Jamaica readies for first cat bond, already budgeting for its renewal

Despite the fact a catastrophe bond for Jamaica has not yet come to market, after receiving support to pay premiums for the in-development first issuance the Caribbean island nation is already preparing to budget for its future renewal.

Jamaica’s government has been working towards sponsoring its first catastrophe bond for at least two years, with assistance from the World Bank.

Our latest two updates on Jamaica’s progress towards becoming a cat bond sponsor discussed the support provided by the World Bank in risk modelling for the perils to be covered, and funding the country has received to help in paying cat bond premiums to investors.

Jamaica’s Minister of Finance and the Public Service, Dr. the Hon. Nigel Clarke, will provide an update on all of this progress when giving his budget speech later this quarter, according to the government’s information agency.

The catastrophe bond is in development he said at a recent meeting in Jamaica, as his government looks to prepare financially for the impacts of weather and climate related disasters using the wealth of insurance and reinsurance appetite to be found in the capital markets.

Dr. Clarke explained that the grant towards premium payments has been provided through the World Bank’s Global Risk Insurance Facility (GRIF), with more funding coming via the United States Agency for International Development (USAID) as well.

That stands Jamaica in good stead for affording its first catastrophe bond issuance at a time when government finances are seen to be tighter.

But Dr. Clarke said that his government is preparing to budget for a renewal, saying that, “Jamaica will by then have more fiscal space, so that we can continue to pay those premiums going forward.”

The catastrophe bond will sit alongside a raft of measures taken by the government of Jamaica to make the countries finances more resilient to natural disasters and to secure all-important financing for recovery when catastrophes strike.

It’s encouraging that the discussion has already moved on to how Jamaica will budget for renewing the catastrophe bond backed insurance and reinsurance protection after its first transaction matures.

Too often, countries are unable to ring-fence the financing needed for disaster insurance and reinsurance facilties, which can lead to them expiring and not being renewed.

It’s important to enter into a relationship with the capital markets and insurance-linked securities (ILS) investors with a long-term view.

ILS investors are looking for sponsors to come back with renewals each time, in return for which the sponsors will benefit from continuity of capital, stronger relationships, enabling better terms to be negotiated and sometimes beneficial improvements to pricing as well.

As with any insurance or reinsurance policy, it is vital that governments do not look at catastrophe bonds as a one-time cost.

Budgeting for renewals every few years, as well as for the modelling to re-assess the risks and adjust their exposure metrics is key and investors will appreciate this long-term approach to accessing the capital markets as a source of disaster risk financing.

It also helps the World Bank in its discussions with service providers, as the kind of insurance and reinsurance service providers, companies and intermediaries that act on catastrophe bonds will prefer to hear that a sponsor is likely to become a repeat sponsor, rather than a one-time visitor to the cat bond market.