94980 COOK ISLANDS Country Note PCR AFI 2015 THE COOK ISLANDS February 2015 Disaster Risk Financing and Insurance © 2015 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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THE COOK ISLANDS PCRAFI i Table of Contents 01 Acknowledgments 02 Acronyms and Abbreviations 03 Executive Summary 04 Introduction 06 Economic Impact of Natural Disasters 09 Public Financial Management of Natural Disasters 10 Post-Disaster Budget Mobilization 16 Post-Disaster Budget Execution 18 Domestic Catastrophe Risk Insurance Market 20 Options for Consideration 21 End Notes 22 References 23 About PCRAFI 24 Annex 1 31 Annex 2 ii PCRAFI THE COOK ISLANDS Table of Contents 32 Annex 3 32 Executive Summary 33 Introduction 37 Regulatory Framework 39 Insurance of Public Assets 40 Past Catastrophe Events 41 Options for Consideration 41 Endnotes 41 References 43 Annex 4 THE COOK ISLANDS PCRAFI 01 Acknowledgments This note has been prepared by a team led (SPC) through its Applied Geoscience and by Olivier Mahul (Disaster Risk Financing and Technology Division (SOPAC), the World Bank, Insurance Program Manager, World Bank) and and the Asian Development Bank, with financial comprising Samantha Cook (Financial Sector support from the government of Japan and the Specialist) and Barry Bailey (Consultant). Global Facility for Disaster Reduction and Recovery (GFDRR). The team gratefully acknowledges the data, information, and other invaluable contributions The Disaster Risk Financing and Insurance Program made by the Pacific Island Countries. Without their is grateful for the financial support received from skills and expertise, the compilation of this note the government of Japan and the Global Facility would not have been possible. for Disaster Reduction and Recovery. This note benefitted greatly from the technical expertise of the following persons: Franz Drees- Gross (Country Director Timore-Leste, Papua New Guinea. and Pacific Islands, World Bank), Olivier Mahul (Disaster Risk Financing and Insurance Program Manager, World Bank), Denis Jordy (Senior Environmental Specialist, World Bank), Michael Bonte-Grapentin (Senior Disaster Risk Management Specialist, World Bank), Paula Holland (Secretariat of the Pacific Community), and David Abbott (Secretariat of the Pacific Community). Inputs and reviews from Robert Utz, David Knight, Kim Edwards, Oscar Ishizawa, Rashmin Gunasekera, Keren Charles, Francesca de Nicola and Susann Tischendorf greatly enhanced the final note. Design and layout developed by Bivee.co. Section The Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) is a joint initiative between the Secretariat of the Pacific Community A 02 PCRAFI THE COOK ISLANDS Acronyms and Abbreviations ACRRP Aitutaki Cyclone Recovery and Reconstruction Plan CIIC Cook Islands Investment Corporation DRFI Disaster risk financing and insurance EMC Emergency Management Cook Islands ERTF Emergency Response Trust Fund FSC Financial Supervisory Commission GDP Gross domestic product GFS Government Finance Statistics HFA Hyogo Framework for Action IAIS International Association of Insurance Supervisors IMF International Monetary Fund ISR Industrial Special Risks JNAP Joint National Action Plan LRF Loan Repayment Fund MDBI Material Damage/Business Interruption MFEM Ministry of Finance and Economic Management MOIP Ministry of Infrastructure and Planning NAP National Action Plan PCRAFI Pacific Catastrophe Risk Assessment and Financing Initiative PIC Pacific Island Country RFA Regional Framework for Action SMEs Small and medium enterprises SOPAC Applied Geoscience and Technology Division of SPC SPC Secretariat of the Pacific Community SOE State-owned enterprise TC Tropical Cyclone Section UNDP United Nations Development Programme UNISDR United Nations International Strategy for Disaster Risk Reduction A Currency: New Zealand dollar (NZ$) Average exchange rate: US$1 = NZ$1.22 THE COOK ISLANDS PCRAFI 03 Executive Summary The Cook Islands is composed of 15 islands, /// The Cook Islands has a proactive approach to /// spread across nearly 2 million km2 of disaster risk financing and insurance (DRFI), territorial waters. The geographic spread of the /// which is supported by the upper echelons of Cook Islands poses logistical problems for any government. In January 2011, the prime minister /// necessary post-disaster relief and response efforts. in his role as chair of the National Disaster Risk The 2011 census estimated the resident population Management Council requested that the Ministry of the Cook Islands at approximately 14,974 of Finance and Economic Management look people, with a further 2,820 temporary residents. at ways to become self-reliant in initial disaster Approximately three-quarters of the population response and generate new income streams lived in Rarotonga. The geographic spread of for investment in a fund specifically for disaster the population makes initial disaster response to management response and recovery. the outer islands expensive and further burdens The Cook Islands has available a maximum already-constrained public finances. /// amount of NZ$5.6 million (US$4.6 million)— The events of 2005 demonstrated that the in the form of contingency funds and catastrophe risk insurance—to facilitate /// Cook Islands is extremely vulnerable to the disaster response. This amount is equivalent to threat of tropical cyclones (TCs): in the two /// 4 percent of gross total appropriations and 1.7 /// months of February and March 2005, TCs Meena, percent of gross domestic product in 2011. The Nancy, Olaf, Percy, and Rae swept the country. probability in any year that disaster losses could Four of these cyclones reached the maximum exceed these contingency funds is estimated at category 5 rating and caused severe damage to 4.9 percent. The government has dedicated, yet infrastructure and agriculture (Cyclone Recovery limited, funds that can be accessed following an Committee 2006). event. The Cook Islands is expected to incur, on A number of options for further improving /// average, about NZ$6 million (US$4.9 million) /// the Cook Islands’ financial protection against per year in losses due to tropical cyclones. /// disasters are presented for consideration: In the next 50 years, the Cook Islands has a 50 /// percent chance of experiencing a per-event loss (a) The development of an integrated DRFI exceeding NZ$97 million (US$79.5 million), and strategy; a 10 percent chance of experiencing a per-event loss exceeding NZ$327 million (US$268 million) (b) Investigation of using contingent credit to from tropical cyclones. Tropical cyclones are the access additional liquidity post-disaster; predominant peril impacting the Cook Islands; (c) Development of an operations manual Pacific Catastrophe Risk Assessment and Financing for post-disaster budget mobilization and Section Initiative (PCRAFI) catastrophe models indicate execution; and negligible losses from earthquake and tsunami. (d) The identification of assets to be included in an insurance program for critical public assets. A 04 PCRAFI THE COOK ISLANDS Introduction The Cook Islands is composed of 15 islands, /// Development Programme (UNDP) Pacific Centre, spread across nearly 2 million km2 of the United Nations International Strategy for territorial waters. The geographic spread of the /// Disaster Risk Reduction (UNISDR), and other Cook Islands poses logistical problems for any partners, has developed several institutional necessary post-disaster relief and response efforts. frameworks on disaster risk management and The 2011 census estimated the resident population climate change adaptation at the national, of the Cook Islands at approximately 14,974 subregional, and international level, including people, with a further 2,820 temporary residents. the following: Approximately three-quarters of the population lived in Rarotonga. The resident population • Hyogo Framework for Action (HFA) 2005– has been in a slow but generally steady decline 2015 since 1965 as a result of outward migration. The • Pacific Disaster Risk Reduction and Disaster government views outward migration as a major threat to sustainable development. A steady Management Framework for Action (Regional increase in the number of migrant workers, Framework for Action, or RFA) 2005–2015 primarily in the tourism industry, has acted as a • National Action Plan (NAP) for Disaster Risk counter to out-migration. Management, 2009–2015 Events of early 2005 demonstrated that the • Joint National Action Plan (JNAP) for Disaster /// Cook Islands is extremely vulnerable to the Risk Management and Climate Change threat of tropical cyclones (TCs): in the two Adaptation, 2011–2015 /// months of February and March 2005, TCs Meena, Nancy, Olaf, Percy, and Rae swept the country. The JNAP cites the creation of sustainable /// Four of these cyclones reached the maximum national financing mechanisms for disaster category 5 rating and caused severe damage to risk management and climate change infrastructure and agriculture (Cyclone Recovery adaptation as a priority for action (Government /// Committee 2006). of Cook Islands 2011). This goal has been The government of Cook Islands, in conjunction carried forward from the NAP, and a great deal with the Secretariat of the Pacific Community of progress has been made in the Cook Islands Section Applied Geoscience Division (SPC-SOPAC), the toward establishing sustainable sources of finance Secretariat of the Pacific Regional Environment for these areas, including establishment of the 01 Programme (SPREP), the United Nations Emergency Response Trust Fund (ERTF) in 2011. THE COOK ISLANDS PCRAFI 05 Disaster risk financing and insurance (DRFI) is /// The Pacific Disaster Risk Financing and Insurance a key activity of the HFA Priorities for Action (DRFI) Program enables countries to increase their 4 and 5. 1 The HFA is a result-based plan of action financial resilience against natural disasters by improving their capacity to meet post-disaster /// adopted by 168 countries to reduce disaster risk funding needs without compromising their fiscal and vulnerability to natural hazards and to increase balance. This program is one application of the the resilience of nations and communities to Pacific Catastrophe Risk Assessment and Financing disasters over the period 2005–2015. In the Pacific, Initiative (PCRAFI). The Pacific DRFI program is the HFA formed the basis for the development of built upon a three-tiered approach to disaster risk the Pacific Disaster Risk Reduction and Disaster financing. These layers align to the basic principles of sound public financial management, such as the Management Framework for Action (Regional efficient allocation of resources, access to sufficient Framework for Action, or RFA). resources, and macroeconomic stabilization. The three tiers acknowledge the different financial The Regional Framework for Action cites requirements associated with different levels of /// DRFI activities as a key national and regional risk: activity. Theme 4—“Planning for effective /// preparedness, response and recovery”—has (a) Self-retention, such as a contingency budget an associated key national activity, “Establish a and national reserves, to finance small but national disaster fund for response and recovery.” recurrent disasters; Theme 6 of the RFA—“Reduction of underlying (b) A contingent credit mechanism for less risk factors”—cites the development of “financial frequent but more severe events; and risk-sharing mechanisms, particularly insurance, re-insurance and other financial modalities (c) Disaster risk transfer (such as insurance) to against disasters” as both a key national and cover major natural disasters. See figure 1. regional activity (SOPAC 2005). These regional This report aims to build an understanding of implementation activities align with the three-tiered /// the existing DRFI needs and tools in use in the disaster risk financing strategy promoted by the Cook Islands. Specifically, it aims to encourage /// World Bank. peer exchange of regional knowledge through dialogue on past experiences, lessons learned, optimal use of these financial tools, and their effect on the execution of post-disaster funds. Figure 1 —  Three-Tiered Disaster Risk Financing Strategy International Assistance Low Frequency/ High Severity Risk Transfer Sovereign Risk Transfer (e.g. Cat Bond/Cat Swap, (re)insurance) Insurance of Public Assets Contingent Credit Lines Post Disaster Credit Risk Retention Section High Frequency/ Low Severity Government Reserves, Contingency Budget / Funds Source: World Bank 2010. 01 Emergency Funding Reconstruction 06 PCRAFI THE COOK ISLANDS Economic Impact of Natural Disasters Since 1955 the Cook Islands has experienced a /// Because of its high exposure to severe /// total of 28 natural disasters that have cost in tropical cyclones, the Cook Islands is among total approximately NZ$65.4 million (US$53.6 the 30 countries that experience the highest average annual disaster-related losses in million) (SPC-SOPAC 2011). Cyclones account terms of gross domestic product (GDP). /// for 86 percent of past disasters (24 of 28), with /// Average annual disaster-related losses in the Cook epidemics and earthquakes accounting for 11 Islands are estimated at 2 percent of GDP (World percent and 4 percent, respectively (SPC-SOPAC Bank 2011). 