In a recent speech, the Minister of Finance and the Public Service for Jamaica, Dr. Nigel Clarke, explained that the country needs better disaster risk financing structures in place, with catastrophe bonds cited as one option that may be suitable.
Cat bonds have come up in government discussion in Jamaica a number of times, as the countries exposure to natural catastrophe risks, particularly hurricanes, is seen as so extreme that a major event could severely impact its economic development and finances.
Hence having robust natural disaster financing in place is seen as key and with a line of credit through a Precautionary Stand-By Arrangement with the IMF set to come to an end in 18 months time, the country is now looking to put in place disaster risk management plans to ensure ongoing financial liquidity when the worst occurs.
“Today, and for the next 18 months, Jamaica is in a Precautionary StandBy Arrangement with the IMF. Within the context of this program with the Fund, we have access to significant resources should we need them. As we move towards the end of this program relationship with the IMF with the commensurate stand-by line of credit that it offers, it is important that we consider measures that can moderate the fiscal impact of natural disasters,” Dr. Clarke said during the speech.
He explained the importance of planning for the necessary public expenditure that disasters can create, while financing is also key to fill holes in budgets following major catastrophe losses.
He stated, “Natural disasters have a fiscal cost, and sometimes a profoundly large fiscal cost. Natural disasters can result in unplanned public expenditure or the reallocation of already committed financial resources to reconstruct, repair and/or rehabilitate roads, bridges and public buildings and to provide support to victims.
“Budgetary revenues also fall in natural disasters as, on a net basis, economic activity is often curtailed. As a consequence, governments often face budgetary pressures at exactly the wrong time and flows of foreign exchange decline as tourism is often affected.”
Insurance, reinsurance and the insurance-linked securities (ILS) market could all have a role to play in shoring up Jamaica’s finances following disaster.
The country already benefits from parametric insurance protection through the CCRIF facility, but in reality it requires a much larger source of credit should a major loss occur.
Dr. Clarke said that it was prudent to look at all the options, including various forms of risk financing, insurance, sovereign disaster risk transfer and capital market solutions.
He explained that currently Jamaica’s protection against natural disasters is inadequate, despite the fact public bodies pay significant insurance premiums to protect their assets.
But there is no coverage across Government budgets for public buildings, roads, schools etc, where there is significant uncovered risk.
As a result, the use of insurance is key and availability of reinsurance capacity will too. But structure is also important and Jamaica is naturally drawn to parametric triggers as a way to secure the kind of disaster risk financing that can payout rapidly to help the country recover.
He said that the best approach will be a mix of disaster risk mitigation, adaptation and financing strategies.
On the financing side he explained that contingent credit facilities are an element of importance, perhaps suggesting that Jamaica might look to explore something like a World Bank supported Disaster Risk Management Development Policy Loan with a Catastrophe-Deferred Drawdown Option (CAT-DDO 2).
Also up for exploration would be a sovereign natural disaster fund, that could pool the risk and be funded by government budgets. Eventually this could also be the source of risk transfer options for Jamaica as well.
Climate financing for adaptation and risk mitigation is also seen as key in reducing the long-running costs of natural disasters.
The catastrophe bonds are raised as an option, which Dr. Clarke said is “another product for Jamaica and Caribbean countries to consider.”
“An advantage of Cat bonds is that they provide payout triggered by the severity of an event rather than by dollar estimates of damages so payouts can happen quickly once the trigger has been met allowing governments to provide emergency relief,” he explained.
However, he also noted that cost may be an issue and cat bond sponsorship is not a simple task, saying, “A disadvantage is that Cat bonds require budgetary space to fund premiums and designing the appropriate trigger can be difficult.”
Jamaica will develop a Public Financial Management Policy for Natural Disaster Risk combined with a ten-year operational plan for its implementation, to be ready in time for the IMF arrangement expiring, he said.
In order to get to where the country wants to be though, Dr. Clarke insisted that “institutional capital” is key.
“Expansion of Jamaica’s economy is a crucial imperative and institutional capital can play a critical role. By “institutional capital”, I mean money that is held by pension funds, insurance companies, collective investment schemes and security dealers all of which are regulated, in addition to unregulated pools of capital that are managed professionally by third party managers,” he said.
Of course, this explains well the investor-base for catastrophe bonds and other insurance-linked securities (ILS), hence this institutional capital may become a key player as Jamaica looks to put in place its disaster risk management plans for the future.