Cat bond to narrow Jamaica’s natural disaster financing gap: World Bank

Work continues on the first catastrophe bond for Jamaica and the World Bank has highlighted how the soon to be launched transaction will help to narrow the Caribbean nations natural disaster financing gap.

As yet, the World Bank’s catastrophe bond for Jamaica has not come to market, but it is expected within the coming two months or so, in advance of the peak of the 2021 hurricane season.

Jamaica’s catastrophe bond has been a work-in-progress for some years now, as we’ve documented regularly, but was forcibly delayed due to the Covid-19 pandemic in 2020, as financial market volatility from the coronavirus outbreak put the Caribbean island nations’ first cat bond issuance on-hold, Jamaica’s finance minister previously said.

But as we reported in March of this year, the expectation is that Jamaica’s first cat bond will now come to market in 2021, with it expected to be issued in advance of the peak of the hurricane season.

World Bank project documents show that the work to get Jamaica’s cat bond to market is progressing.

The World Bank Treasury will issue the catastrophe bond on behalf of Jamaica’s government, we understand, with the IBRD Capital-At-Risk notes program the likely structure to be used.

Jamaica will enter into a risk transfer agreement with the World Bank, while the World Bank will then intermediate the transfer of Jamaica’s catastrophe risk to capital market investors by issuing the catastrophe bond.

The cat bond risk premium and associated transaction costs are currently estimated to be $16.365 million, which will be paid out of the World Bank’s Global Risk Financing Facility, but originally support has come from the UK and Germany, through the Global Risk Financing Facility (GRiF), and the United States through USAID.

In addition, the Government of Jamaica will also cover a World Bank intermediation fee from its own budgeted resources.

The World Bank and Jamaica hope that the catastrophe bond will provide an important layer of additional disaster risk financing capacity, that can be disbursed quickly after qualifying catastrophe events occur.

It’s expected that Jamaica’s catastrophe bond will provide it with insurance or reinsurance like protection against the wind-related impacts of major tropical storms and hurricanes, which we presume will involve the use of a parametric trigger linked to either hurricane central pressure and track, or perhaps even specific storm-related wind speeds.

Natural disasters have been driving Jamaica’s need for sovereign debt, so by providing layers of financing, contingent on the occurrence of disasters, it’s hoped this liquidity can reduce the need to borrow so much when a major hurricane strikes the island nation.

The World Bank said that its analysis into the potential impacts of tropical cyclones in Jamaica, found that the disaster risk the financing gap can range from zero, for a small, more frequent tropical cyclone event, to at least US $1.449 billion for the less frequent and far more severe hurricane events.

That gap between the available financing from Jamaica’s existing contingent disaster fund, parametric contingent disaster credit line from the IADB, parametric insurance through the CCRIF, and Jamaica’s own National Disaster Fund, is the gap that this catastrophe bond will become a funding source for.

While a cat bond certainly won’t cover the near $1.5 billion potential funding gap after a really significant hurricane, whatever capacity can be raised will be welcome capital liquidity when any large cyclone event occurs and triggers the catastrophe bond.

Finally, the new catastrophe bond for Jamaica is being designed to be complementary to the countries other funding sources, as part of a new risk layering strategy being followed by its Government.

We will update you as soon as there is any sign of Jamaica’s first catastrophe bond being marketed.