2011). Of the NZ$65.4 million (US$53.6 million) The recovery and reconstruction program in disaster loss recorded in the Cook Islands, 100 /// following TC Pat (2010) was equivalent to 10 percent is attributable to tropical cyclones. It should percent of national revenue in 2012 terms, be noted that the cost of disasters presented above or 3.5 percent of GDP. In 2012, tax revenue was /// reflects only 10 cyclone events. Figure 2 —  Building Locations 166° W 164° W 162° W 160° W 158° W 0 150 300 600 Aitu- 012 4 Arutanga 8° S taki Kilometers Kilometers 10° S Atiu Mangaia 12° S 012 4 0 1 2 3 14° S Buildings Residential Public Avarua Rarotonga 16° S Commercial Other Industrial Section 18° S Atiu Aitutaki 02 20° S Rarotonga Mangaia 22° S Cook Islands 0 2 4 8 Source: PCRAFI 2011. THE COOK ISLANDS PCRAFI 07 Figure 3 —  Direct Losses by Return Period 400 DIRECT LOSSES (MILLION USD) 300 200 TC + EQ TC EQ 100 Source: PCRAFI 2011 0 Note: TC = tropical cyclone; EQ = earthquake. 0 100 200 300 400 500 600 700 800 900 1000 MEAN RETURN PERIOD (YEARS) approximately NZ$100 million (US$81.9 million). among the best-performing Pacific economies, This narrow revenue base poses problems for with GDP per capita around NZ$15,477 stable public financial management in the Cook (US$12,686) in 2012 (ADB 2013). Islands, just as it does for many other Pacific Island The build-up of assets along the coastline Countries (PICs). /// of the capital, Rarotonga, has increased The economy is driven by tourism, pearl /// the country’s vulnerability and exposure to farming, fishing, and agriculture, all of which damage from tropical cyclones and storm are susceptible to adverse weather conditions. /// surge (see figure 2). Coastal construction has been /// Emigration poses problems for skilled labor-force driven by the tourism industry, which seeks to offer availability to support the tourism industry, in tourists direct access to the waterfront. The risk of particular, and it has led to an increase in the damage from tropical cyclones and storm surge number of migrant workers in the tourism sector. has increased with this development, since many Notwithstanding these issues, the Cook Islands is natural barriers that protect the coastline have Figure 4 —  Average Annual Loss by Area 166° W 164° W 162° W 160° W 158° W 0 150 300 600 Aitu- 012 4 Arutanga 8° S taki Kilometers Kilometers 10° S Atiu Mangaia 12° S 012 4 0 1 2 3 14° S Building Replacement Cost Density (million USD / km^2) Avarua Rarotonga 16° S 0 - 0.5 1-5 15 - 20 0.5 - 0.75 5 - 10 20 - 30 Section 0.75 - 1.0 10 - 15 18° S Atiu 02 Aitutaki 20° S Rarotonga Mangaia 22° S Cook Islands 0 2 4 8 Source: PCRAFI 2011 08 PCRAFI THE COOK ISLANDS been removed to create uninterrupted views of the ocean. The Cook Islands is expected to incur, on /// average, about NZ$6 million (US$4.9 million) of losses per year due to tropical cyclones. /// In the next 50 years, the Cook Islands has a 50 percent chance of experiencing a loss exceeding NZ$97 million (US$79.5 million) and a 10 percent chance of experiencing a loss exceeding NZ$327 million (US$268 million) (see figure 3). Figure 4 shows the modeled average annual loss by area, with red indicating high levels of average annual losses—in the range of NZ$0.6 million to NZ$0.8 million (US$0.49 million–US$0.65 million). The full risk profile can be found in annex 4. Photo Credit /// /// Phillip Capper/Flickr b THE COOK ISLANDS PCRAFI 09 Public Financial Management of Natural Disasters In 2007, Emergency Management Cook Islands /// but could not access the funds needed to facilitate (EMCI) was moved from the supervision of action. the police to the Office of the Prime Minister Effective post-disaster financial response relies on (OPM). This move gave EMCI greater political two fundamental capabilities: visibility and resources: its annual budget /// allocation more than doubled, from NZ$46,000 (a) The ability to rapidly mobilize funds post- (US$37,700) in 2006 to NZ$102,000 (US$83,600) disaster; and in 2007. The budget allocation for the 2013 (b) The ability to execute funds in a timely, financial year was NZ$105,542 (US$87,500) for transparent, and accountable fashion. operational and capital costs. This section discusses the Cook Islands’ existing The Cook Islands has a proactive approach procedures for post-disaster budget mobilization /// to DRFI, which is supported by the upper and execution and where possible provides echelons of government. In January 2011, the examples of their use. /// prime minister in his role as chair of the National Disaster Risk Management Council requested that the Ministry of Finance and Economic Management (MFEM) look at ways to become self-reliant in initial disaster response and generate new income streams for investment in a fund specifically for disaster response and recovery. The demand for self-reliance followed a Section /// delayed response to TC Pat in 2010, which caused widespread devastation on the island of Aitutaki. National agencies wanted to respond /// 03 10 PCRAFI THE COOK ISLANDS Post-Disaster (the ERTF) and has purchased catastrophe risk insurance with a maximum payout of NZ$3.4 Budget Mobilization million (US$2.79 million) under the Pacific Catastrophe Risk Insurance Pilot. While these The MFEM is heavily involved in disaster steps do not negate the need for international /// response, and the financial secretary sits on assistance, they provide dedicated funds for the Response Executive, a committee that initial response and ensure that the government is required to report directly to the cabinet. maintains control during this crucial period. /// The role of the Response Executive is to provide advice and support to ensure effective emergency Mobilizing ex-post financial measures (such /// response and initial relief coordination. It is as budget reallocation) and the contingency primarily concerned with systematic acquisition fund can take between one and two weeks. /// and distribution of resources in accordance with A Statement of Disaster will generate access requirements imposed by the national emergency to the ERTF, but use of the contingency fund or declared disaster. and reallocation of funds (even within the same ministry) may take one to two weeks to mobilize, Following response to TC Percy in 2005 and given that both require cabinet approval. The /// TCs Pat and Oli in 2010, the MFEM has taken cabinet sits every week, so it is unlikely but not an ex-ante approach to DRFI. To help finance impossible that the reallocation of funds could /// immediate relief, it has established NZ$500,000 take as long as two weeks to mobilize. Table (US$409,000) in dedicated domestic reserves Table 1—  Sources of Funds Available SHORT TERM MEDIUM TERM LONG TERM (1-3 MONTHS) (3-9 MONTHS) (OVER 9 MONTHS) Ex-post Financing Donor Assistance (relief) Budget Reallocation Domestic Credit External Credit Capital Budget Realignment Donor Assistance (reconstruction) Tax Increase Flash Appeal Ex-ante Financing Emergency Fund Contingency Budget Contingent Credit Sovereign (parametric) Catastrophe Section Risk Insurance Traditional Disaster Insurance 03 Source: Government of the Cook Islands; World Bank. THE COOK ISLANDS PCRAFI 11 Box 1—  The Pacific Catastrophe Risk Insurance Pilot The Pacific Catastrophe Risk Insurance Pilot aims to provide /// government in the aftermath of a severe natural disaster that disrupts the immediate budget support following a major tropical cyclone or provision of government services. Countries can choose between three earthquake/tsunami. The insurance is designed to cover emergency /// layers of coverage—low, medium, and high—depending on the frequency losses, which are estimated using both a modeled representation of the of events. The lower layer will cover events with a return period of 1 in 10 event based on hazard parameters and a calculation of total modeled years, that is, more frequent but less severe events. The medium layer will physical damage. Unlike a conventional insurance scheme, where a payout cover events with a 1-in-15-year return period, while the higher layer will would be assessed against actual incurred costs, this scheme pays out on cover less frequent but more severe events, or those with a return period the results of a model. The advantage of this approach is that it results in of 1 in 20 years. However, countries may request that a more customized a much faster payout. The payout would act as a form of budget support option be developed for them. and would go some way to cover the costs that would be incurred by the 1 provides an indication of when funds can be takes to mobilize these funds and the amount of mobilized and where possible the amount of funds available. funding available. Ex-Ante Practices and Arrangements The Cook Islands has a variety of ex-ante /// and ex-post financial tools, and the timing The uncertainty surrounding international for mobilizing and executing these funds assistance following a disaster has placed pressure varies significantly. Building on the World Bank /// on countries to establish domestic sources of framework for disaster risk financing and insurance finance for post-disaster relief, such as the (see annex 1), table 1 shows the ex-ante and establishment of national reserves or the transfer ex-post financial tools available, specifies those of risk to the international insurance market. utilized by the Cook Islands, and gives indicative The ex-ante practices and arrangements that timings. The tools utilized by the Cook Islands are have been made by the Cook Islands include a highlighted in blue. Those sections highlighted in contingency budget, the ERTF, and sovereign gray are for generic instruments that to date have catastrophe risk insurance. not been used in the Cook Islands. Contingency budget The sections below discuss in detail the ex-ante Section 70b(i) of the Cook Islands Constitution and ex-post finance tools available to the Cook /// sets a cap on the contingency budget Islands, including information on the time it equivalent to 1.5 percent of the total sums Section 03 12 PCRAFI THE COOK ISLANDS appropriated (Government of Cook Islands the following: deployment of initial damage 2004). These sums were the equivalent of assessment team(s); reestablishment of essential NZ$1.7 million (US$1.4 million) for the 2012/13 services; deployment of appropriate ministry staff fiscal year. It should be acknowledged, however, /// from Rarotonga to assist or relieve staff on the that the contingency budget is not exclusively outer islands; deployment of skilled volunteers, for disaster response, and it is unlikely that the tools, parts, and machinery to assist with clearance full amount would be available in the event of and immediate repairs; transport, accommodation, a disaster. food, and water for volunteers and relief workers; and all costs associated with either air or sea Emergency Response Trust Fund freight (ERTF Policy 2011). Following the prime minister’s request /// The ERTF was fully operational and had /// that the country become self-reliant in the received an appropriation from the annual provision of initial disaster response, EMCI budget by December 2011, less than 12 collaborated with the MFEM and the Ministry months after it was initially discussed. /// of Infrastructure and Planning (MOIP) to Following its establishment and receipt of the establish the Emergency Response Trust initial appropriation, the ERTF received additional Fund. Led by EMCI, these agencies within one /// funds from the government and the Pacific Islands year were able to draft a policy for the ERTF that Forum Secretariat to establish a minimum reserve was approved by the cabinet. This policy details of NZ$500,000 (approximately US$409,000). the budget execution process, the reporting It is expected that the fund will be increased to requirements to ensure that expenditures are reach NZ$1 million (US$819,000). The country’s transparent and accountable, and the role of the experience with the ERTF demonstrates the trustees’ management committee. importance of ex-ante cooperation between government agencies, and suggests how quickly The purpose of the ERTF is to enable a swift /// procedures can be developed when several and coordinated response by the Disaster agencies work together to remove barriers to Response Executive once a State of Emergency effective post-disaster budget execution. or State of Disaster is activated. The fund /// is limited to emergency response, including Sovereign catastrophe risk insurance Table 2—  Selected Insurance Coverage, 2014–2015 Pilot Season TROPICAL CYCLONE Policy period November 1, 2013–October 31, 2014 Peril selected Tropical cyclone Layer of coverage selected 1 in 10 years Coverage limit as a percentage of contingency 200 percent budget Section Reporting agencies Joint Typhoon Warning Center Source: World Bank and PCRAFI 2013. 