Reciprocal exchanges could bring direct participation to community-based covers: Guy Carpenter's Franco

Reciprocal exchanges could help build sustainable community-based catastrophe insurance programs, according to Guy Carpenter's Guillermo Franco.

Franco, global head of catastrophe risk research at Guy Carpenter, spoke to Parametric Insurer after the firm announced a research project investigating how the reciprocal exchange model could support community-based catastrophe insurance on a parametric basis.

"There's been a lot of [community-based catastrophe insurance] pilots and we ourselves have been involved in several of them," said Franco.

"There's been a lot of exploration and we have spent countless hours working with many local governments and communities and so on, trying to look for solutions."

Franco added that "we haven't found a way to scale these things up yet".

Community-based catastrophe insurance usually involves a community organisation or local government buying insurance for a group of people collectively. Any claim payments can then be distributed to households or used in other ways to assist affected community members.

Franco explained that a community-based reciprocal exchange could see a community group work to design and implement an insurance product for catastrophe risks, which would then be available for community members to purchase. Parametric triggers could ensure a transparent claims process.

Franco said the concept was inspired by the informal financial protection mechanisms created by some communities in developing countries in the absence of products such as loans and insurance.

Reciprocals are another way in which communities can self-organise coverage for risks. They are broadly similar to mutuals, but the policyholders within an exchange are both insurer and insured, and share in profits and losses in proportion to their premium payments.

The crucial difference between a reciprocal exchange and other systems that have been tried for community-based catastrophe insurance is that it involves "active participation of the community", Franco said.

"The commitment is not made by the town or the city. The commitment is made by the individual, but supported by all the work that has been done at the community level," Franco said.

"What are the conditions for that system to work out, and will it work out at all? [Exploring those questions] is the purpose of conducting all of this research."

The research project

Guy Carpenter's research project will initially focus on hurricane risk in Sarasota, Florida. It plans to work with its research partners to design a parametric hurricane cover for Sarasota residents and present the hypothetical product to the local community at a conference on 3 April 2025 hosted by the Climate Adaptation Center, a Sarasota-based nonprofit.

In the weeks afterwards, the research team will meet with residents directly and conduct surveys to understand their response and interest in the idea.

"And that will bring us to the summer when we will start writing our conclusions, with an eye to publishing a final report or final set of papers towards the end of the year," said Franco.

"At the moment it's an exploration," he continued. "But the idea is that this will serve as start-up funding, let's say, for a larger type of initiative, which may include more research, may include some small implementations or pilot projects – that is to be seen."

For the Sarasota research, Guy Carpenter is working with the Climate Adaptation Center, the Institute of Environment at Florida International University and the University of Michigan. It has also partnered with the Center for Coastal Climate Resilience at UC Santa Cruz to explore how the concept could apply to wildfire risks in California.