Alive and uninsured: rebuilding businesses after hurricanes
People stand near damaged boats caused by Hurricane Otis on October 25, 2023, in Acapulco, Guerrero state, Mexico, February 25, 2024. REUTERS/Henry Romero
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As ever more hurricanes hit the Caribbean and Mexico, microinsurance may help struggling small business rebuild
- Most hurricane-hit small businesses uninsured
- Parametric microinsurance may cushion climate impact
- High premiums are a barrier to takeup
BOGOTA/ACAPULCO, Mexico - A year after Hurricane Otis ripped along Mexico's Pacific Coast, ghost resorts and dilapidation still dot the battered beaches.
Buildings stand empty. Breeze blocks strew the sands. And hotel bosses are busy clearing up last year's multi-billion-dollar mess even as they gear up for a new high season.
"If another hurricane comes, it will be the end of us," said Salvador Bucio, who has spent 1.5 million pesos ($79,634) to rebuild his small beach club in Bonfil, a popular tourist spot on the coast of Acapulco.
Otis was one of the strongest storms to hit the country's high-rise resort when it rolled through last Oct. 27, killing at least 50 people and causing $15.3 billion worth of losses.
Last month, Hurricane John again brought mass destruction, with floods and landslides that caused at least 22 deaths and a still untallied bill for Acapulco.
"During this hurricane season, we're very nervous because we're experiencing sea swells. As we don't have the same amount of beach anymore, the water is getting closer to our businesses," said Bucio, whose small guest house sits in an area flooded by Hurricane John.
Hurricane Otis destroyed 80% of the businesses in Acapulco, according to the Confederation of National Chambers of Commerce, and Bucio, like many small-businesses owners, was uninsured.
Consultancy group Integralia estimates that 12% of Acapulco businesses were insured and expects only 10% to 15% of those affected to re-open this year.
Bucio received 42,500 pesos ($2,190) of aid from the federal government as part of a $3.4 billion recovery plan to rebuild Acapulco, which has drawn high-spending tourists for decades.
But many other small businesses hit by tropical storms and hurricanes are left to their own devices and must rely on savings, private loans and remittances to rebuild, experts say.
To fill the gap and unlock cash more quickly, parametric microinsurance is increasingly seen as an option to help cushion the financial blow of ever-more-frequent hurricanes.
Unlike traditional insurance, parametric insurance guarantees a set payout if certain pre-defined criteria are met during a specific event, such as a hurricane.
As human-caused climate change causes storms to become stronger and more frequent, the need to provide financial support to small businesses is also rising - and to something well beyond cash transfers, emergency food aid or shelter.
Effective, reliable insurance is a must, public finance experts say, given that small businesses will likely find it ever harder to access recovery funding.
In Mexico, experts point to recent cuts in federal funds for natural disasters, forcing government to draw money from its health and education pots to finance reconstruction.
For 2024, the budget allocated for the government's disaster management fund, FONDEN, is down 38% from the 29 billion pesos ($1.4 billion) it received on average between 2013 and 2018.
As of February, the Mexican government had invested 28 billion pesos ($1.5 billion) in aid for the reconstruction of Acapulco - more than the entire year's disaster fund budget.
Business leaders feared Acapulco would not fully recover until 2025 - but after that second wave wreaked by Hurricane John, the timing of a bounceback remains impossible to predict.
"The most affected people are always the most vulnerable. This is a matter of justice," said Anaid Velasco, director at GFLAC, a civil society group that advocates for climate finance.
Hurricane-hit Caribbean
In the eastern Caribbean, islands have already experienced the destruction unleashed by Hurricane Beryl in July - the earliest recorded Category 5 hurricane to form in the Atlantic.
The economies of the Caribbean, among the most vulnerable regions to climate change, rely heavily on tourism and fishing.
An estimated 20,000 people lost homes across Grenada and St. Vincent and the Grenadines during Beryl, according to the United Nations (U.N.). The hurricane also destroyed 98% of banana and plantain production and devastated the lobster and fish sector.
Financial support options for small businesses dependent on agriculture and fishing is limited, according to the United Nations Development Programme (UNDP) office in Barbados.
In Grenada, the government has allocated $4.2 million in cash transfers for nearly 1,000 farmers and fishing communities affected by Beryl. Efforts are also underway to design a longer-term cash assistance program.
But with few social protection systems operating in the Caribbean, most small businesses rely on short-term cash transfers from the U.N., aid agencies or government.
The Caribbean Catastrophe Risk Insurance Facility (CCRIF), a regional risk pool providing parametric insurance, protects governments rather than individuals caught in natural disasters.
Since its launch in 2007, CCRIF has made 45 payouts totalling $163 million to 14 countries, with its biggest single payout of $44 million going to Grenada after Beryl hit.
A parallel scheme for uninsured small businesses and homes could similarly help cushion individuals against climate shocks.
Parametric insurance guarantees a set payout for a specific event that meets pre-defined triggers - such as the level of rainfall or wind speed - rather than paying out an amount to cover actual losses incurred or to repair any damage.
"Payment is triggered according to the agreed parameters of the insured event," said Tim McCoy, co-founder of London-based Yokahu, a parametric insurance provider operating in nine Caribbean countries.
"With parametric insurance, you know what money you are getting, payment is a lump sum and it can be received and used quickly," said McCosh.
But rolling out such products in what is a fledgling market has been patchy and slow.
Across the Caribbean, parametric microinsurance is "not yet widely available," and in some countries there are no such option, according to climate risk finance expert, Sinja Buri.
High premium costs and scant regulation remain key barriers.
"Awareness and take-up vary but are generally low amongst the communities that could benefit from access to these solutions," said Buri, a senior expert at the U.N. University's Institute for Environment and Human Security in Bonn.
While interest is now rising, McCosh said rollout had proved challenging, so many small businesses in Mexico and the Caribbean remain uninsured.
An annual premium typically costs from about US$60 to $500, out of reach for many small business owners.
"Is someone in poverty going to spend a large part of their income on insurance or lean on aid?" said McCosh.
"There's an affordability barrier. Insurance is expensive for a small business. Most people have less than $250 to spend on hurricane protection," said McCosh.
His company aims to relaunch its parametric microinsurance policies against hurricanes in the Caribbean later this year by offering the product wholesale to local insurers.
"The insurance industry is still learning how to sell parametric insurance and educate people about it," said McCosh, but the guaranteed payout structure could help bridge that gap.
"It's difficult for people to trust insurance companies, they don't know how an insurer will behave until they try to claim on their policy."
(Reporting by Anastasia Moloney and Diana Baptista; Editing by Lyndsay Griffiths.)
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