IMF backs calls for Caribbean catastrophe bond

The International Monetary Fund (IMF) is putting its weight behind calls for the use of catastrophe bonds to help the Caribbean nations to increase their resilience to and ability to recover from disasters, after a hurricane season that has impacted the region heavily.

After the devastating impacts of hurricanes Irma and Maria in the Caribbean, talk has turned once again to how to provide more disaster risk financing and parametric insurance to the island nations most at risk, with a regional catastrophe bond back on the agenda as a way to finance and provide reinsurance for regional risk transfer.

The need for support from governmental and quasi-governmental or international institutions, in achieving a goal of growing the amount of disaster risk financing and transfer that the Caribbean benefits from, is clear and the IMF appears ready to assist in these efforts.

Speaking at a recent event in Jamaica, IMF Managing Director Christine Lagarde explained that, “These hurricanes have again highlighted the special vulnerabilities of the Caribbean, and the need to strengthen its resilience.”

The IMF recognises the risks that the Caribbean faces, Lagarde continued, “Climate change is expected to intensify the impact of natural disasters, and worsen the vulnerabilities of small states in the Caribbean. Rising sea levels increase risks of erosion and flooding, and warmer water temperatures heighten the potential for more intense hurricanes.”

Lagarde said that the IMF is ready to assist in a number of ways, “In assessing macroeconomic implications, determining financing needs, and providing financial support that would also help catalyze broader financing from the rest of the international community.”

Broader financing can assist with the costs of risk transfer for the countries most exposed to natural disasters and climate related events, structuring or issuance costs as well as premiums. However the use of the most efficient sources of reinsurance and risk capital, as well as the syndication of risks through global capital markets, can also reduce the cost of risk transfer, something the IMF clearly recognises.

“I propose convening an event with all the major public and private stakeholders to explore options for building resilience in the region, including risk mitigation, debt management strategies, and use of catastrophe bonds,” Lagarde said, adding, “This effort is not about a short-term response, but about building defenses to events that will recur again.”

The IMF is expected to work with the World Bank, Inter-American Development Bank, Caribbean Development Bank and other partners on such initiatives.

We’re told that initial conversations have taken place, with some Caribbean governments pushing for there to be a much larger amount of risk transfer capacity in place before the 2018 hurricane season begins, which means access to larger amounts of reinsurance capacity will be essential.

That gives plenty of time for a regional catastrophe bond for the Caribbean to be structured, marketed and issued, which bodes well for achieving the size of transaction that can offer some meaningful disaster financing support to the island nations.

A number of Caribbean nations have called on the IMF to support them by adjusting their lending criteria, but in terms of building resilience the Fund may be better put to work helping them to achieve the level of risk transfer that would be required to provide meaningful coverage in time for the 2018 hurricane season.

The catastrophe bond market is, of course, just one avenue that could be pursued to secure the necessary risk financing and reinsurance.

But in terms of capital efficiency, the capacity that global institutional investment markets can provide may be the most efficient that can be found with an appetite to assume more of the Caribbean regions natural disaster risk.

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