Tue | Nov 30, 2021
ADVISORY COLUMN: RISKS & INSURANCE

Cedric Stephens | Risk management talk finally going mainstream

Published:Sunday | March 21, 2021 | 12:13 AM
Minister of Finance Dr Nigel Clarke.
Minister of Finance Dr Nigel Clarke.

Risk management is now part of the national conversation. This conclusion is based on the words of Finance and Public Service Minister Dr Nigel Clarke as he opened the 2021-22 Budget Debate.

I read the Citizen’s Guide to the Budget, which was produced by his ministry, watched his address to Parliament, and read the 46-page official transcript of the speech. The COVID-19 pandemic, which is estimated to have reduced the country’s gross domestic product during the current financial year by 12 per cent, played a big role in putting the topic on centre stage.

By the way, a quick internet search of this newspaper, found that risk management was the subject of at least 20 articles that I wrote between June 17, 2017, and January 2021.

Risk management, according to The Economic Times, refers to the practice of identifying potential risks in advance, analysing them, and taking precautionary steps to avoid, reduce, or curb the risks.

Three parts of Dr Clarke’s speech were devoted to risk management. The first was under the subtitle, Disaster Contingency Funds. He spoke about the failure of successive administrations – for 30 years – to allocate financial resources to pre-fund contingencies like natural disasters. Instead, recovery was funded from ‘concessionary flows’ – handouts from friendly countries and borrowed money after these events occurred.

Research that I conducted after Hurricane Gilbert in 1988 found that US$612 million was made available from international agencies and friendly countries. About one-quarter was in the form of grants. Three-quarters were in the form of loans. Presumably, it did not occur to the decision-makers that negotiating loans to fund recovery post-disaster was not a smart move, especially in the case of a country that is prone to these events.

“For the two fiscal years before the pandemic,” said Minister Clarke, “we tucked away more resources in the Contingencies Fund than has been placed there in 30 years cumulatively. In fact, for 30 years, the Contingencies Fund only had $100 million.” Put more simply, the country was not saving for the proverbial rainy day or, to use Dr Clarke’s metaphor, had an empty cupboard.

The second part of the analysis focused on the International Monetary Fund’s Rapid Fund Facility. The island, along with 100 other countries, applied for access to the facility due to the economic disruption caused by the pandemic. The application was approved for the maximum amount of 100 per cent of the country’s quota or US$500 million. Those funds now sit in the Bank of Jamaica as an extra layer of protection.

Minister Clarke’s contribution to the debate about risk financing, a subset of risk management, was also about the present and the future. He discussed it under the heading ‘Modernising Institutions and the Institutional Framework’.

“Natural disaster risk is a risk with which we must contend and prepare for as natural disasters have the potential to destabilise our economy. This is why I am such a keen proponent of having a comprehensive disaster risk financing strategy to reduce the fiscal risks of natural disasters,” he said. “The fiscal risk of natural disaster comes into sharper focus given the historic shock delivered by the COVID-19 pandemic. We certainly cannot afford to leave ourselves completely exposed to the fiscal risk of natural disasters, especially during a time that we are recovering from the COVID-19 pandemic.”

The Government’s disaster risk financing strategy consists of the following parts:

• Liquidity support from CCRIF. In December 2020, the Government received a payment of $500 million as a result of the damage caused by excessive rainfall.

• The World Bank is working with Jamaica to issue a three-year catastrophe bond to allow the island to transfer some of its hurricane risk to the international capital markets in time for the 2021 hurricane season. The CAT bond solution has been underpinned by analytical work, and the design and preparation of the instrument have been ongoing since early 2020. Market placement was put on hold in 2020 due to the onset of the COVID-19 pandemic as that event induced significant price volatility in CAT bond pricing.

• Technical advice from the World Bank and grant funding provided by the governments of the United States, Canada, the United Kingdom and Germany (the latter two through their funding of the Global Risk Financing Facility), Jamaica is all set to tap the international capital markets for the issuance of the very first catastrophe bond ever issued by any Caribbean government. Under the CAT bond, Jamaica will pay annual premiums, funded by grants from the GRIF Facility, USAID, and Canada over three years. In the event of a hurricane, above a particular threshold, in any of those three years, the bond will pay out the principal amount to Jamaica.

• To ensure any CAT bond pay-outs will be spent in a matter consistent to mitigate the impact of natural disasters, CAT bond payouts will flow to the National Disaster Risk Fund, to be created out of the Contingencies Fund through an amendment to the Financial Administration and Audit Act and subject to the advice of the attorney general.

• The World Bank is providing technical assistance on the utilisation, accumulation, and investment management of the amounts in the National Disaster Risk Fund and the institutional set-up of the fund.

Risk experts have identified 30 types of risks that can threaten the world. Natural disasters constitute only one of those threats.

They say that if lessons from this crisis only inform decision-makers how to better prepare for the next pandemic – rather than enhancing risk processes, capabilities, and culture – the world will be again planning for the last crisis rather than anticipating the next.

The response to COVID-19 offers four governance opportunities to strengthen the overall resilience of countries, businesses and the international community, the experts say: formulating analytical frameworks that take a holistic and systems-based view of risk impacts; investing in high-profile ‘risk champions’ to encourage national leadership and international cooperation; improving risk communications and combating misinformation; and exploring new forms of public-private partnership on risk preparedness.

To this, I say Amen!

- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to aegis@flowja.com.