03 THE COOK ISLANDS PCRAFI 13 Table 3—  Total Operating Expenditure, Fiscal Year 2013/14 PERCENTAGE OF TOTAL 2013 NZ$ MILLION US$ MILLION EXPENDITURE Payments on behalf of the 78.4 64.2 66% Crown Operating 28.5 23.4 24% Othera 11.9 9.8 10% Total budget 118.8 97.4 100% Source: MFEM 2013; World Bank Note: a. This comprises airport authority, debt-servicing interest, and depreciation. The Cook Islands has financed its premium /// coverage—that is, they chose coverage for more in an innovative way: by collaborating with frequent but less severe events. state-owned enterprises (SOEs). The SOEs find /// In the event that the Cook Islands it difficult to access insurance for infrastructure /// experiences a tropical cyclone with an in the insurance marketplace. To overcome this estimated emergency loss2 that exceeds the problem, the Cook Islands has arranged to fund attachment point, it will be eligible for a half of its premium through SOE contributions payout equivalent to over double the annual and half through a contribution from the national contingency budget. Events that generate an budget; the SOEs will receive 50 percent of any /// emergency loss beneath the attachment point payout. The MFEM and SOEs agreed to finance the must be managed by optimizing the use of other premium in this way as a form of self-insurance; financial tools. it is recommended that they consider increasing their insurance coverage in the future. This is a Ex-Post Practices and Arrangements model that could be considered by other countries participating in the pilot program. A disaster often exceeds a country’s capacity to cope with such an event, and there will The Cook Islands’ participation in the Pacific generally be a need for ex-post practices and /// Catastrophe Risk Insurance Pilot provides arrangements. An optimal strategy for DRFI relies access to an injection of liquidity within on a combination of ex-ante and ex-post financial the first month of a qualifying disaster. This instruments. Ex-post arrangements benefit from /// coverage came into effect on November 1, 2014, being able to establish the extent of the disaster and was renewed on November 1, 2015. The Section and prioritize the response needs. As a result these Cook Islands opted for coverage against tropical arrangements take longer to implement than ex- cyclones (see table 2) and chose the lower layer of ante arrangements, but they can often mobilize 03 14 PCRAFI THE COOK ISLANDS Photo Credit /// /// Australian Department of Foreign Affairs and Trade/ Flickr b larger amounts of finance. This section discusses a summary of the total operating expenditure the ex-post practices and arrangements that have for the financial year 2013/14. It is estimated been made by the Cook Islands. that approximately NZ$28.5 million (US$23.4 million), or 24 percent, can be reallocated from the Budget reallocation operating expenditures in between departments within the same ministry with the approval of the Under the Ministry of Finance and Economic /// minister and the financial secretary. Management Act 1995/1996, ministries may transfer operational funds between External credit departments with the agreement of the minister /// responsible and the financial secretary. Any ministry In 2012/13 gross debt servicing was /// spending over its appropriation as a result of approximately NZ$4.8 million (US$3.9 million) /// these transfers will be investigated by the Public and included loans from New Zealand and the Expenditure Review Committee, which may direct Asian Development Bank, both major development that funds to be repaid from any subsequent partners to the Cook Islands. Debt outstanding as appropriation. of June 30, 2012, was NZ$93.6 million (US$76.2 million), an 18 percent reduction from 2010. In 2012/13, the Cook Islands adopted the Annual debt service is equivalent to 4.4 percent of /// Section Government Finance Statistics (GFS) format recurrent expenditure (MFEM 2013). of the International Monetary Fund (IMF) to present Crown expenditures. Table 3 shows 03 /// THE COOK ISLANDS PCRAFI 15 The Cook Islands is in the process of /// organizations, businesses, and individuals establishing a fund for debt repayment, the contribute in the form of cash grants and aid in Loan Repayment Fund (LRF). The LRF would /// kind. The provision of aid in kind, while vital, can manage the repayment of government debt and affect the costs borne by governments for the of guaranteed debt of SOEs. The government is distribution these goods. to deposit funds in the LRF annually to provide Donor assistance for reconstruction often for the repayment of all government borrowing /// takes significant amounts of time and and government guaranteed borrowing. Annual requires negotiation between the country contributions to the LRF are to be based on the and its donors to establish key priorities. debt service requirements for the year. /// Significant amounts of finance can be assigned, The Cyclone Emergency Assistance Project /// however. For example, New Zealand Aid provided with the Asian Development Bank provided NZ$6.4 million (US$5.3 million) to support the a NZ$4.8 million (US$3.9 million) loan to help Aitutaki Cyclone Recovery and Reconstruction with the recovery efforts following the series Plan (ACRRP). Reconstruction financing may be of cyclones that affected the Cook Islands conditional and may be aligned to donor rather in 2005. This loan took four months to approve, /// than national priorities. significantly delaying the necessary relief and recovery work and demonstrating the need to have Total Response Funds Available access to a pre-agreed upon line of contingent The Cook Islands has a maximum amount /// credit to minimize disruption to the provision of of NZ$5.6 million (US$4.6 million) available relief and recovery. to facilitate disaster response. This amount is /// Given the structured management of existing /// equivalent to 4 percent of gross total appropriation debt, the use of contingent credit could be and 1.7 percent of GDP in 2011. Figure 8 shows explored as an alternative to securing cash the three-tiered DRFI strategy alongside the reserves for disaster response. MFEM expressed /// sources of funds and the maximum amounts of an interest in optimizing the use of contingent funding available to the Cook Islands following credit as an alternative to increasing the level of an event. However, it should be acknowledged cash held in the ERTF. that the contingency budget is not exclusively for disaster response, and it is unlikely that NZ$1.7 Donor funds for relief million (US$1.4 million) would be exclusively and reconstruction available for response. Consequently, there is likely to be a gap between the amount available from While donor funds will always be required the contingency and ERTF before a payout may be /// following disaster, there is often an element triggered by breaching the selected attachment of uncertainty surrounding how much point of the catastrophe risk insurance pilot. It will be provided, what will be provided, and is estimated that there is a 4.9 percent chance /// when funds will arrive in country. Consequently, in any year that disaster losses will exceed these overdependence on international relief as a contingency funds. source of post-disaster financing can delay the Section provision of initial relief and inhibit ex-ante contingency planning. Development partners, 03 international organizations, local nongovernmental 16 PCRAFI THE COOK ISLANDS Post-Disaster aid-coordinating agencies to ensure timely and accurate processing and reporting of expenditure. Budget Execution The total cost of the ACRRP was NZ$597,074 (US$489,000) under the planned budget Following TC Pat in 2010, the Cook Islands (ACRRP 2013). /// government reallocated NZ$2.7million (US$2.2 million) from its outer islands budget Following a Statement of Disaster or a /// to reestablish essential services and for /// Statement of Emergency by the prime infrastructure support; the aim was to enable minister under part 3 or 4, respectively, of the businesses to resume immediate operations so Disaster Risk Management Act (Act No. 33) of that the locals could assist with recovery efforts. 2007, the funds contained within the ERTF can An additional NZ$6.4 million (US$5.2 million) be disbursed for any purchases deemed necessary /// was provided by New Zealand Aid to support by the fund’s trustee management committee. the ACRRP. There are four trustees on the committee: the national controller, director of EMCI, secretary of The completion report for the ACRRP suggests MOIP, and the financial secretary. Upon agreement /// that overall financial management could be within the committee, all funds can be spent improved through personnel secondments if required in order to facilitate response. The from MFEM. The report indicated that overall, fund is to be administered in accordance with /// financial management processes could have been Cook Islands Government Financial Policies and better coordinated between the implementing and Figure 5 —  Amount of Ex-Ante Funds Available for Immediate Response Section Source: World Bank. 03 THE COOK ISLANDS PCRAFI 17 Photo Credit /// /// US Navy /Flickr b Procedures, specifically the MFEM Act (Act No. 21 staff training and to develop a dedicated post- of 1995/96), and the draft Trust Fund Procedures. disaster budget execution manual to ensure swift post-disaster mobilization and execution when Although ERTF procedures and processes are next required. /// well documented, there appears to be limited awareness of them within MFEM. Given the /// small number of staff in the department this is not surprising; it is likely that those initially involved have moved to positions elsewhere in government. In small island states it is easy for institutional knowledge be lost upon the departure of a few key individuals. The Cook Islands has developed policies and /// procedures well founded on past experiences. /// The government has dedicated, yet limited, funds Section that can be accessed following an event, but not all staff are aware of the procedures involved in 03 accessing them. It would be helpful to carry out 18 PCRAFI THE COOK ISLANDS Domestic Catastrophe Risk Insurance Market The insurance market in the Cook Islands is /// There is a high uptake of insurance by the /// small, with the portfolio for general insurance private sector, particularly in the tourism premium estimated to be NZ$8.2 million /// industry, where it is estimated that 80 percent (US$6.7 million), including aviation. There is one of operators purchase property insurance. /// local insurance provider who holds NZ$4.4 million Almost all these policies include tropical cyclone coverage, and some of the policies include (US$3.6 million) of the market, while the remainder coverage against sea surge. In addition, many is placed offshore. Insurance agents and brokers tourism industry operators, irrespective of size, placing risk offshore are required to report back to hold business interruption insurance. the Financial Supervisory Commission (FSC) with details of those offshore placements. The Cook Islands is exposed to the /// catastrophic peril of cyclones. It is located in /// Insurance law and regulation within the /// the Southern Hemisphere tropical cyclone zone, Cook Islands is governed by the Insurance and though the cyclone season officially runs Act (2008), the Insurance Code (2010), and from November to May, tropical storms may Insurance Regulations (2009). Insurance /// occur outside this period. There have been few supervision is the responsibility of the FSC. earthquakes or tsunami events in the Cook Islands. Photo Credit /// /// Australian Department of Foreign Affairs and Trade/Flickr b THE COOK ISLANDS PCRAFI 19 Insurance for catastrophe insurance perils /// of earthquake and cyclone are available in the market and can be included in property insurance products. Cyclone insurance is not /// covered under standard property coverage wordings, and is available by extension only. Property insurance rates for the cyclone peril are 0.45 percent in the Cook Islands, which is higher than the rate in most other Pacific countries. Rates for the earthquake peril are 0.12 percent, around the Pacific average. The Cook Islands government does have /// an indemnity property insurance program in place for the majority of its assets. The program is arranged by Cook Islands Investment Corporation (CIIC). It does not /// insure buildings under NZ$50,000 in value, and many infrastructure assets are not insured. Cyclone insurance is not included in this program. SOEs have independent indemnity property /// insurance programs in place for the majority of their assets. Cyclone insurance is not /// included in the majority of these programs. SOEs contributed 50 percent of the premium for the parametric pilot insurance program in 2013. Please refer to annex 3 for the full market insurance review that was conducted in the Cook Islands. Section 04 20 PCRAFI THE COOK ISLANDS Options for Consideration The Cook Islands has implemented several DRFI recovery. The government has expressed interest instruments to increase its financial protection in establishing access to credit in advance of an against disasters. Some actions that would event so that the funds can be received as soon as strengthen this work further are outlined below for required without any negotiation. consideration. Recommendation 3: Develop an operations /// Recommendation 1: Develop an overarching /// manual detailing the processes required disaster risk financing strategy aligned to to facilitate swift post-disaster budget existing processes. The Cook Islands has taken a /// mobilization and execution. This document /// proactive ex-ante approach to DRFI. However, the would build on the procedures established for activities in place have been developed in isolation, the ERTF and refer to emergency procurement and while some processes are documented, this procedures in place. A manual that detailed information can be difficult to find. An overarching existing practices in a single document would help DRFI strategy could be developed, and possibly staff understand correct procedures by formalizing endorsed by the cabinet, in order to create a single existing processes—such as the allocation of a document that would articulate the financing member of staff from MFEM to the EMCI—that options available and associated policies behind are now conducted on a goodwill basis . Such these tools. It would be complemented by an processes are at risk of lapse when they rely on a action plan for implementation. few key individuals in government, as is the case in the Cook Islands. Recommendation 2: Investigate the use of /// contingent credit to complement existing Recommendation 4: Develop an insurance /// finance options. The Cook Islands has a strong /// program for key public assets. This program /// history of using credit to its best advantage would identify possible assets to be included, and has developed the LRF to ensure prudent investigate existing insurance coverage provided management of debt in the future. Having access in country, and develop a table detailing coverage to a line of contingent credit that has been agreed options by provider to help determine which assets Section upon in advance could prove a useful way to to include in the program and to select appropriate access cash following a disaster and could help coverage. This program could investigate the use 05 minimize disruption to the provision of relief and of an insurer vehicle if appropriate. THE COOK ISLANDS PCRAFI 21 End Notes 1 Priority for Action 4—“Reduce the Underlying Risk Factors”— has an associated key activity of financial risk-sharing mecha- nisms, such as insurance, while Priority for Action 5—“Strengthen disaster preparedness for effective response at all levels”—in- cludes the establishment of emergency funds such as contingency budget, national reserves, and annual budgetary allocations. See UNISDR (2005). 