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Formerly Moody’s RMS

The islands of the Caribbean have a problem. The air and earth around them is unforgiving. They are some of the most hazardous places on the planet.

What makes many of these islands so beautiful and dramatic also reflects the catastrophic processes that have built the terrain — the earthquakes, eruptions, floods, and landslides. And these catastrophic processes in turn affect the island economies.

The losses from Hurricane Irma in the British Virgin Islands are the equivalent of 300 percent of the island’s GDP. For Hurricane Maria in Dominica, the losses represent 240 percent of GDP. Put aside five percent of GDP each year to compensate for the losses and it could take 50 or 60 years to pay off the debt. By which time it is likely another comparable disaster will have arrived (the last highly destructive hurricane in Dominica was in 1979). The situation leads to a fateful pessimism, as epitomized in the words of Max Romeo’s reggae classic: “One step forward, Two steps backward, Down inna Babylon.”

The island economies are challenged by isolation, small local markets, high transport costs, expensive energy — even before the wrecking from floods and hurricanes. The promised agricultural revolution never quite arrived, with fragile crops like coffee and bananas, at the whim of the winds. Many of the islands of the Caribbean have maxed out their available credit, with borrowings of more than 100 percent of GDP.

And yet the Caribbean islands have never been more popular as a tourist destination. In 2017 more than 57 million visitors came to the Caribbean, with 27 million of these visitors on cruise liners.

Thirty million visitors stayed in accommodation on the islands. However, these 27 million cruise line visitors slept and ate on their boats, depriving local hotels and restaurants of their business and sidestepping many of the tax revenues if these same visitors stayed on land.[1]

Cruise Ships
Carnival Liberty, Carnival Triumph and Carnival Glory (near to far) docked in St. Thomas, U.S. Virgin Islands. Image credit: Wikimedia

Even while it is the Caribbean islands that are the destination, perhaps 90 percent of the visitor revenue goes to the cruise company and only 10 percent to the local economy of the islands. One 2013 estimate for the economic benefit brought by the cruise industry to the Caribbean is US$2 billion or a mere US$200 per visitor, compared to US$37 billion visitor spend overall. And the cruise companies have immense leverage. If the harbor is damaged by a hurricane, or the scenes of destruction are too distressing, the cruise liners will stay away, further depriving the island of revenues when they are most needed.

What makes these islands such charmed destinations are also what makes them most fragile. It is time the visitors were more deeply engaged in the sustainability of the island economies.

So why not charge the cruise line visitors to the Caribbean a levy entirely devoted to making the islands more resilient to disasters? For example, a US$50 levy on ten million passengers could raise US$500 million. There would be a teachable moment in applying the levy, to explain how the islands of the Caribbean are repeatedly set back by disasters. One could even market on-island tours to show cruise liner visitors the value of their contribution in supporting recovery.

It will be important to convince cruise companies and their passengers the levy is supporting real improvements in resilience. The cruise companies could be represented on the board of trustees of the fund.

In terms of how to make the funding most effective, I would split the money raised in two, and devote one half to a very targeted insurance system, leaving the other half to be spent on measurable actions to reduce risk.

For the insurance side of the “Caribbean Disaster Resilience Levy”, the model could be the Mexican FONDEN system, first launched in 1996. The scheme is funded by the Mexican government (which is expected to pay a premium of 0.4 percent of government expenditure, equivalent to US$800m in 2011) topped up when needed, with a levy on the Mexican oil industry.

FONDEN leverages its coverage by purchasing reinsurance and since 2006, by issuing catastrophe bonds. FONDEN was designed to offer pre-identified compensation to restore infrastructure and provide support to the poorest citizens. FONDEN is deliberately targeted to avoid competition with the private insurers. Any homeowner or business owner who can afford private insurance is expected to purchase the private coverage.

The other half of the money raised from the Caribbean Disaster Resilience Levy could be used to fund resilience projects (FONDEN also includes programs for reconstruction and prevention). Each project would be challenged to show value in terms of how much risk has been reduced. And every completed project is audited for its risk reduction: measured in saving lives, damage, and livelihoods.

The cruise liner industry is another manifestation of the unequal benefits of globalization. Tourism used to mean bringing economic activity to another country, but now it is possible to visit another country leaving almost no economic footprint. The cruise industry should be more deeply invested in the long-term health of the Caribbean islands, that provide such a picturesque backdrop to their tours.

[1] Hotel taxes are typically seven to eight percent, 10 to 15 percent in Jamaica, but 18 percent on Dominica.  National arrival/departure taxes range from US$15 to US$50.

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Robert Muir-Wood
Robert Muir-Wood
Chief Research Officer, Moody's RMS

Robert Muir-Wood works to enhance approaches to natural catastrophe modeling, identify models for new areas of risk, and explore expanded applications for catastrophe modeling. Robert has more than 25 years of experience developing probabilistic catastrophe models. He was lead author for the 2007 IPCC Fourth Assessment Report and 2011 IPCC Special Report on Extremes, and is Chair of the OECD panel on the Financial Consequences of Large Scale Catastrophes.

He is the author of seven books, most recently: ‘The Cure for Catastrophe: How we can Stop Manufacturing Natural Disasters’. He has also written numerous research papers and articles in scientific and industry publications as well as frequent blogs. He holds a degree in natural sciences and a PhD both from Cambridge University and is a Visiting Professor at the Institute for Risk and Disaster Reduction at University College London.

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