Jamaica & World Bank set disaster risk transfer roadmap towards cat bonds

The Jamaican government continues to work with the World Bank to identify and develop a long-term disaster risk financing strategy and a report from this work found that Jamaica faces an average of US $121 million of hurricane and flood damages every year.

The work aims to put in place a framework for disaster risk financing and risk transfer, components of which are set to include parametric coverage, micro-insurance and in the long-term catastrophe bonds are likely to play a role.

Catastrophe bonds have been regularly raised as an option for Jamaica, including recently by government ministers.

A report from the World Bank explains that the average annual loss to the Jamaican government is approximately US $121 million (J$ 16 billion), equivalent to 0.84% of Jamaica’s 2015 gross domestic product (GDP).

But looking at the less frequent event return periods, a 1-in-100 year loss for the Jamaican government could equal US $1.729 billion, while a 1-in-250 year return period loss would be as much as $3.276 billion, a significant hit to the countries GDP and finances.

Hence, it’s vital that Jamaica looks to mechanisms and risk transfer tools in order to address its contingent liabilities related to hurricanes and floods, the World Bank found.

The research suggests that Jamaica can adjust its approach to disaster risk financing, in order to be more timely and cost-effective, as well as to minimise opportunity costs.

The current situation in Jamaica sees the country lacking in protection and risk financing, with an under-capitalised Natural Disaster Fund and Contingencies Fund.

While Jamaica does benefit from the efficiencies of the reinsurance markets through its purchase of coverage through the CCRIF SPC (Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company) this coverage is insufficient to assist with recovery from the higher impact return period catastrophe events.

Using a risk layering approach, the World Bank recommends a variety of instruments are used to provide financing and transfer of risk for disaster events of varying frequency and severity, including use of parametric triggers, risk transfer on an indemnity basis for public assets, micro-insurance catastrophe products for property and agriculture, as well as catastrophe contingent credit lines, post-disaster borrowing and a bolstered Natural Disaster Fund.

These recommendations would see Jamaica increasingly benefiting from the efficiencies of reinsurance capital and perhaps the capital markets as well.

But where the capital markets really come into their own will be in the return period events of 1-in-100 years and higher, where the need for sovereign risk transfer is clear in order to secure financing that can be rapidly disbursed when the most severe hurricanes strike Jamaica.

The World Bank recommends continued exploration of the catastrophe bond market for Jamaica, as a tool that can provide the risk capital to finance recovery from peak catastrophe events.

The wealth of capital in reinsurance and ILS markets can assist the Jamaican government in enhancing its resilience to the larger catastrophes that would cause a significant dent to the countries GDP otherwise and the cat bond market certainly has the appetite to support these goals.

Natural disasters and severe weather are an increasing threat to GDP, fiscal targets and also the economic outlook for countries like Jamaica and the World Bank believes that this threat will amplify as climate change suggests that storms will become more intense.

By helping the Jamaica government to better protect public finances, public assets, infrastructure and also put in place contingent financing to provide liquidity when the biggest disasters strike, the World Bank aims to help enhance the resilience of the entire country.

The World Bank explains that contingent credit can be more cost-effective than risk transfer for the intermediate layers of risk, such as tropical storms and low-intensity hurricanes, but that catastrophe risk transfer solutions like parametric insurance (and cat bonds) can be more cost-efficient against high-risk layers, such as major hurricanes and earthquakes.

Additionally, the World Bank calls for the implementation of a disaster risk insurance program to protect key public assets in Jamaica, developed in partnership with the private re/insurance markets.

“A national property catastrophe insurance program for public assets would create economies of scale and diversification benefits and thus lower reinsurance premiums,” the World Bank said.

All of these initiatives will also help to make accessing catastrophe bond markets more cost-efficient as well, as the amount of risk premium in Jamaica will be rising steadily, increasing the need for reinsurance level solutions and making their implementation more attractive to markets.

Efficient reinsurance capital and ILS funding can promote this goal and it is certain that the role of the catastrophe bond market in such regions is only going to increase over time.