Mon | Jan 18, 2021

Jamaica closer to catastrophe bond

Published:Wednesday | October 23, 2019 | 12:00 AM

A new World Bank grant of nearly US$15 million has put the Jamaican Government a step closer to inviting investors to take part in a catastrophe bond that could become active before the next hurricane season.

The funds put Jamaica in a better position to finance insurance coverage related to the bond.

“We have international consultants engaged in the catastrophe modelling. After that, we have to determine the parameters,” said Minister of Finance Dr Nigel Clarke in response to Financial Gleaner queries. “And after that, we go to market to place the risk-transfer instrument.”

Clarke stayed clear of setting a timeline, but a key source indicated that the Government wants to fast-track the project before next year’s volatile hurricane season. The season begins in June of each year.

On Tuesday, the World Bank announced a US$14.85-million grant to Jamaica from its Global Risk Financing Facility, GRiF, to support the measures being taken by the Government to mitigate disaster risk and strengthen its financial protection against natural disasters.

The GRiF is a multi-donor trust fund housed at the World Bank and supported by Germany and the United Kingdom. The grant to Jamaica represents the largest made by GRiF to a middle-income country. The funds partially cover the annual insurance premiums that the Jamaican Government needs to pay to satisfy its obligations for the catastrophe bond, Clarke explained.

“Assistance from the GRiF is crucial as the most significant of the layers involve low-frequency, high-severity events that can be covered, in part, by risk-transfer instruments such as a catastrophe bond, which require premiums to be paid and hence, fiscal space. This GRiF grant is therefore highly appreciated as it makes the goal of multilayered coverage more realisable by assisting Jamaica in covering the premium cost of a risk-transfer instrument,” Clarke said in a statement.

Approximately 18 months ago, the Government of Jamaica set out a multilayered and strategic approach to protecting Jamaica against the potential fiscal shocks that can be caused by natural disasters. In March, the Government began the capitalisation of a Natural Disaster Fund with an allocation of some $2 billion, even as it was applying to the World Bank for assistance.

Information on the pricing, size and placement of the bond remains undisclosed.

The bonds are expected to be taken up by private investors, who will be paid interest on the debt.

Under such a bond, the Government pays the premiums against a principal sum, and in the event of a natural disaster, the insurer will pay out the principal, Clarke told the Financial Gleaner.

“Catastrophe bonds are normally three-year contracts, so the grant will help with that premise over three years,” he said, adding that it would be premature to estimate the size of the total premium. “Suffice to say this is a significant contribution,” he said.

World Bank country director for the Caribbean, Tahseen Sayed, said in a statement that the GRiF grant “bears testimony to Jamaica’s strong progress in building fiscal and financial resilience” and that the bank was steadfast in its commitment to deepen its partnership with Jamaica in the country’s “efforts to sustain these hard-won gains”.

The World Bank, with support from the United Kingdom, is providing technical assistance for Jamaica’s preparation of a National Disaster Risk Financing Policy. It is also working with the Jamaican government on risk modelling, which could be used to access risk insurance through the capital markets.