2 Emergency loss is estimated as a percentage of direct losses, which include the cost of repairing or replacing damaged assets. Section 05 22 PCRAFI THE COOK ISLANDS References ACRRP (Aitutaki Cyclone Recovery and Reconstruction Plan). SOPAC (Pacific Islands Applied Geoscience Commission). 2005. 2013. “Aitutaki Cyclone Recovery and Reconstruction Plan “Pacific Disaster Risk Reduction and Disaster Management Draft Completion Report.” Ministry of Finance and Economic Framework for Action (Regional Framework for Action or RFA) Management, Rarotonga, Cook Islands. 2005–2015.” SOPAC, Suva, Fiji. ADB (Asian Development Bank). 2013. “Asian Development Bank SPC-SOPAC (Secretariat of the Pacific Community, Applied and Cook Islands Fact Sheet.” ADB, Manila, Philippines. Geoscience and Technology Division). 2011. “Investment in DRM—Cook Islands.” Secretariat of the Pacific Community, Cyclone Recovery Committee. 2006. “Cyclone Recovery Recon- Suva, Fiji. struction Plan 2006–2009.” Ministry of Finance and Economic Management, Aid Management Division, Rarotonga, Cook SPC (Secretariat of the Pacific Community) 2011 Cook Islands: Islands. Investment in DRM, Suva, Fiji Cyclone Recovery Committee, ———. 2010. “Cyclone Pat SPC (Secretariat of the Pacific Community) 2011 Fiji: Investment Recovery and Reconstruction Plan 2010–2011.” Office of the in DRM, Suva, Fiji Prime Minister, National Policy and Planning, Rarotonga, Cook SPC (Secretariat of the Pacific Community) 2011 Republic of Islands. Marshall Islands: Investment in DRM, Suva, Fiji GFDRR (Global Facility for Disaster Reduction and Recovery) SPC (Secretariat of the Pacific Community) 2011 Vanuatu: Invest- 2012 The Sendai Report: Managing Disaster Risks for Resilient ment in DRM, Suva, Fiji Future, Washington D.C., U.S.A. SPC (Secretariat of the Pacific Community) 2012 Papua New Government of Cook Islands 2009, National Action Plan for Disas- Guinea: Investment in DRM, Suva, Fiji ter Risk Management (2009- 2015), Cook Islands and Pacific SPC 2012 “Investment in DRM—Cook Islands.” Secretariat of the Islands Applied Geoscience Commission (SOPAC), Suva. Pacific Community, Suva, Fiji. Government of Cook Islands. 2004. Constitution of the Cook UNISDR (United Nations International Strategy for Disaster Islands with Amendments as of 2004. Government of Cook Reduction). 2005. Hyogo Framework for Action 2005–2015: Islands, Rarotonga, Cook Islands. Building the Resilience of Nations and Communities to Disas- ———. 2009. “National Action Plan for Disaster Risk Manage- ters. UNISDR, Hyogo, Japan. ment (2009–2015).” Cook Islands and Pacific Islands Applied World Bank 2010 Financial Protection of the State against Natural Geoscience Commission (SOPAC), Suva, Fiji. Disasters; A Primer, Washington D.C., U.S.A. ———. 2011.” Joint National Action Plan for Disaster Risk World Bank. 2011. Pacific Catastrophe Risk Financing Initiative: Management (2011–2015).” Cook Islands and Pacific Islands Catastrophe Risk Assessment and Options for Regional Risk Applied Geoscience Commission (SOPAC), Suva, Fiji. Financing. Phase 1 Report. Washington, DC: World Bank. Government of Cook Islands. 2013. “Cook Islands Government Appropriation Amendment 2012/2013.” Ministry of Finance and Economic Management, Rarotonga, Cook Islands. Section Government of Cook Islands. 2013. “Cook Islands Government Budget Estimates 2012/2013.” Ministry of Finance and Eco- nomic Management, Rarotonga, Cook Islands. 05 PCRAFI (Pacific Catastrophe Risk and Financing Initiative). 2011. “Country Risk Profile: Cook Islands.” September. [http://pacris. sopac.org](http://pacris.sopac.org). 23 PCRAFI THE COOK ISLANDS About PCRAFI The Pacific Catastrophe Risk Assessment and disaster risk financing strategy and focus on three Financing Initiative (PCRAFI) is a joint initiative core aspects: between the Secretariat of the Pacific Community • the development of a public financial through its Applied Geoscience and Technology management strategy for natural disasters, Division (SPC-SOPAC), the World Bank, and the recognizing the need for ex-ante and ex-post Asian Development Bank, with financial support financial tools; from the government of Japan, the Global Facility for Disaster Reduction and Recovery (GFDRR), and • the post-disaster budget execution process, the European Union, and with technical support to ensure that funds can be accessed and from Air Worldwide, New Zealand GNS Science, disbursed easily post-disaster; and and Geoscience Australia. • the insurance of key public assets, to resource The initiative aims to provide the Pacific Island the much larger funding requirements of Countries (PICs) with disaster risk modeling recovery and reconstruction needs. and assessment tools for enhanced disaster risk The PICs involved in PCRAFI are the Cook Islands, management, and to engage PICs in a dialogue the Federated States of Micronesia, Fiji, Kiribati, on integrated financial solutions to increase their the Marshall Islands, Nauru, Niue, Palau, Papua financial resilience to natural disasters and climate New Guinea, Samoa, the Solomon Islands, Timor- change. The initiative is part of the broader agenda Leste, Tonga, Tuvalu, and Vanuatu. on disaster risk management and climate change For further information, please visit adaptation in the Pacific region. http://pacrisk.sopac.org or contact PCRAFI@spc.int. The Pacific Disaster Risk Financing and Insurance (DRFI) Program is one of the many applications of PCRAFI. It is designed to increase the financial resilience of PICs by improving their capacity to meet post-disaster financing needs without compromising their fiscal balance. Through DRFI, technical assistance is available to PICs to build Section capacity in the public financial management of natural disasters. The technical assistance will build 06 on the underlying principles of the three-tiered 24 PCRAFI THE COOK ISLANDS Annex 1 World Bank Framework for Disaster Risk Financing and Insurance Major disasters increase public spending development projects (see figure A.2). This layer requirements and reduce revenues, placing further uses tools such as contingency budgets and strain on limited national budgets. The immediate national reserves. The aim is to finance small and long-term fiscal consequences of a disaster but high-frequency disasters. The second layer is depend on the sources of revenue available to aimed at less frequent but more severe events that the government versus its public expenditure are too costly to pre-finance through retention commitments. Investment in disaster risk financing mechanisms. Here, liquidity mechanisms—such as instruments can help prevent the diversion of funds contingent credit, which can mobilize additional from key development projects and significantly funds immediately following an event—become reduce the time needed to activate an initial cost-effective. response. Financial protection is a core component of any comprehensive disaster risk management The third layer, disaster risk transfer (such as strategy, and should be implemented alongside insurance), focuses on mobilizing large volumes the pillars of risk identification, risk reduction, of funds for large but infrequent natural disasters. preparedness, and post-disaster reconstruction (see For events of this type, risk transfer instruments— figure A.1). such as insurance or catastrophe swaps and bonds—become cost-effective in averting a The World Bank framework for disaster risk liquidity crunch. financing and insurance advocates a three-tiered approach for the development of financing There is a clear time dimension to post-disaster arrangements to cover the residual disaster risk funding needs and the various phases of relief, that cannot be mitigated. These layers align to recovery, and reconstruction. Some financing the basic principles of sound public financial instruments can be activated rapidly. Others management, such as the efficient allocation may take longer to activate but can generate of resources, access to sufficient resources, and substantial funding. The disaster risk financing macroeconomic stabilization. The first layer, strategy needs to reflect both time and cost Section retention, relates to countries’ development of dimensions, ensuring that the volume of funding an internal layer of protection against natural available at different stages in the response efforts 07 disasters to prevent the diversion of funds from matches actual needs in a cost-efficient manner. THE COOK ISLANDS PCRAFI 25 Figure A .1 —  Disaster Risk Management Framework PILLAR 1: RISK IDENTIFICATION Improved identification and understanding of disaster risks through building capacity for assessments and analysis PILLAR 2: RISK REDUCTION Avoided creation of new risks and reduced risks in society through greater disaster risk consideration in policy and investment PILLAR 3: PREPAREDNESS Improved capacity to manage crises through developing forecasting and disaster management capacities PILLAR 4: FINANCIAL PROTECTION Increased financial resilience of governments, private sector and households through financial protection strategies PILLAR 5: RESILIENT RECOVERY Quicker, more resilient recovery through support for reconstruction planning Figure A .2 —  Three-Tiered Disaster Risk Financing Strategy International Assistance Low Frequency/ High Severity Risk Transfer Sovereign Risk Transfer (e.g. Cat Bond/Cat Swap, (re)insurance) Insurance of Public Assets Contingent Credit Lines Post Disaster Credit Risk Retention High Frequency/ Low Severity Government Reserves, Contingency Budget / Funds Section 07 Emergency Funding Reconstruction 26 PCRAFI THE COOK ISLANDS The initial relief phase requires a quick injection the funds for this phase can therefore be raised of liquidity from day 0 but does not need to be via post-disaster budget reallocation and the sustained for a long period of time (see figure realignment of national investment priorities. A.3). Rapid budget mobilization and execution However, the opportunity cost for these options are key for financing initial disaster response, and is high, given that they can lead to reduced governments should develop appropriate policies expenditure on other key investment areas, such as and procedures for procurement and acquittals health and education. Consequently, governments to facilitate them. Initial relief should be met via may also choose to utilize development partner annual budget allocations and the establishment contingent credit arrangements. of dedicated reserves for disaster response that can be accessed immediately; major catastrophes In contrast, the reconstruction phase has much will exhaust these funds quickly. The residual risk larger financing requirements needed over a associated with higher-cost events should be much longer period of time (see figure A.3). transferred to third parties via a mixture of more Given the large funding requirements associated expensive (re)insurance tools and catastrophe with reconstruction, this phase often requires bonds and, for the most extreme events, post-disaster reconstruction loans to complement international assistance. traditional disaster insurance. Governments The recovery phase requires additional funds may also introduce temporary post-disaster tax but not immediately (see figure A.3). Some of increases aligned to budget restructuring. Figure A .3 —  Post-Disaster Phases: Funding Requirements and Duration` Section 07 THE COOK ISLANDS PCRAFI 27 If adequate and timely funding arrangements are innovative nature of the work in this area and the not in place, the adverse socioeconomic impact number of products under development, this list is of a disaster can be significantly exacerbated, at not exhaustive. both the macroeconomic and household levels. Ex-post financing vehicles are those that become An optimal disaster risk financing and insurance available in the wake of an event. The most strategy aims to combine ex-ante and ex-post familiar form of ex-post disaster financing is financial instruments to secure adequate and donor assistance for relief. There are two forms timely funding at lower cost for the successive this finance can take, cash grants and aid in kind, post-disaster phases. The optimal mix of finance and both play an important role in response. The instruments will be unique to each country based provision of aid in kind, while vital, can affect the upon its associated hazard and exposure. Table distribution costs for these goods. While donor A.1 lists potential finance instruments that can be funds will always be required, there can often be used to address disasters. Those that are shaded in an element of uncertainty surrounding how much blue indicate the generic timelines for mobilizing will be provided, what will be provided, and when and executing these funds, though each country funds will arrive in country. may be slightly faster or slower depending on its internal processes. The table can be adapted by Budget reallocation often plays a key role for the countries to reflect these differences according to continuation of relief and the initial stages of the the financial instruments they have utilized and the recovery program. Generally, this process takes time it takes to mobilize these funds. Given the time, as the reallocation of funds will need to be Table A .1—  Availability of Financial Instruments Over Time SHORT TERM MEDIUM TERM LONG TERM (1-3 MONTHS) (3-9 MONTHS) (OVER 9 MONTHS) Ex-post Financing Donor Assistance (relief) Budget Reallocation Domestic Credit External Credit Capital Budget Realignment Donor Assistance (reconstruction) Tax Increase Flash Appeal Ex-ante Financing Emergency Fund Contingency Budget Contingent Credit Sovereign (parametric) Catastrophe Risk Insurance Traditional Disaster Insurance Section Source: World Bank 2013. 