How Jamaica took out an insurance policy for itself, and why it’s about to pay off after Hurricane Melissa

Over the past decade, Jamaica has been building layers of financial protection in the event of a natural disaster. Now, after Hurricane Melissa ravaged the country, destroying homes, roads and essential infrastructure, the country’s strategy may be successful – and provide a model for climate-sensitive countries elsewhere.

Last year, the country issued US$150 million in disaster or “CAT” bonds – which are triggered in case certain parameters related to how strong a storm is and where it passes through.

“They are connected to tWhen a storm makes landfall it has central pressure,” said Florian Steiger, CEO of Ecosa Investments, a Swiss firm. Focuses on catastrophe bonds. A third party needs to verify the trigger, but in this case there is no question that the required threshold has been exceeded.

“Based on what we’ve seen, there’s going to be a payout.”

Jamaica can get the funds within a few days. The country also has several eggs in its disaster risk basket – including insurance policies to cover extreme rainfall and tropical storms through a regional pool that provides disaster insurance to the Caribbean country.i.e. Additionally, it can Dr.On the lines of loans with the World Bank and the Inter-American Development Bank.

“Jamaica’s strategy, from my perspective, is one of the most comprehensive of any country globally minute,” saID Conor Meenan is a risk financing consultant at the UK-based Center for Disaster Protection.

overallAl, Jamaica’s Ministry of Finance says it has approximately US$820 million of financing available for evacuation in the days and weeks immediately following the disaster. This won’t cover everything possibility bloss of billions of dollars There is a need, but insurance-related financing will flow to Jamaica very quickly and will help to quickly restore the most essential services such as roads, health care and telecommunications.

How does Jamaican cat bondage work?

Jamaica’s $150 million US distress bond issued in 2024 World Bank helpThe country financed the bonds itself, while investors, mostly investment firms from North America and Europe, bought them. The bond will mature in 2027, covering four hurricane seasons.

this was Second CAT bond issued for Jamaica. The first round in 2021 was funded by donors and provided US$185 million to countries in disaster situations. Jamaica decided to renew that initial last year.

Bonus of US$150 million if payments do not startD Treated like a regular, Jamaica pays the full principal and interest to investors by December 29, 2027. And considering the disaster risk, it came with an attractive interest rate of about seven percent per annum.

And if so, the total payment would be to the country rather than investors, depending on the severity of the storm. It starts at 30 percent and continues up to the entire bond amount. The triggers are based on the storm’s central air pressure and whether or not it passes through certain parts of the country.

This is what differentiates this bond from other forms of insurance: rather than based on the amount of damage or the cost of rebuilding, the insurance pays out based on the severity of the storm.

this map from the world bank Shows the range of wind pressure in different parts of Jamaica to trigger a disaster bond:

“They break Jamaica and some of the ocean around it into boxes,” said Steve Evans, owner and editor of Artemis, a publication focused on insurance and securities.

“Each box has a different central pressure that needs to be broken, so a hurricane requires less pressure than those boxes.”

central air Hurricane Melissa’s pressure on the coast was 892 milesLibars (Lower numbers indicate a more severe storm), indicating that the storm was severe enough to trigger full repayment of the bond.

disastrous investment

A loss of US$150 million may seem like a big hit to investors, but its impact on the entire market will not be very significant.

“We’re talking about a transaction with a US$150 million country for a market worth more than US$50 billion,” Steiger said.

Most disaster bonds are issued in rich countries, especially the US, he said. Analysts argue that larger bond markets provide low-income countries an opportunity to spread their climate risks.

In fact, he says the market desires more investment in disaster bonds for developing countries.

“They see them as doing a social good. The investors I talk to are still very focused on topics like ESG,” Evans said, referring to investment standards related to enhancing environmental, social and governance performance.

Analysts said Jamaica’s strategy could be a model for the rest of the region and other climate-sensitive countries in getting funding quickly after a disaster.

They will be watching closely to see how the country deploys its various insurance and financing mechanisms in the coming days – an example of what governments can do to prepare for more severe storms like Melissa, which are increasingly likely to grow due to climate change.

“Cat bonds are not the answer, but they could be part of the answer,” Stiegler said.

“I hope many people will see this as an example of something that can help broaden the resilience of economies around the world, and bring people together to better share risk around the world.”