Wed | Dec 19, 2018

Growth & Jobs | IDB: Consider catastrophe bonds

Published:Tuesday | November 20, 2018 | 12:00 AM
HYDE

Jamaica should consider following Mexico's example by developing catastrophe bonds as part of its disaster risk management strategy, says Yuri Chakalall, senior specialist, natural disaster and risk management at the Inter-American Development Bank (IDB).

The catastrophe bonds issued by Mexico are insurance-linked securities, which provide its government with cash payouts in the event of specified environmental catastrophes. Investors receive positive return on their investment if there are no such events while the security is in effect.

"If the worst possible type of earthquake occurred, Mexico would have access to the investor's principal," Chakalall explained. "If there was none, the principal and interest would be given back to the investor.

"Mexico in the 1980s had a massive earthquake, which resulted in severe infrastructural damage and significant deaths," he said. "And, they wanted a level of confidence and financial capacity to deal with any type of earthquake."

On that basis, "They developed a system of risk layering, with the budget being the first line of defence. And if a bigger earthquake occurred there were other sources, and they went to market with bonds," he said.

Chakalall was presenting on the theme 'Disaster Risk Management and Business Continuity - Issues to Consider and How to Evaluate Risk,' at the Caribbean Microfinance Alliance Forum, which was held at the Hyatt Ziva Hotel, Rosehall, St James, recently.

 

Unanticipated spending

 

With regard to the Jamaican experience, he said that "If there is a shock because of a disaster, there is unplanned and unanticipated spending, which puts the country back into debt. To prevent that from occurring, you have to do financial disaster risk management. And, there are tools and instruments, such as contingent credit facilities, catastrophe risk insurance and catastrophe bonds."

He pointed out that the macroeconomic targets in Jamaica were regularly impacted by natural disasters.

"If you look at the data for Jamaica during the past 15 to 20 years, you will see that Jamaica's macroeconomic targets are highly dependent on the weather," he stated. "The gross domestic product (GDP) numbers for a particular year swings, based on the performance of the agricultural sector. And, if Jamaica had a bad year in terms of drought or rainfall, it affects the GDP figures."

He said this showed that Jamaica had weather-related disaster risk management issues, with particularly heavy impacts on the agricultural sector.

Gillian Hyde, general manager of JN Small Business Loans, explained that financial support and weather-related insurance for farmers are policy areas for the Government and other stakeholders to consider.

"Last year, the floods in Montego Bay, and other incidents of flooding since then, have reminded us about the need for climate resilient funding, especially for farmers and micro-entrepreneurs," she stated.

"Through our Climate Smart Loan product, which is offered in collaboration with the IDB, the Development Bank of Jamaica and the Ministry of Economic Growth and Job Creation, we continue to work to assist farmers. We believe that more should be done to assist those who are most at risk, in the event of disasters in the future," she said.

Chakalall also pointed out that financial disaster risk management considerations are vital for sustainability of the agricultural sector, and efforts to educate and implement appropriate facilities would be beneficial.

"We have to tackle everything pertaining to disaster risk management," Chakalall said. "We need to educate the farmers about how to cope, while also designing the right type of facility to make agriculture more sustainable."