07 28 PCRAFI THE COOK ISLANDS agreed upon by the cabinet and across ministries. Donor assistance for reconstruction can be Budget reallocation can sometimes divert funds delivered as a form of direct budget support, from key development projects and hence seriously grant, or a post-disaster reconstruction loan. harm the long-term growth prospects of the The form of finance used here will depend on country. The same issues are relevant to capital the size of the event, the development status of budget realignment, although the timelines for a country (for example, low-income countries that process are typically significantly longer. may have access to concessional loans and have more access to grants), and the debt-servicing Domestic credit, such as the issuance of ratio of a country. Typically, this form of finance government bonds, can be used to raise additional is conditional and requires sufficient lead time for revenue to fund post-disaster expenditures. Again, aligning the priorities of countries and donors to due to the processes involved, domestic credit will meet reconstruction and recovery needs. take some time to operationalize and is best suited to financing recovery and reconstruction activities. Tax increases will help redress the increase in public External credit will likewise take time to be expenditure following a disaster by generating agreed upon with providers and will require clear additional revenue. Although higher taxes could articulation of the activities it is to finance. Both of be politically unfavorable, they create a sustainable Section these forms of credit will have an impact on the source of finance for reconstruction activities. debt-servicing ratio of a country and may not be a Conversely, some governments have applied tax 07 viable option for heavily indebted countries. incentives to encourage donations to response THE COOK ISLANDS PCRAFI 29 funds from both the private sector and members of Parametric insurance uses hazard triggers, linking the public. This approach can be popular when tax immediate post-disaster insurance payouts credits are written off on annual tax returns. to specific hazard events. Unlike traditional insurance settlements that require an assessment Ex-ante financing provides an element of financial of individual losses on the ground, parametric certainty during a disaster, because governments policies do not pay based on actual losses incurred. have established these sources of finance in Instead, the payout disbursements are triggered advance. These funds can be quickly disbursed by specific physical parameters for the disaster following an event so that essential relief work (e.g., wind speed and earthquake ground motion). commences immediately. A reserve fund provides The payouts provide a rapid, yet limited, injection a dedicated amount of funding for response of liquidity that can be a valuable boost to and if properly managed can accrue over time to relief funds. increase the level of funding available. However, the opportunity cost of holding money in a Traditional disaster insurance offers indemnity dedicated fund is high, as it diverts funds from coverage. Receipt of funds may take longer than the operational budget. Careful analysis should be with parametric insurance, as a detailed damage undertaken to identify the optimal level of reserves assessment is required. However, as payouts that a country should hold and maintain. are directly linked to the damage experienced, the payout will better match the needs of the Contingent credit is a relatively new instrument, insured party. with current forms offering disbursement following an event whose magnitude has been agreed upon Public financial management in the Pacific is in advance. It can be fungible or conditional by dictated by the fact that many PICs are classified design. As with other sources of credit, the amount as Small Island Developing States (SIDS). Typically, available will depend on the development status countries in this classification have a narrow of the country and the debt-servicing ratio. The revenue base, are net importers, and have a advantage of contingent credit is that a drawdown consequential reliance on aid as an income stream. can be made within a 24-hour period. These characteristics can limit the options available for post-disaster finance. It is unlikely that a SIDS government could afford to reallocate the capital 30 PCRAFI THE COOK ISLANDS budget, and a tax increase could make many items in post-disaster budget reallocation and build unaffordable and hence be detrimental to citizens’ a case for establishing national reserves. While quality of life. Given these constraints on the international assistance will always play a valuable national budget, alternatives such as contingent role, overdependence on such assistance as a credit and risk transfer options should be used to source of financing carries limitations; international reduce the drain on limited public funds. aid can be uncertain, which inhibits contingency planning, and can be slow to materialize. PIC governments face critical challenges for Increasingly, PICs such as the Cook Islands are financial resilience to natural disasters. Most PICs establishing national reserves for funding initial have restricted options for securing immediate response. liquidity for swift post-disaster emergency response without compromising their long-term fiscal The World Bank, SPC, and their partners, with balance. In addition, PICs are constrained by their grant funding from the government of Japan, have size, borrowing capacity, and limited access to implemented the Pacific Disaster Risk Financing international insurance markets. In the absence of and Insurance Program to help the PICs increase easy access to debt and well-functioning insurance their financial resilience to natural disasters and markets, a large portion of the economic losses improve their financial response capacity in the stemming from adverse natural events is borne by aftermath of natural disasters. This program is part governments and households, with support from of the Pacific Catastrophe Risk Assessment and development partners. Financing Initiative (PCRAFI). The Pacific has seen several recent cases that show the need for immediate liquidity post-disaster. In the Cook Islands, in the immediate aftermath of TC Pat in 2010, a delay in the receipt of travel funds meant that key government personnel could not immediately commence the initial damage assessment. Following TC Vania in 2010, Vanuatu had to reallocate a significant amount of the national budget. Similarly, Fiji and Samoa had to reallocate budgetary funds in the wake of TC Evan in 2012 and 2013; and the Santa Cruz earthquake in the Solomon Islands in February2013 drained the annual budget for the National Disaster Management Office and used the majority of the national contingency budget. Lacking contingency reserves and access to short- term loan funds, PICs have limited post-disaster budget flexibility and rely heavily on post-disaster Section donor assistance. Studies by SPC (2011 and 2012) that look at the fiscal impact of past disasters in selected PICs demonstrate the financial constraints 07 THE COOK ISLANDS PCRAFI 31 Annex 2 G lossary Attachment point. The attachment point (deductible) amount is essentially the excess payable before any /// /// payout is made under a policy. That is, anything under this value will be borne by the policy holder. Catastrophe swap. A catastrophe swap, also known as a cat swap, is a financial tool used to transfer some /// /// of the risk that the covered party faces from catastrophes to the international reinsurance or capital markets. In the case of the Pacific Catastrophe Risk Insurance Pilot, tropical cyclone and/or earthquake risk is passed to the financial markets. Coverage limit. This indicates the maximum payout as defined under the policy. /// /// Emergency losses. Emergency losses in the context of the Pacific Catastrophe Risk Insurance Pilot are /// /// calculated by using a percentage of the estimated ground-up losses. Exhaustion point. The exhaustion point indicates the loss level at which the payout under a policy reaches /// /// its maximum point. Ground-up losses. Ground-up losses in this context refer to estimated total damage to buildings, /// /// infrastructure, and cash crops. Payout. A payout refers to the amount of cash that countries will receive following an eligible event. /// /// Premium. The premium is the cost that an insured party will pay for a given level of coverage: the more /// /// that is included in the coverage provided, the higher the premium will be. Premiums are determined by the amount of coverage a country chooses, the event attachment point (deductible) and exhaustion point (limit) of that coverage, and the risk profile of the country. Risk pool. A risk pool is a group of people, institutions, or countries that collaborate to manage risk /// /// financially as a single group. Section 07 32 PCRAFI THE COOK ISLANDS Annex 3 Insurance Market Review, February 2014 Executive Summary May, tropical storms may occur outside this period. There have been few earthquakes or tsunami The insurance market in the Cook Islands is /// events in the Cook Islands. small, with the portfolio for general insurance premium estimated to be NZ$8.2 million /// Insurance for catastrophe insurance perils /// (US$6.7 million), including aviation. There is one of earthquake and cyclone are available in local insurance provider who holds NZ$4.4 million the market and can be included in property (US$3.6 million) of the market, while the remainder insurance products. Cyclone insurance is not /// is placed offshore. Insurance agents and insurance covered under standard property coverage brokers placing risk offshore are required to report wordings, and is available by extension only. In back to the Financial Supervisory Commission (FSC) the Cook Islands, property insurance rates for the with details of those offshore placements. cyclone peril are higher (0.45 percent) than in most other Pacific countries, and are around the Pacific Insurance law and regulation within the /// average for the earthquake peril (0.12 percent). Cook Islands is governed by the Insurance Act (2008), the Insurance Code (2010), and The Cook Islands government does have /// Insurance Regulations (2009). Insurance /// an indemnity property insurance program supervision is the responsibility of the FSC. in place for the majority of its assets. The program is arranged by Cook Islands There is a high uptake of insurance by the /// Investment Corporation (CIIC). It does not /// private sector, particularly in the tourism insure buildings under NZ$50,000 in value, and industry, where it is estimated that 80 percent many infrastructure assets are not insured. Cyclone of operators purchase property insurance. insurance is not included in this program. /// Almost all these policies include tropical cyclone coverage and some of the policies include sea State-owned enterprises (SOEs) have /// surge coverage. In addition, many tourism industry independent indemnity property insurance operators, irrespective of size, hold business programs in place for the majority of their interruption insurance. assets. Cyclone insurance is not included in the /// majority of these programs. SOEs contributed 50 Section The Cook Islands is exposed to the percent of the premium for the parametric pilot /// catastrophic peril of cyclones. It is located in the insurance program in 2013. /// Southern Hemisphere tropical cyclone zone, and 08 though the season officially runs from November to THE COOK ISLANDS PCRAFI 33 Introduction There is one licensed insurance broker, Willis /// /// New Zealand Limited (Willis). Insurance Market Insurance may be placed offshore by an /// In the Cook Islands, total non-life (general) /// approved insurance agent or insurance broker insurance premium, all classes including licensed under the Insurance Act. Those agents /// aviation, is estimated at NZD$8.2 million and brokers must report back to the Financial (US$$6.7 million). Estimates based on anecdotal /// Supervisory Commission (FSC) with details of evidence from insurance industry sources suggest those offshore placements. The main offshore that of this amount, NZD$4.4 million (US$3.6 insurer used in the market is the London market million), or 54 percent of the market, is placed with (including Lloyd’s), which is the major international local insurer Tower Insurance Cook Islands Limited insurance market. Another offshore insurer used (Tower), and the remaining NZD$3.8 million to provide some additional capacity is the New (US$3.1 million) is placed with offshore insurers. India Insurance Company Ltd via branches in New Zealand or London. The non-life insurance industry within the /// Cook Islands is limited to Tower as the only The non-life premium spending in the Cook /// locally