Jamaica’s cat bond risk modelling supported by World Bank


The work to issue a catastrophe bond for Jamaica continues, with the World Bank providing risk modelling support and expertise to assist in getting a transaction to market, the countries Finance Minister said.

jamaica-flag-mapJamaica has been exploring insurance and reinsurance structures for sourcing disaster risk financing for some time now (discussions have been ongoing since at least as far back as 2017).

In particular the Caribbean island nation’s government has been exploring how best to secure a layered disaster risk transfer financing program, including insurance and reinsurance elements, that can assist it in protecting itself, its assets and its people against impacts from tropical storms and hurricanes, perhaps earthquakes as well.

The catastrophe bond has come into increasing focus, with the government saying that its work with the World Bank was underway back in May.

In an update last week, Jamaica’s Finance and Public Service Minister, Dr the Hon. Nigel Clarke, said that the government’s work with the World Bank continues, with modelling for a cat bond issuance a focus.

The Jamaica Information Service reported that Clarke said that in order to develop a viable catastrophe bond issue for Jamaica a lot of detailed risk modelling work was required.

He explained the the World Bank is providing technical support in order to deliver the modelling necessary.

However, the government of Jamaica is ready and prepared to pay the costs of issuing the catastrophe bond, with Clarke saying that the country will “have some skin in the game” and that Jamaica is ready to use “some of our own resources to pay the premiums that are involved.”

The Jamaican government is set to pass a budgetary allowance to set aside the money for the catastrophe bond issue.

The catastrophe bond will be designed to sit in a tiered disaster risk financing and transfer program for Jamaica, which will include other elements such as parametric insurance or reinsurance, contingent capital, a credit facility and other elements.

Clarke also explained that it’s important to diversify the countries sources of risk capital, to ensure it does not all fall on the budget and ultimately taxpayers.

“The idea is to have up to US $1 billion of non-budgetary emergency funding available to Jamaica, that can be available in the worst possible event and that is the strategic intent, the strategic direction,” he said.

He further explained that an “institutional response” to disaster risk was required.

This is good to hear, as too often countries do not want to tap into external sources of capital due to the costs (premiums) associated with it.

It is only by coming to terms with the severe exposure faced that governments tend to then become more open to premium payments for coverage from insurance to catastrophe bonds. Somewhere the Jamaican government has clearly now found itself.

That’s not to say donor funding and assistance from multi-lateral organisations isn’t also key. USAID has delivered $5 million to Jamaica to assist in the setting up of its disaster risk financing plans, while the World Bank’s support is vital.

But even with that support and donor injections of capital, unless the government itself is ready to pay for the protection risk transfer can offer it can be difficult to gain the consensus required to push these initiatives forwards.

In the case of Jamaica, it’s encouraging to see a country that faces a clear risk of severe financial impacts from natural disasters and climate change related risks take proactive steps to transfer its risk and secure just-in-time financing for its government, to the benefit of its people.

The catastrophe bond will be a significant step forwards for the Caribbean region as well, setting a precedent that could be followed by other nations, if their governments can come to terms with the work involved and the potential costs of cat bond sponsorship as Jamaica has.

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