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Climate risk insurance in the Caribbean: 20 lessons learned from the Climate Risk Adaptation and Insurance in the Caribbean (CRAIC) project

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NATURAL HAZARDS IN THE CARIBBEAN

Countries in the Caribbean face a range of natural hazards, particularly tropical cyclones, excess rainfall, earthquakes and to a lesser extent volcanic risks. The region also faces secondary risks from flooding, landslides, storm surge and wave impacts, drought, and tsunamis. The most significant natural hazard in the Caribbean is tropical cyclones, largely due to their high frequency and severity in the region as well as their potential to hit many islands with a single storm. Tropical cyclones have had an inordinate impact on the economies of Caribbean countries, many of which depend on tourism and agriculture as their main economic drivers. With respect to hydro-meteorological hazards, climate change is expected to result in an increase in the frequency, intensity, and potential impact of these hazards. The changing climate can be considered to be a global driver of increasing disaster risk, and threatens to undermine many of the critical development gains being made by Caribbean countries.

ECONOMIC IMPACTS OF NATURAL HAZARDS

In these small islands and island states, single catastrophes can have a disproportionate effect on the economy, with hurricanes reported to have caused damage ranging from a low of 6 per cent of gross domestic product (GDP) to 200 per cent of national annual GDP, as was the case in Grenada and the Cayman Islands following Hurricane Ivan in 2004. Hurricane Ivan was considered a watershed event in the Caribbean, impacting at least 9 countries and resulting in regional losses totaling over USD 6 billion for the event. The year 2017 was another defining moment for the Caribbean, after suffering the devastation caused by two category 5 hurricanes within 14 days of each other. Damage and losses due to these storms have been estimated at approximately USD130 billion and affected 18 countries, their populations and social and economic infrastructure. These catastrophic events resulted in the Caribbean Community (CARICOM) declaring its ambition to become the first climate resilient zone in the world.

Additionally, a 2017 Moody’s report stated that the average annual damage from natural hazards over the period 1980-2015 was 1.5 per cent of GDP in emerging markets versus 0.3 per cent of GDP in developed economies. The average share of affected population over the same period was 3.0 per cent in emerging markets versus 0.4 per cent in developed economies. The average share of affected population over the same period was 3.0 per cent in emerging markets versus 0.4 per cent in developed economies. In fact, the report further indicated that of the 20 most vulnerable countries globally, more than half are small island states across the Caribbean and Pacific regions—with these 20 countries bearing average losses between 2.1 per cent and 20.1 per cent of their respective GDP every year.

It is important to stress that whilst disasters have significantly impacted countries’ economies leading to higher fiscal deficits and debt-to-GDP ratios, they have also impacted populations and key industries such as tourism, agriculture, fisheries and social sectors, including housing, schools and hospitals. A case in point is Dominica, in which damage totaled approximately USD 931 million and losses another USD 380 million following Hurricane Maria in 2017, amounting to about 225 per cent of their 2016 GDP or USD 1.31 billion in damage and loss. But the damage and loss was far more than economic damage. Over 90 per cent of the population was affected: 15 per cent of the country’s housing stock was totally destroyed and 75 per cent partially damaged. Critical infrastructure—roads, bridges, water systems, electricity, telecommunications—was also significantly impacted. The impact on the agriculture and tourism sectors was also significant as these sectors were key to food security, economic activity and providing a livelihood for thousands. Importantly, these disasters also resulted in increasing poverty levels, as these events tend to have a disproportionate impacts on the poorer segments of the population, as well as on older individuals and children.

Left unchecked, the economic impact of disasters can generate large losses that disrupt long-run economic growth and development trajectories. To some extent, natural hazards can be compared to financial crises—both are typically exogenous events that represent covariate shocks across a country and its households. Economic damages from natural hazards can jeopardize the health of national economies at a level comparable to, or greater than, that of financial crises. However, natural hazards also destroy human and physical capital stocks—something that financial crises do not do. This therefore calls for consideration of hazards in development planning as an important priority for governments, businesses, communities and individuals in their pursuit of a sustainable future. It is also critical for the small island and coastal states of the Caribbean region to strengthen their capacity to prepare for and respond to these natural hazards as a means of reducing current and future vulnerabilities.