licensed company. Tower has a small /// Islands, at NZ$417.2 (US$$342), is higher local office with three employees who handle than comparable spending in other Pacific direct domestic insurance, agency business, and Island Countries (PICs); see table 1. The higher /// insurance for small and medium enterprises (SMEs). premium per capita could be driven by a number The Auckland office of Tower manages insurance of factors, including higher market penetration for corporate businesses. by non-life insurers, higher asset concentration as a consequence of higher gross domestic product There are four licensed insurance agents in /// (GDP) per capita, issues with the pricing of policies the market: Australian and New Zealand Banking /// arising from a lack of competition in the market, Group Limited (Cook Islands), Bank of Cook Islands higher exposure to natural perils, or a mix of these Limited, Shaun Gallagher Insurance, and Richard ET factors. A single local insurer has the potential to Fisher Insurance Services. restrict local competiveness for insurance products, particularly for SMEs and personal insurance Table A .1—  Pacific Non-life Insurance Premium per Capita 2012 (US$) GDP PER MARKET PREMIUM PER MARKET GDP MILLIONS POPULATION CAPITA PREMIUM CAPITA Cook Islands $305 19,300 $15,823 $6,600,000 $342 Fiji $3,908 874,700 $4,467 $97,500,000 $111 Samoa $683 188,900 $3,619 $17,000,000 $90 Tonga $471 104,900 $4,495 $4,400,000 $42 Section Vanuatu $781 247,300 $3,182 $16,500,000 $67 Source: World Bank; Cook Islands MFEM. 08 34 PCRAFI THE COOK ISLANDS Table A .2—  Pacific Commercial Property Insurance Rate and Deductible Comparison AVERAGE GENERAL AVERAGE CYCLONE GENERAL CYCLONE MARKET EARTHQUAKE EARTHQUAKE RATE DEDUCTIBLE RATE DEDUCTIBLES Cook Islands 0.12% 2% of sum insured 0.45% 20% of sum insured Fiji 0.08% 10% of sum insured 0.30% 20% of loss 2% of sum insured or 2% of sum insured or Samoa 0.12% 0.20% 5% of loss 5% of loss Tonga 0.15% 5% of sum insured 0.25% 5% of sum insured Vanuatu 0.30% 5% of loss 0.17% 20% of loss Source: World Bank 2013. Note: Tables shows average market rate percentage of value based on insurance industry sources. buyers who do not have the ability to access the 2011) suggests, however, that the country’s offshore insurance market. However, this report earthquake risk is extremely low. The local basis does not seek to undertake a full quantitative rate for cyclone extension was quoted at 0.45 analysis of the appropriateness and competitiveness percent, considerably higher than the regional of insurance pricing within the Cook Islands, range of 0.17 percent to 0.30 percent. Insurance and so cannot comment on the degree to which intermediaries in the Cook Islands market advised anticompetitive behavior is influencing pricing. that while 0.12 percent and 0.45 percent were the local standard rates for earthquake and There are a number of variables in property cyclone perils, it was possible to negotiate for insurance rating, such as location of premises, larger corporate accounts or to place the business construction, occupation, fire protection, frequency with offshore markets. This type of negotiation of expected losses, and the amount and type of would be more difficult for SMEs or domestic deductible on policies. It is not possible to use homeowners, making insurance products less average rating data as an exact basis for rating a accessible to them due to price. However, specific company, individual risk, or country. It is the limitations of comparing rates (explained possible, however, to offer a general comparison above) should be considered when interpreting of the property insurance rates in respective this information. markets (see table 2). The analysis below should be interpreted with due consideration of the fact that Catastrophe Risk Insurance corrections for differences in exposure to natural perils, building stock, occupation, and financial The main catastrophe hazard in the Cook Islands terms have not been made. is tropical cyclone. Tower advised it was aware of the potential exposure and insured only those Local property insurance rates in the Cook /// properties that had an engineer’s certification of Islands are higher than in other PICs. The local /// compliance with the cyclone (wind load) standard. earthquake insurance basis rate used in the Cook The Cook Islands’ primary accumulation exposure Section Islands is 0.12 percent, which is consistent with is on the main island of Rarotonga. the earthquake basis rate used in other Pacific 08 countries; the Cook Islands risk profile (PCRAFI THE COOK ISLANDS PCRAFI 35 According to the World Bank (1999), “Catastrophic as evidenced by the withdrawal of New Zealand Photo Credit /// /// US Navy /Flickr b events are unique among insurance risks: while Insurance Ltd. in 1985 (Crocombe 1992). traditional insurable risks occur with predictable All insurers with catastrophe exposures need frequency and relatively low losses, catastrophes to obtain reinsurance to increase their capacity. occur infrequently but with high losses.” For this Reinsurance is even more important when the reason, it is difficult for insurers to prepare for insurer or the insurance market pool is small, such catastrophe losses and obtain an appropriate as in the Pacific. As regulators become increasingly premium for these infrequent events. To reduce vigilant about requiring insurers to have sufficient the volatility that results from catastrophe events, capital and a good solvency margin to protect they undertake a mix of methods, including their interests from catastrophic events, they are portfolio management, underwriting selection requiring adequate reinsurance programs, placed (e.g., declining risks in high exposure areas), and with robust reinsurers. purchase of reinsurance. The non-life premium per capita comparison (table While the market is constrained by its small size, 1) demonstrates that the insuring public in the some additional capacity is available offshore— Cook Islands pays more in premiums per head though in the past, the Cook Islands’ cyclone than in other PICs. From the catastrophe peril rates exposure has limited the willingness of New comparison (table 2), it is clear that cyclone rates Section Zealand–based insurers to provide such capacity, are higher in the Cook Islands than in other PICs; 08 as a consequence, property premiums, particularly 36 PCRAFI THE COOK ISLANDS for cyclone, will also be higher. The need to obtain Australia and Thailand, and a cyclone in Australia. an engineer’s cyclone certification for buildings According to the Global Insurance Market Report before obtaining cyclone insurance presents a (IAIS 2012), these Asia Pacific events accounted challenge to the insuring public. These two factors for 61 percent of the insured losses from natural are likely to restrict the access to cyclone insurance catastrophes in 2011, compared to a 30-year in the Cook Islands, particularly for residential average of 18 percent. As a consequence, there property owners and small businesses. were adjustments in reinsurance capacity and higher risk premiums. In 2012 the natural disaster Catastrophe Reinsurance losses dropped to US$77 million (Swiss Re 2013), but this was still the third-highest year for natural Tower advised that its operation in the Cook Islands catastrophe insured losses since 1970. In the is included in the group reinsurance program Pacific, Tropical Cyclone Evan caused insured losses arranged by Tower Insurance Limited. of F$57 million in Fiji (Reserve Bank of Fiji 2012) In 2011, natural catastrophe insured losses in the and estimated insured losses of SAT 3 million in global reinsurance market were the second-largest Samoa in December 2012. ever, at over US$110 billion (Swiss Re 2012). In its 2011 annual report, Tower Insurance What made this year significant for insurers (and Limited specifically advised that its event excess Section reinsurers) in the Pacific was the number of events (net retention) had increased to NZ$6.7 million that occurred in the Asia Pacific region, including (US$5.5 million) and that it had protection for earthquakes in New Zealand and Japan, floods in 08 THE COOK ISLANDS PCRAFI 37 two catastrophe events within the program for Regulatory Framework the 2011–2012 period (Tower Limited/Tower Capital Limited 2011). The reinsurance program Insurance Law and Regulation is not detailed in the 2012 report, but it would be expected to follow the previous arrangements. Insurance law and regulation within the /// Tower did express concern in its annual reports at Cook Islands is governed by the Insurance the increase in catastrophe reinsurance premiums Act (2008), the Insurance Code (2010), and in recent years. Insurance Regulations (2009). Insurance /// supervision is the responsibility of the FSC (Cook Indeed, insurers throughout the Pacific have Islands Financial Supervisory Commission, 2014). expressed concern at the recent increase in reinsurance premiums, and more particularly The Insurance Code (2010) details the /// premiums for catastrophe reinsurance. They have requirements for registered insurance limited ability to pass on the full costs of these companies, including capital, solvency, and increases to insured clients due to the small size reinsurance programs. Minimum capital for a /// and economic constraints in those markets. local general insurer (category A) is NZD$200,000 (US$163,000) and minimum solvency is 5 percent Market Property and Catastrophe of unearned premium reserve or 10 percent of Insurance Products outstanding claim reserve. There is no requirement for the general insurer to hold a catastrophe Tower uses Material Damage/Business reserve. A written reinsurance strategy must be /// Interruption (MDBI) wordings for major submitted to the FSC each year in November. The commercial, government, and state-owned FSC advised that it did not undertake a detailed enterprise (SOE) insurance. The MDBI analysis of the submitted reinsurance strategy from /// wording is based on insurance industry standard Tower because it lacked the necessary expertise Industrial Special Risks (ISR) wordings used in and understanding of the reinsurance contracts. many Commonwealth countries. These wordings include cover of specified natural perils, such as The Cook Islands is not listed as a member /// earthquake, but do not cover cyclone risk. of the International Association of Insurance Supervisors (IAIS). Membership in IAIS would /// Cyclone insurance is available in the Cooks /// allow the Cook Islands to access international Islands by extension only and is limited to those best practice information on insurance regulation /// buildings with an engineering cyclone certificate and supervision. that confirms the building meets the building code for cyclone. The cyclone engineer’s certificates are The Cook Islands has recently enacted the /// valid for seven years. Captive Insurance Act (2013) and Captive /// Insurance Regulations. As of September 2013, A Business Protection Policy is used for SMEs there were no captive insurers registered under the /// /// and is taken as either Multi Risks (accidental new legislation. damage including earthquake and cyclone by extension) or as Specified Risks (fire and extraneous Under existing insurance regulations, Tower /// perils). These policies generally follow the perils is required to submit to the FSC its annual Section insured under the MDBI, although coverage may reinsurance management strategy, which /// be more restricted. would include risk accumulations and catastrophe 08 38 PCRAFI THE COOK ISLANDS Table A .3—  Property Insurance for Major Cook Island State-Owned Enterprises REPLACEMENT PROPERTY EARTHQUAKE CYCLONE PERIL VALUE (LAST INFRASTRUCTURE ENTITY INSURANCE PERIL INCLUDED INCLUDED VALUATION DATE, ASSETS (MDBI/ISR) WHERE KNOWN) Investment Bridges or roads—not Yes Yes No Yes (1998) corporation insured Airports Authority Yes Yes One building only Yes (2012) Runway—not insured Te Aponga Uria O Transmission lines— Tumu (Electricity Yes Yes No Yes (2013) not insured provider) Bank of Cook Islands Yes Yes Yes Yes (2013) Not applicable Ports Authority Yes Yes No Yes (2013) Wharf—not insured Source: SOE senior employees and insurance industry members. exposures. The FSC advised that it did not not always adhered to for residential properties, undertake the detailed analysis of the local insurer’s and that these properties could not obtain cyclone reinsurance program and property accumulation insurance without upgrades. that would determine if these are adequate for the probable maximum loss (PML) within the Cook Insurers have taken proactive steps to ensure Islands. The FSC also advised they did not check compliance with the cyclone building standard the number of reinstatements available under the by requiring engineering certificates for insured catastrophe reinsurance program. properties, rather than relying on government enforcement of the building code. Building Controls and Standards The legal basis for all construction in the Cook /// Financial Security of Onshore Insurers Islands is the Building Controls and Standards Tower Insurance Cook Islands Limited is a wholly Act (1991) and the building code. According to owned subsidiary of Tower Insurance Limited, a /// a local project manager and engineer in Rarotonga New Zealand–registered company listed on the who undertook cyclone inspections for insurers, most commercial and government buildings New Zealand and Australian stock exchanges. As constructed after 1991 are in accordance with the a subsidiary whose parent company has a security code and the wind loads for cyclones. This suggests rating of A- (excellent),1 Tower Cook Islands is that the building code is being followed for not required to provide additional security