Sun | Dec 17, 2017

Cedric Stephens | Mitigating natural disaster risks and enhancing economic resilience

Published:Sunday | November 19, 2017 | 12:00 AM
A slew of hurricanes hit the Caribbean and the United States this year.
Richard Byles
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Richard Byles wears many hats. Two are germane to this article. His role as chairman, Sagicor Group - owners of Sagicor Life Jamaica - and former co-chair of the Economic Programme Oversight Committee (EPOC).

He made the news at a recent ceremony when he was inducted into the Private Sector Organisation of Jamaica's (PSOJ) Hall of Fame. He highlighted the crucial functions that the International Monetary Fund (IMF) and independent oversight of the implementation of its programmes play in the economy. "Jamaica," he said, "(has) made a remarkable turnaround, moving from being locked out of international financial markets due to a lack of confidence in our capacity to manage our own affairs to becoming a poster-child for the IMF." How have things changed? IMF approval is no longer the kiss of death in political and economic circles as it was during the '70s, a point that Barbados government leaders appear to be overlooking.

In October, during a period of intense hurricane activity, the IMF said important things about "... insurance and mitigation policies against the risk of natural disasters ... and economic resilience." Those comments are important to the governments and people of the Bahamas and Jamaica, specifically, and to the wider Caribbean. They were made in the context of the 2017 Article IV Mission to the Bahamas and the second review of Jamaica's performance under the economic programme supported by the Stand-By Arrangement (SBA). Mr Byles' acceptance speech grabbed all the media attention.

 

Jamaica and The Bahamas Have Different Risk Profiles

 

Today's column intends to fill that gap. It will summarise "Annex V. Mitigating Natural Disaster Risks and Enhancing Economic Resilience" from the Bahamas report. IMF's comments are, in my view, applicable to Jamaica because of the fragility of its economy. They are also consistent with ideas that I expressed in this newspaper. It should be noted in reviewing the summary, that Jamaica's risk profile and that of the Bahamas' are not similar. This island is exposed to natural hazards like hurricanes, floods, and earthquakes. The Bahamas islands face threats posed mainly by hurricanes.

Excerpts from The IMF's Comments:

"The Bahamas has, on average, faced larger damage and more frequent natural disasters over the last 20 years than the rest of Caribbean region. The annual damage averaged about two per cent of GDP for The Bahamas compared to an average of 1.25 per cent of gross domestic product for the Caribbean region. The probability of a storm disaster in any given year is also elevated at 30 per cent relative to 20 per cent for the Caribbean region.

"Natural disasters can have severe (social and) macroeconomic consequences. The recurrent destruction of a country's productive assets constitutes an implicit tax on capital that tends to deter investment, lowers productivity and income. Natural disasters also worsen external trade balances and fiscal balances, often leading to a rapid accumulation of debt. The erosion of these policy buffers entails broader risks to economic stability. Therefore, investment in risk reduction, increased use of risk-transfer mechanisms, and maintaining adequate fiscal and external buffers are critical to reduce and smooth out the economic consequences of natural disasters." These comments resemble those in my September 10 column, "Memo to Ministry of Economic Growth & Job Creation".

"Sturdy infrastructure is a first line of defence against natural disasters. Infrastructure programmes should adequately prioritise effective sea walls along urban coastlines, adequate maintenance and reinforcement of public infrastructure, and seek to 'build back better', following disaster events.

"Adequate regulatory and property rights frameworks are central pillars of infrastructure risk mitigation. Targeted fiscal incentives such as subsidies for retrofitting properties can spur private investment in disaster resilience. However, regulatory and property rights frameworks are central to risk mitigation. Building codes (should be) adequate to ensure that building structures withstand wind damage, but the lack of regulatory protections against storm surge constitutes a clear gap given the countries' low-lying geography. Regulations should be expanded in this area including by establishing height and minimum building setbacks and sea wall requirements potentially by drawing on regulatory guidance in similar vulnerable jurisdictions. Establishing systems that mandate regular reviews and updates of land use and zoning rules with limited exemptions would further boost resilience to natural disasters." Work on Jamaica's new building code, laws and regulations to make them mandatory are still going on after nearly 20 years, according to reliable sources.

"The Bahamas has a relatively well-developed natural disaster insurance market." The same can be said about Jamaica. Costs are, however, beyond the reach of most households, and, as shown in last week's article, the operating expenses of insurers here are high when compared with those of companies outside of Jamaica.

 

SOCIAL SUPPORT

 

"Sixty per cent of households in The Bahamas have no insurance or are underinsured ... research has shown that countries with more private and public insurance penetration experience far lower output and income losses from disasters. Penetration is weak, especially among the most vulnerable segments of the population. The cost of obtaining insurance and the lack of trust in insurance companies are regarded as the main obstacles to entry among the population of uninsured/underinsured, reflecting, in part, the legacy of consecutive years of weak economic activity. This gap in coverage constitutes a contingent liability for the public sector in terms of ex-post direct and indirect social support and rehabilitation expenses.

"Market-based insurance could be better leveraged to minimise and smooth revenue and expenditures impacts, thus laying the groundwork for a timely disaster response that reduces the potential economic dislocation (rather than waiting for government hand-outs). To that end, the authorities should consider insuring public assets, at least on a selective basis. Policies should also be developed to broaden insurance coverage by reducing the costs of insurance plans on a targeted basis, informed by cost-benefit analyses. One possibility is to provide means-tested subsidies to low-income households for micro-insurance disaster instruments.

Mandatory property insurance, supplemented by targeted subsidies, could also decrease the cost of insurance plans by expanding the premium base. The sector makes extensive use of international reinsurance markets, which helps minimise aggregate payout risks." Locally, there has been talk about financial inclusion, and micro insurance products are being tested by one insurer.

"Regional approaches can also be pursued to enhance risk transfer ... economies of scale can be achieved by adopting regional regulatory standards and/or by establishing regional administrative bodies. Furthermore, the pooling of regional funds can finance regional insurance schemes."

This is being done, to some extent, under the Caribbean Catastrophe Risk Insurance Facility (CCRIF). Jamaica subscribes to the CCRIF.

Mr Byles wants an EPOC-type oversight of Jamaica's programmes and policies. I agree. Mitigating natural disaster risks and enhancing economic resilience is a good place to start. After all, we do not want to end up like our neighbours in Puerto Rico.

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. Email aegis@flowja.com.