Jamaica’s work with World Bank suggests ILS role on disaster risks

The World Bank is working with the Jamaican government and general insurance companies to develop an adequate and effective disaster risk financing strategy in the region, amidst concerns CCRIF SPC coverage is not sufficient alone to support the country in the face of major losses.

The work is being done through the Disaster Risk Financing Technical Assistance Programme (DRFTA), and suggests the potential for Jamaica to utilise a broader set of insurance-linked securities (ILS) features, structures, and capital in order to meet its disaster risk insurance needs.

Currently, Jamaica is insured against certain natural disasters through its CCRIF SPC membership, of which the country pays $6.3 million a year in insurance premiums. However, potential losses in the billions of dollars from hurricane risk or earthquake exposure in the country, for example, means that the protection Jamaica receives from its CCRIF SPC membership is inadequate, hence the DRFTA initiative.

To provide some context, the CCRIF SPC has paid out $69 million since it began operations in 2007, with the largest being a $20 million payout to Haiti in 2016. Whereas a hurricane like Hurricane Gilbert that struck Jamaica in 1988, would likely drive insurance industry losses of around $1.37 billion.

So, clearly Jamaica feels it needs greater protection against natural disasters and is concerned that the CCRIF SPC coverage is far from adequate, which of course it was never really designed to be at this stage. The CCRIF cannot provide the high levels of capital support Jamaica is talking about without a significant premium being paid, working with the World Bank could help Jamaica find a way to access efficient risak capital at lower cost, it hopes.

This suggests that the country could just increase its protection via the CCRIF SPC and become more protected that way, but owing to its low-income levels it’s likely that Jamaica doesn’t want to pay too much more, or any more money for its disaster risk protection.

This could be part of the reason the country is working with the World Bank to explore new disaster risk financing strategies and approaches, and perhaps Jamaica could secure something similar to that of the Philippines and its $500 million Disaster Risk Management Development Policy Loan with a Catastrophe-Deferred Drawdown Option (CAT-DDO 2.)

Catastrophe bonds could be another option for Jamaica. The World Bank has supported and helped to develop the MultiCat Mexico Ltd. catastrophe bond issuance from sponsor Swiss Re, and perhaps a similar type of transaction could be established for Jamaica as is seen with Mexico.

In fact, it might also be possible for the World Bank to work with a number of countries in the region to develop a MultiCat-type catastrophe bond for the entire Caribbean region, essentially providing greater coverage than the CCRIF SPC provides to account for low frequency, high severity events.

The World Bank and the CCRIF SPC have launched a catastrophe bond in the past, World Bank – CCRIF 2014-1, covering hurricane and earthquake risk for member countries. However, the deal was sized at just $30 million, and with the potential loss in Jamaica so much higher and ILS investor appetite seemingly strong, it begs the question why a much larger, Caribbean-wide cat bond hasn’t come to market.

The issue, potentially, is that Jamaica and other countries in the Caribbean are typically poorer than other parts of the world, and simply can’t afford higher premiums in order to receive greater protection and larger payouts post-event.

The flexibility, efficiency and maturity of the ILS investor base and its features suggests that it would likely be possible to develop such a solution, but part of the challenge will be how countries like Jamaica pay for their increasing natural disaster insurance needs.

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