in commercial structures. The project manager also accordance with the New Zealand Insurance Section advised that, based on inspections, many houses Prudential Supervision Act (2010). were not constructed to meet the wind loads in 08 the code. This suggests that the building code is THE COOK ISLANDS PCRAFI 39 Financial Security of Known their assets revalued on average every three years, Offshore Insurers whereas the CIIC relies on an asset register that uses property valuations from 1998. This practice The main offshore insurer used in the market is generates a risk of underinsurance. Insurance Lloyd’s, which is regulated by the UK Financial professionals recommend that individual buildings Conduct Authority and the Prudential Regulation should be revalued at best every three years and Authority under the Financial Services and Markets certainly no longer than five years apart. CIIC Act (2000). As of August 2013, Lloyd’s had should consider engaging an independent valuer confirmed security ratings of A (excellent) from A. to provide updated valuations as soon as possible. M. Best and A+ (strong) from Fitch Ratings and CIIC has made a decision not to insure any Standard & Poor’s. property under NZ$50,000 in value. The New India Insurance Company Limited is used The provision of cyclone insurance requires an /// as a coinsurer on some local property insurance engineer’s certificate to verify that properties programs. It is registered in India and operates comply with the building code, and it is often branches in New Zealand, Fiji, and London. Its expensive. As a result the majority of government /// financial strength rating, issued by A. M. Best in and SOE assets are not insured for the main January 2013, is A- (excellent). catastrophic peril in the Cook Islands. The insurance broker used for SOE programs is Insurance of Public Assets Willis New Zealand; the program uses various insurers, including Tower. Findings on existing Insurance of government properties is /// property insurance arrangements for SOEs are arranged either by Cook Islands Investment summarized in table 3. Corporation (CIIC) or by the individual public authorities, with many policies excluding Government infrastructure assets are not /// the tropical cyclone peril. CIIC manages the /// insured in the Cook Islands, due either to /// government insurance program, although some property exclusions under existing market public authorities—i.e., SOEs—make their own insurance policy wordings or to high premium independent arrangements. As a result SOEs have cost. Uninsured property includes wharves, Photo Credit /// /// Phillip Capper /Flickr b 40 PCRAFI THE COOK ISLANDS bridges, roads, power transmission and distribution in part be linked to the uncoordinated approach lines, and airport runways (see table 3). toward an asset register. With the passage of the Captive Insurance /// Act (2013), the Cook Islands government can consider setting up of a captive insurer, /// Past Catastrophe Events as a subsidiary of CIIC, to act as an alternative The major reported damaging cyclones within the risk financing facility for property assets. A Cook Islands have been Cyclone Sally (1987) and feasibility study would be necessary to explore this Cyclone Pat (2011). option, taking into account the volume of risk to transfer and the consequent economics, capital, Damage from Cyclone Sally was estimated at captive management, claims management, and NZ$30 million (US$24.6 million) in 1987 prices (Fiji reinsurance. This option has some advantages for Meteorological Service 1987) across all islands in the government and SOEs, such as the possibility the group, but the cyclone was reported to be at of wider coverage, the inclusion of infrastructure its strongest when passing by Rarotonga (the most assets in a program, and premium savings from risk populated island in the group and the government pooling. The captive would need to reinsure the and commercial center). The main non-life insurer total accumulated catastrophe exposures once a at the time, Cook Islands Insurance Limited, is pre-agreed upon level was reached that exceeded reported as incurring claims that exceeded NZ$4 its capacity. million (US$3.3 million) in value on a premium base of NZ$400,000 (US$328,000) (Crocombe The Cook Islands government has been /// 1992). This would suggest an insurance included in the Pacific Catastrophe Risk penetration of around 13 percent at that time. Insurance Pilot since 2013. The government /// should include this program in any disaster risk Damage from Cyclone Pat, which impacted financing and insurance strategy that is developed, Aitutaki, was estimated at NZ$9.5 million (US$7.8 and should also provide input on ways to expand million); there was damage to 436 homes, and 68 the program. homes were totally destroyed. Tower advised that there were minimal insured losses from Cyclone There is no up-to-date government central /// Pat because most damaged properties on Aitutaki asset register for public assets. While the CIIC /// were not insured for cyclone. This suggests has an asset register, it uses 1998 data. Some a current low property insurance penetration government departments, public authorities, and on Aitutaki. state-owned enterprises hold asset registers, but these are not looked at collectively. The result is a There have been no reported earthquakes or piecemeal approach to insuring assets. Should a tsunami events in the Cook Islands. centralized asset register be developed, there may be potential for premium reduction. The government keeps no centralized register /// of insurance arrangements for public assets /// Section that have been made by individual government departments, public authorities, or SOEs. This may 08 THE COOK ISLANDS PCRAFI 41 Options for Consideration Endnotes Recommendation 1: Develop an insurance /// 1 A. M. Best rating, July 26, 2013. program for key public assets to be included in a broader disaster risk financing and insurance strategy. This approach would include /// References establishment of a centralized asset register with up-to-date valuations in conjunction with the Cook Crocombe, R. G. 1992. Pacific Neighbours: New Zealand’s Rela- Islands Investment Corporation, assessment of tions with Other Pacific Countries. Christchurch, New Zealand: MacMillan Brown Centre for Pacific Studies and Institute for probable losses, and a review of existing indemnity Pacific Studies. insurance to ensure that the major perils of cyclone and sea surge are included, and that the Fiji Meteorological Service. 1987. “Tropical Cyclone Report 87/5: government and SOEs are getting the best available Tropical Cyclone Sally, 26 Dec 1986–5 Jan 1987.” Fiji Meteoro- logical Service, Nadi, Fiji. terms and conditions for the premiums paid. IAIS (International Association of Insurance Supervisors). 2012. Recommendation 2: Develop a program /// Global Insurance Market Report. 2012 edition. http://iaisweb. of technical development for the Financial org/index.cfm?event=getPage&nodeId=25308. Supervisory Commission and consider PCRAFI (Pacific Catastrophe Risk Assessment and Financing Initia- applying for membership in the International tive). 2011. “Country Risk Profile: Cook Islands.” September. Association of Insurance Supervisors. This/// http://pacris.sopac.org. program should focus on building the capacity of those responsible for risk-based supervision. Reserve Bank of Fiji. Insurance Annual Report 2012. http://www. rbf.gov.fj/Publications/Publications/Insurance-Annual-Reports. Membership in IAIS would allow the Cook Islands aspx. to access international best practice information on regulation and supervision of insurance companies. Swiss Re. 2012. “Natural Catastrophes and Man-Made Disasters in 2011.” Sigma 2/2012. http://www.swissre.com/sigma/. ———. 2013. “Natural Catastrophes and Man-Made Disasters in 2012.” Sigma 2/2013. http://www.swissre.com/sigma/. World Bank. 1999. “Using Capital Markets to Develop Private Catastrophe Insurance.” Viewpoint Note 197, World Bank, Washington, DC.Glossary Section 08 42 PCRAFI THE COOK ISLANDS Someone who acts for the insurance company in arranging insurance contracts. There are two main Agent types of agents: tied agents, who act for one insurer only, and general agents, who act for multiple insurance companies. Someone who acts as an agent for the insured in arranging an insurance or reinsurance program Broker with a provider of capacity. The ability of an insurance company to provide insurance protection to clients, which is limited by Capacity its own financial strength and the reinsurance protection it has in place. An insurance company wholly owned by a company or entity that insures the risks of the parent Captive insurer entity and subsidiaries. Insurance that reimburses individuals or entities for loss or damage to a financial position as close Indemnity insurance as possible to the position they were in prior to the event, in the context of the financial terms of the coverage (such as deductible/excess and limit). Intermediaries The general term given to insurance agents and brokers. The amount that an insurance company retains on a reinsurance contract and in particular an Net retention excess of loss of contract. A type of insurance that is triggered by the occurrence of a specific measured hazard event, such Parametric insurance as a certain magnitude of earthquake or category of cyclone. Probable maximum loss The maximum value of a claim from a large or catastrophe event. May also be called MPL. (PML) The insurance of physical assets such as buildings, plant and equipment, stock, and machinery. Property insurance The products used for this insurance are variously named as fire and perils, commercial or business package, industrial special risks, or material damage insurance. A risk transfer method used by insurance companies to transfer part of a single large risk or an accumulation of similar risks and so increase their capacity. Reinsurance helps to smooth the Reinsurance extreme results and effects of specific perils (such as catastrophe events) and therefore to reduce the volatility of an insurance portfolio. The extent by which an insurer’s assets exceed its liabilities. Minimum statutory solvency Section Solvency margin requirements are normally included in insurance acts or regulations. 08 THE COOK ISLANDS PCRAFI 43 Annex 4 Country Risk Profile Section 09 PACIFIC CATASTROPHE RISK ASSESSMENT AND FINANCING INITIATIVE COOK ISLANDS SEPTEMBER 2011 COUNTRY RISK PROFILE: COOK ISLANDS The Cook Islands are expected to incur, on average, about 5 million USD per year in losses due to earthquakes and tropical cyclones. In the next 50 years, the Cook Islands have a 50% chance of experiencing a loss exceeding 75 million USD and casualties larger than 130 people, and a 10% chance of experiencing a loss exceeding 270 million USD and casualties larger than 200 people. BETTER RISK INFORMATION FOR SMARTER INVESTMENTS COUNTRY RISK PROFILE: COOK ISLANDS POPULATION, BUILDINGS, INFRASTRUCTURE AND 166° W 164° W 162° W 160° W 158° W Aitu- 012 4 0 150 300 600 Arutanga 8° S CROPS EXPOSED TO NATURAL PERILS taki Kilometers Kilometers An extensive study has been conducted to assemble a 10° S comprehensive inventory of population and properties at Atiu risk. Properties include residential, commercial, public and Mangaia 12° S 012 4 industrial buildings; infrastructure assets such as major ports, airports, power plants, bridges, and roads; and major crops, 0 1 2 3 14° S such as coconut, palm oil, taro and many others. Buildings Avarua Rarotonga Residential Public 16° S Commercial Other TABLE 1: Industrial Summary of Exposure in Cook Islands (2010) 18° S Atiu General Information: Aitutaki 20° S Total Population: 19,800 Rarotonga Mangaia GDP Per Capita (USD): 12,330 22° S Total GDP (million USD): 244.1 Cook Islands 0 2 4 8 Asset Counts: Figure 1: Building locations. Residential Buildings: 8,357 166° W 164° W 162° W 160° W 158° W Public Buildings: 503 0 150 300 600 Aitu- 012 4 Arutanga 8° S taki Kilometers Commercial, Industrial, and Other Buildings: 1,742 10° S Kilometers All Buildings: 10,602 Atiu Hectares of Major Crops: 6,390 Mangaia 12° S 012 4 Cost of Replacing Assets (million USD): 0 1 2 3 14° S Buildings: 1,296 Building Replacement Cost Density Infrastructure: 118 (million USD / km^2) Avarua Rarotonga 16° S 0 - 0.5 1-5 15 - 20 Crops: 8 0.5 - 0.75 5 - 10 20 - 30 0.75 - 1.0 10 - 15 Total: 1,422 18° S Government Revenue and Expenditure: Atiu Aitutaki 20° S Total Government Revenue Rarotonga Mangaia (Million USD): 86.9 22° S (% GDP): 35.6% Cook Islands 0 2 4 8 Total Government Expenditure Figure 2: Building replacement cost density by district. (Million USD): 77.9 (% GDP): 31.9% 166° W 164° W 162° W 160° W 158° W 0 150 300 600 Aitu- 012 4 Arutanga 8° S taki Kilometers 1 Data assembled from various references including WB, ADB, IMF and The Kilometers Secretariat of the Pacific Community (SPC). 