Jamaica to sponsor World Bank cat bond before 2021 hurricane season

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The Government of Jamaica aims to have its World Bank supported catastrophe bond issued and in place, providing a much-needed source of capital market backed disaster insurance protection in advance of the 2021 hurricane season, its Finance Minister said yesterday.

jamaica-flag-mapJamaica had been planning a catastrophe bond issuance a year ago, to enhance its disaster insurance arrangements in advance of the 2020 hurricane season.

However, that cat bond deal, which had been a work-in-progress for some years  as we’ve documented regularly, was forcibly delayed by the Covid-19 pandemic and the financial market volatility that occurred put the Caribbean island nations’ first cat bond issuance on-hold, the country’s finance minister previously said.

As we reported in January of this year, Jamaica has continued to work with the World Bank on a first catastrophe bond for the country and now it appears this work is making progress, with a cat bond issuance imminent.

Commenting yesterday, Dr. Nigel Clarke, Finance Minister of Jamaica, said that an allocation in Jamaica’s new budget will provide the financing for a range of natural disaster insurance, including more coverage from the CCRIF SPC, alongside the in-progress catastrophe bond.

“This Government remains committed to social protection and support of the most vulnerable in our society. That is our goal and mission as we recover faster and stronger,” he explained, referring to the recovery from the COVID-19 pandemic.

Continuing, “We have to prioritise fiscal strategies designed to counter the risk of natural disasters. As such, $2.3 billion has been allocated to support natural disaster risk management within the Central Government.”

Remember, the $2.3 billion will be in Jamaican dollars, so this translates to roughly $15.5 million US.

Dr. Clarke explained the mix of funding and where it would be going, saying, “This is made up of: $1.1 billion for issue of Catastrophe Bonds (Cat-Bonds) (funded by grants); $1.0 billion to meet premium payments to the Caribbean Catastrophe Risk Insurance Facility (CCRIF); and $200 million to be transferred to the Contingencies Fund.

“In addition: $50.0 million is allocated to the National Disaster Fund managed by the Ministry of Local Government and Rural Development.”

So that’s just under US $7.5 million allocated to the catastrophe bond issuance from Jamaica’s new budget.

We’d explained before that in getting close to its first cat bond issuance around this time in 2020, Jamaica had already secured a lot of grant support for the initiative.

The cat bond will enable Jamaica to secure a source of disaster insurance or reinsurance protection funded by capital market investors from insurance-linked securities (ILS) funds and direct investors.

Jamaica secured the support of the UK and Germany, through the Green Climate Fund, and the United States through USAID, while the World Bank was lined up as both facilitating the cat bond issuance and acting as the advisor and placement agent.

The grant funding was designed to pay the premiums for the placement of Jamaica’s first catastrophe bond, which had been slated to be in place prior to the beginning of the 2020 hurricane season.

But, the timing of the COVID-19 pandemic outbreak and its escalation stopped the 2020 effort and as catastrophe bond markets froze to new issuances, Jamaica pulled the cat bond.

But now, it’s back and meaningfully trying to get the catastrophe bond completed in advance of the 2021 hurricane season.

Dr. Clarke said yesterday, “The World Bank is working with Jamaica to issue a three-year Catastrophe bond (“CAT bond”) to allow Jamaica to transfer some of our hurricane risk to international capital markets in time for the 2021 hurricane season.”

He provided further details on the ongoing cat bond work, “The CAT bond solution has been underpinned by analytical work and the design and preparation of the instrument has been ongoing since early 2020. However, on the advice of the World Bank, the market placement was put on hold in 2020 due to the onset of the COVID-19 pandemic as the pandemic induced significant price volatility in CAT Bond pricing.

“With continued technical advice from the World Bank and grant funding provided by the governments of the United States, Canada, the United Kingdom and Germany (the latter two through their funding of the Global Risk Financing Facility or GRIF), Jamaica is all set to tap the international capital markets for the issuance of the very first catastrophe bond ever issued by any Caribbean government.

“Under the CAT bond Jamaica will pay annual premiums, funded by grants from the GRIF Facility, USAID and Canada over three years. In the event of a hurricane, above a particular threshold, in any of those three years, the bond will pay out the principal amount to Jamaica.

“To ensure any CAT bond pay-outs will be spent in a matter consistent with the objective of mitigating the impact of natural disasters, CAT bond pay outs will flow to the National Disaster Risk Fund, to be created out of the Contingencies Fund through an amendment to the Financial Administration and Audit Act and subject to the advice of the Attorney General’s chambers.

“The World Bank is providing technical assistance on the utilization, accumulation, and investment management of the amounts in the National Disaster Risk Fund and the institutional setup of the fund.

“Good and disciplined policy implies that we think about tomorrow as well as today. I will provide further updates as we progress with the CAT bond.”

It’s assumed that Jamaica’s catastrophe bond will feature a parametric trigger, enabling it to be responsive to storm intensity rather than to economic losses, thus enabling more rapid payouts to be secured.

It’s not known at this time whether there will be any fronting reinsurance entity sitting between the World Bank’s IBRD issuer and the Jamaican National Disaster Risk Fund, or whether a more direct approach will be taken.

World Bank cat bonds have featured reinsurance entities as intermediary cedents, or been direct between government entities and the IBRD, so it could be structured either way it seems.

It’s assumed the World Bank will look to deal with the collateral from the Jamaica catastrophe bond in the same way as other recent issuances, allocating it to be used in World Bank development work, thus making the collateral much more ESG compatible and perhaps heightening the attraction for investors.

No idea of size of the catastrophe bond has been given, but if we had to hazard a guess, we’d expect Jamaica to seek around $200 million of coverage from a cat bond, based on economies of scale, perhaps more.

We will of course update you as soon as any sign of Jamaica’s first catastrophe bond emerge.

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