By: Staff Writer
November 4, 2022
The International Monetary Fund remains optimistic on the region’s financial systems staying resilient in the face of climate change disasters, but we should not forget insurance penetration is still weak.
Bo Li, deputy managing director of the fund, said at the 59th Bi-Annual Meeting of CARICOM Central Bank Governors in New Providence, Bahamas that: “Over the last three years, we have seen shock upon shock upon shock hit the global economy—and each has struck the shores of the Caribbean. The pandemic devastated tourism, causing double-digit declines in GDP in 2020. The war in Ukraine further stoked food and fuel price spikes that have broadened into stubborn inflation. And all the while, natural disasters have continued to grow more frequent and severe due to climate change—an existential threat to this region and to our planet.”
He also said: “Nonetheless, the region’s financial systems have been resilient to climate-related shocks. This reflects the rapid rebound in tourism and other activity following shocks, insurance payouts, and banks’ limited credit exposures to the agriculture and tourism sectors. And importantly, it reflects your work—the rapid financial assistance provided by governments and central banks to affected firms and households.
“The financial system’s role in helping people rebuild—in honoring claims after major storms—highlights its importance to improving resilience to climate change.
“However, insurance penetration in the Caribbean relative to climate-related damages is generally lower than in Latin America, due to the high upfront costs of insurance products, concerns that significant damages may not trigger payouts, and competing developmental needs.”
Latin America and the Caribbean account for 3.1 percent of global insurance premiums, although the current population of the region exceeds 652m people – representing 8.6 percent of the world’s inhabitants, according to the United Nations World Population Prospects.
However, insurance penetration (premia/GDP) has grown steadily during the last few decades. This trend is in line with the emerging markets average, and differs from more mature markets such as the US, Canada, Japan and the EU, where the aggregated insurance penetration has been around 8% of GDP in the past few decades.
Although the gap is closing in Latin America and the Caribbean, penetration levels are still far below those in developed markets. “The Caribbean Catastrophe Risk Insurance Facility (CCRIF), established in 2007, has been important to improving the region’s insurance coverage, but more action is needed,” Mr Li said.
Mr Li added: “Consequently, governments often need to provide financial support to repair damaged public infrastructure and assist uninsured households. This increases public debt and the risks to domestic financial institutions who hold it.
“These risks will only grow as climate change intensifies. Successive storms may delay economic recoveries for longer and may even deter private investment.
“Recent IMF simulations for the Eastern Caribbean Currency Union suggest that more frequent hurricanes could have pronounced effects on the quality of banks’ loan portfolios, depending on the country’s fiscal, monetary, and prudential policy responses, its dependence on tourism, and the sectoral composition of banks’ loan books.”
He also said: “The IMF plays a catalytic role in this area through our financial sector assessment programs (FSAPs)ꟷ a comprehensive and in-depth assessment of a country or currency area’s financial sector.
“In FSAPs, we integrate material and systemically important climate risks into our overall evaluation of the financial sector. For instance, recent IMF country reports and financial sector assessments for the Caribbean have incorporated analyses related to climate risk. These included assessing banks’ capacities to absorb losses from natural disasters and advice on how to integrate physical climate risk scenarios into regulators’ financial system crisis management plans.”
He continued, “Promoting the safety and soundness of financial institutions and the financial system requires ensuring that climate-related risks are adequately captured in the regulatory framework and the supervision process, particularly in climate-vulnerable countries like those in the Caribbean.
“Allocating adequate resources and building internal capacity for supervision of climate risks is one important area. Setting guidelines for financial institutions on governance and strategy, risk management, scenario analysis and risk assessments, and disclosure of climate risks are also important. Improving data collection from financial institutions to better monitor their exposure to climate-related risks is a priority.
“In response to greater risks, financial regulators in the Caribbean have already made material strides to incorporate climate risks into their regulatory and supervisory frameworks. For example, several regulators now incorporate some form of scenario analysis to assess financial institutions’ capacities to absorb losses from natural disasters. “Similarly, work has begun on the development of real estate price indices, which would enhance market monitoring, collateral valuation for mortgages, and the setting of lending standards.”