives from 10 Caribbean jurisdictions, Ministries of Finance, Ministries of Social Affairs, Fisheries, regulators, regional insurance associations, credit union leagues, and international organizations.
Advancing from strong foundations: The next phase of implementing disaster risk finance
Many Caribbean countries have disaster risk financing instruments that enable rapid relief payouts. Facilities like CCRIF SPC have been crucial in providing governments with quick payouts for disaster response. The World Bank promotes a risk layering strategy, combining risk retention (for example, cash reserves) and risk transfer (for example, parametric insurance) instruments for different magnitudes of events. However, structuring finance is complex, and many countries need help combining instruments to meet their financial needs. Expanding insurance access for vulnerable communities, including fisherfolk, MSMEs, and populations vulnerable to climate disasters, remains a priority.
Insuring nature: A new tool
Natural disasters damage ecosystems, reducing their ability to serve as natural defense systems. Coastal ecosystems like coral reefs and mangroves can reduce wave energy and storm damage. There is potential to use innovative nature-based solutions to reduce disaster risk and increase climate resilience. The World Bank released two reports on the role of insurance in protecting marine ecosystems. One focuses on the domestic insurance sector and business interruption insurance for tourism operators, while the second focuses on strengthening modeling of tropical cyclones' impacts on marine ecosystems. During the workshop, PCRIC shared experiences of designing and issuing policies for coral reefs, such as those for the Vatuvara Foundation in Fiji and the Government of Niue.
Insurance is one piece of the puzzle: streamlining payment systems is essential for implementation
While CCRIF SPC has demonstrated the role of parametric insurance in providing rapid payouts to governments, disbursing these funds to beneficiaries has been slow. For example, Hurricane Beryl in July 2024 caused severe losses across the Caribbean. CCRIF SPC disbursed over $85 million in payouts, but many countries struggled to quickly disburse funds to beneficiaries.
Focus needs to shift towards building timely, efficient, and impactful disbursement mechanisms for disaster risk financing instruments, including insurance. Despite high financial account ownership in the Eastern and Southern Caribbean, digital payment usage is low. Approximately 80% of transactions are made in cash or cheque, and only 40% of adults have used electronic or card transactions. Most MSMEs lack business accounts, and roughly 20% of the ESC is unbanked, with potentially higher rates in climate-vulnerable areas. Gaps in government payment processes, accessibility, and connectivity make it difficult for vulnerable populations to receive insurance and post-disaster payouts quickly.
One central theme of the workshop was ensuring that insurance payouts translate into immediate relief for affected individuals. Stakeholders agreed that quick improvements are needed in payment infrastructures, regulatory frameworks, and financial processes to enable efficient disaster recovery and disbursements. A phased approach is required, with quick wins, medium-term improvements, and long-term solutions to ensure timely support for vulnerable populations while government systems evolve to support greater resilience and recovery.
Going the extra mile: A call to action
The Caribbean has an opportunity to strengthen its financial resilience to disasters by offering a wider range of insurance offerings and connecting disaster risk financing instruments to efficient payment systems. Ensuring swift and efficient relief will enhance resilience and reinforce the region's long-term sustainability. By widening coverage with new financial instruments, linking them with efficient digital payment systems, and strengthening policy frameworks, the region can build a robust response mechanism for its people and ecosystems.
As climate risks mount, urgent action is needed to adapt and become resilient. Success will require innovation, learning from industry pioneers, improved data, and collaboration among insurers, regional organizations, governments, communities, and tourism businesses. Through joint efforts to develop effective payment systems and provide adequate insurance for natural disasters, the region can lead the way in disaster risk finance.
This blog was originally published on World Bank Blogs - Link here.