10° S 2 The projected 2010 population was trended from the 2006 census using Atiu estimated growth rates provided by SPC. Land Cover / Land Use Mangaia 12° S Cassava Other Plantation 012 4 Coconut Crops Rice Table 1 summarizes population and the inventory of buildings, Coconut Forest Sand Bay 0 1 2 3 14° S Grass Land Forest infrastructure assets, and major crops (or “exposure”) at risk as well as key economic values for the Cook Islands. It is Nut Tree Open Land Settlement Sugarcane Avarua Rarotonga 16° S Orchard Taro estimated that the replacement value of all the assets in the Other Unknown Crops Palm Oil Water Cook Islands is 1.4 billion USD of which about 91% represents 18° S buildings and 8% represents infrastructure. Atiu Aitutaki 20° S Rarotonga Figures 1 and 2 illustrate the building exposure location and Mangaia replacement cost distribution, respectively. The footprints of 22° S almost 10,000 of the approximately 11,000 buildings shown in Cook Islands 0 2 4 8 Figure 1 were digitized from high-resolution satellite imagery. Figure 3: Land cover/land use map. More than 5,000 of such buildings, almost all in the main 2 September 2011 COUNTRY RISK PROFILE: COOK ISLANDS island of Rarotonga and the rest in the island of Aitutaki, were The Cook Islands are situated in a relatively quiet seismic area, also field surveyed and photographed by a team of inspectors but is surrounded by the Pacific “ring of fire,” which aligns deployed for this purpose. Figure 3 displays the land cover/ with the boundaries of the tectonic plates. These boundaries land use map that includes the location of major crops. The are extremely active seismic zones capable of generating large data utilized for these exhibits was assembled, organized earthquakes and, in some cases, major tsunamis that can and, when unavailable, produced in this study. travel great distances. No significant earthquakes have been reported in recent times. However, in 1909, a tsunami with TROPICAL CYCLONE AND EARTHQUAKE HAZARDS waves up to three meters damaged bridges and crop fields in IN COOK ISLANDS Rarotonga. Figure 5 shows that the Cook Islands have a 40% The Pacific islands region is prone to natural hazards. The chance in the next 50 years of experiencing, at least once, very Cook Islands are located south of the equator in an area weak levels of ground shaking. These levels of shaking are not known for the frequent occurrence of tropical cyclones with expected to cause any damage to well-engineered buildings damaging winds, rains and storm surge between the months and infrastructure assets. of October and May. In the South Pacific region from the 166° W 164° W 162° W 160° W 158° W equator to New Zealand in latitude and from Indonesia to 0 150 300 600 Aitu- 012 4 Arutanga 8° S east of Hawaii in longitude, almost 1,000 tropical cyclones taki Kilometers Kilometers with hurricane-force winds spawned in the last 60 years, with 10° S Atiu an average of about 16 tropical storms each year. The Cook Mangaia Islands affected by devastating cyclones multiple times in 12° S 012 4 the last few decades. For example, in 1997, tropical cyclones 0 1 2 3 Martin and Pam caused 22 fatalities, 19 of which were on 14° S Manihiki Atoll alone, where wind and storm surge destroyed Avarua Rarotonga 16° S essentially every building on the island, incurring about 48 million USD in losses that crippled the local economy. More 18° S recently, in 2010, tropical cyclone Pat wrought widespread Atiu damage on the island of Aitutaki. Figure 4 shows the levels Aitutaki 20° S of wind speed due to tropical cyclones that have about a 40% Rarotonga Mangaia chance to be exceeded at least once in the next 50 years (100- 22° S year mean return period). These wind speeds, if they were to occur, are capable of generating severe damage to buildings, Cook Islands 0 2 4 8 Perceived Shaking Not Felt Weak Light Moderate Strong Very Strong Severe Violent Extreme infrastructure and crops with consequent large economic Moderate/ Very Potential Damage none none none Very light light Moderate Heavy Heavy Heavy losses. Peak ACC. (%g) <0.17 0.17-1.4 1.4-4.0 4.0-9 9-17 17-32 32-61 61-114 >114 Peak Vel. (cm/s) <0.12 0.12-1.1 1.1-3.4 3.4-8 8-16 16-31 31-59 59-115 >115 166° W 164° W 162° W 160° W 158° W Instrumental Intensity I II-III IV V VI VII VIII IX X+ 0 150 300 600 Aitu- 012 4 Arutanga 8° S taki Kilometers Scale based upon Wald. et al: 1999 Kilometers Figure 5: Peak horizontal acceleration of the ground (Note: 1g is equal to the 10° S Atiu acceleration of gravity) that has about a 40% chance to be exceeded at least once in Mangaia the next 50 years. (100-year mean return period). 12° S 012 4 0 1 2 3 RISK ANALYSIS RESULTS 14° S To estimate the risk profile for the Cook Islands posed by Avarua Rarotonga tropical cyclones and earthquakes, a simulation model of 16° S potential storms and earthquakes that may affect the country in the future was constructed. This model, based on historical 18° S Atiu data, simulates more than 400,000 tropical cyclones and Aitutaki 20° S Rarotonga about 7.6 million earthquakes, grouped in 10,000 potential Mangaia realizations of the next year’s activity in the entire Pacific 22° S Basin. The catalog of simulated earthquakes also includes Cook Islands 0 2 4 8 large magnitude events in South and North America, Japan and the Philippines, which could generate tsunamis that may 0 25 50 75 100 125 150 175 200 affect the Cook Islands’ shores. Maximum Wind Speed Figure 4: Maximum 1-minute sustained wind speed (in miles per hour) with a 40% chance to be exceeded at least once in the next 50 years. (100-year mean return period). 3 September 2011 COUNTRY RISK PROFILE: COOK ISLANDS The country’s earthquake and tropical cyclone risk profiles 166° W 164° W 162° W 160° W 158° W Aitu- 012 4 0 150 300 600 Arutanga 8° S are derived from an estimation of the direct losses to taki Kilometers Kilometers buildings, infrastructure assets and major crops that are 10° S caused by all the simulated potential future events. The Atiu Mangaia direct losses include the cost of repairing or replacing the 12° S 012 4 damaged assets, but do not include other losses such as 0 1 2 3 contents losses, business interruption losses and losses to 14° S Total Average Annual Loss primary industries other than agriculture. The direct losses (million USD) Avarua Rarotonga 16° S 0 - 0.05 0.2 - 0.3 0.5 - 0.6 for tropical cyclones are caused by wind and flooding due to 0.05 - 0.1 0.3 - 0.4 0.6 - 0.7 rain and storm surge, while losses for earthquakes are caused 0.1 - 0.2 0.4 - 0.5 18° S by ground shaking and tsunami inundation. After assessing Atiu Aitutaki the cost of repairing or rebuilding the damaged assets due 20° S Rarotonga to the impact of all the simulated potential future events, it Mangaia is possible to estimate in a probabilistic sense the severity of 22° S losses for future catastrophes. Cook Islands 0 2 4 8 Figure 7: Contribution from the different districts to the average annual loss for The simulations of possible next-year tropical cyclone and tropical cyclone and earthquake (ground shaking and tsunami). earthquake activity show that some years will see no storms 166° W 164° W 162° W 160° W 158° W or earthquakes affecting the Cook Islands, while other years 0 150 300 600 Aitu- 012 4 Arutanga 8° S may see one or more events affecting the islands, similar to taki Kilometers Kilometers what has happened historically. The annual losses averaged 10° S Atiu over the many realizations of next-year activity are shown in Mangaia Figure 6 separately for tropical cyclone and for earthquake 12° S 012 4 and tsunami, while the contributions to the average annual 0 1 2 3 14° S loss from the different electoral boundaries are displayed in AAL / Asset Value absolute terms in Figure 7 and normalized by the total asset 0% - 0.1% 0.4% - 0.45% Avarua Rarotonga 0.1% - 0.2% 0.45% - 0.5% 16° S values in each electoral boundary in Figure 8. Figure 8 shows 0.2% - 0.3% 0.5% - 1% how the relative risk varies by electoral boundary across the 0.3% - 0.4% 1% - 2.6% 18° S country. Atiu Aitutaki Tropical Cyclone Earthquake 20° S Average Annual Loss = 4.9 million USD Average Annual Loss = 0.001 million USD Rarotonga 9.6%0.9% 1.5% 0.9% Mangaia 22° S Buildings Cash Crops Buildings Cash Crops Cook Islands 0 2 4 8 Infrastructure Infrastructure 89.5% Figure 8: Contribution from the different districts to the tropical cyclone and 97.6% earthquake (ground shaking and tsunami) average annual loss divided by the replacement cost of the assets in each district. Figure 6: Average annual loss due to tropical cyclones and earthquakes (ground shaking and tsunami) and its contribution from the three types of assets. Tropical Cyclone Earthquake Ground Motion Tsunami Average Annual Loss (million USD) 100 The same risk assessment carried out for the Cook Islands 10 8 was also performed for the 14 other Pacific Island Countries. 80 6 The values of the average annual loss of the Cook Islands and 4 2 of the other 14 countries are compared in Figure 9. 60 0 In addition to estimating average risk per calendar year, 40 another way of assessing risk is to examine large and rather infrequent, but possible, future tropical cyclone and 20 earthquake losses. Table 2 summarizes the risk profile for the Cook Islands in terms of both direct losses and emergency 0 losses. The former are the expenditures needed to repair or replace the damaged assets while the latter are the expenditures that the Cook Islands government may need to incur in the aftermath of a natural catastrophe to provide necessary relief and conduct activities such as debris removal, 4 Figure 9: Average annual loss for all the 15 Pacific Island Countries considered in this study. September 2011 COUNTRY RISK PROFILE: COOK ISLANDS setting up shelters for homeless or supplying medicine and In addition to causing damage and losses to the built food. The emergency losses are estimated as a percentage environment and crops, future earthquakes and tropical of the direct losses. cyclones will also have an impact on population. The same probabilistic procedure described above for losses has been Table 2 includes the losses that are expected to be exceeded, adopted to estimate the likelihood that different levels of on average, once every 50, 100, and 250 years. For example, casualties (i.e., fatalities and injuries) may result from the a tropical cyclone loss exceeding 103 million USD, which future occurrence of these events. As shown in Table 2, our is equivalent to about 42% of the Cook Islands’ GDP, is to model estimates, for example, that there is a 40% chance be expected on average once every 100 years. In the Cook in the next fifty years (100 year mean return period) that Islands, tropical cyclone losses are clearly prominent in the one or more events in a calendar year will cause casualties risk profile although earthquakes and earthquake-induced exceeding 145 people in the Cook Islands. Events causing tsunamis are also capable of generating losses. 300 or more casualties are also possible but have much lower likelihood of occurring. A more complete picture of the risk can be found in Figure 10, which shows the mean return period of direct losses in TABLE 2: Estimated Losses and Casualties Caused by Natural Perils million USD generated by earthquake, tsunami and tropical Mean Return Period (years) AAL 50 100 250 cyclones combined. The 50-, 100-, and 250-year mean return Risk Profile: Tropical Cyclone period losses in Table 2 can also be determined from the curves in this figure. The direct losses are expressed both in Direct Losses absolute terms and as a percent of the national GDP. (Million USD) 4.9 56.8 103.0 198.1 (% GDP) 2.0% 23.3% 42.2% 81.2% 400 Emergency Losses TC+EQ 350 (Million USD) 1.1 13.1 23.6 45.5 Direct Losses (million USD) TC 300 EQ (% of total government 1.4% 16.8% 30.3% 58.4% 250 expenditures) 200 Casualties 9 112 145 183 150 100 Risk Profile: Earthquake and Tsunami 50 Direct Losses 0 (Million USD) 0.0 0.0 0.0 0.0 0 100 200 300 400 500 600 700 800 900 1,000 Mean Return Period (years) (% GDP) 0.0% 0.0% 0.0% 0.0% Emergency Losses 150% TC+EQ (Million USD) 0.0 0.0 0.0 0.0 125% TC (% of total government 0.0% 0.0% 0.0% 0.0% Direct Losses (% GDP) 100% EQ expenditures) 75% Casualties 0 0 0 0 Risk Profile: Tropical Cyclone, Earthquake, and Tsunami 50% Direct Losses 25% (Million USD) 4.9 56.8 103.0 198.1 0% 0 100 200 300 400 500 600 700 800 900 1,000 (% GDP) 2.0% 23.3% 42.2% 81.2% Mean Return Period (years) Emergency Losses Figure 10: Direct losses (in absolute terms and normalized by GDP) caused by either (Million USD) 1.1 13.1 23.6 45.5 tropical storms or earthquakes that are expected to be exceeded, on average, once (% of total government 1.4% 16.8% 30.3% 58.4% in the time period indicated. expenditures) Casualties 9 112 145 183 Casualties include fatalities and injuries. 1 5 September 2011 PCRAFI 2015 Country Note THE COOK ISLANDS This note on the Cook Islands forms part of a series of country Disaster Risk Finance and Insurance (DRFI) notes that were developed to build understanding of the existing DRFI tools in use in each country and to identify gaps future engagements in DRFI that could further improve financial resilience. These notes were developed as part of the technical assistance provided to countries under the Pacific DRFI program jointly implemented by the World Bank and the Secretariat of the Pacific Community financed by the Government of Japan. The technical assistance builds on the underlying principles of the three-tiered di- saster risk financing strategy and focuses on three core aspects: (i) the development of a public financial management strategy for natural disasters, recognizing the need for ex-ante and ex-post financial tools; (ii) the post-disaster budget execution process, to ensure that funds can be accessed and disbursed easily post-disaster; and (iii) the insurance of key public assets, to resource the much larger funding require- ments of recovery and reconstruction needs. The Pacific DRFI Program is one of the many applications of PCRAFI. It is designed to increase the financial resilience of PICs by improving their capacity to meet post-disaster financing needs without compromising their fiscal balance. The Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) is a joint initiative of SOPAC/SPC, World Bank, and the Asian Development Bank with the financial support of the Government of Japan, the Global Facility for Disaster Reduction and Recovery (GFDRR) and the ACP-EU Natural Disaster Risk Reduction Programme, and technical support from AIR Worldwide, New Zealand GNS Science, Geoscience Australia, Pacific Disaster Center (PDC), OpenGeo and GFDRR Labs.