Nigel Clarke | Building robust disaster risk financing framework

The Government of Jamaica’s (GOJ) relief and recovery responses to Hurricane Beryl are well advanced. So why am I still writing about multi-layered disaster risk financing? Because there isn’t a better opportunity to further advance public understanding of this national policy than through the demonstration of its necessity, benefits, and efficacy.

Last week, Minister of Labour and Social Security, Pearnel Charles, Jr, announced interventions of up to J$400,000 for marginal and low income persons whose homes were destroyed by Hurricane Beryl. This compares with the Hurricane Sandy vouchers of a maximum of J$60,000 per person, approved in 2012, for the same purpose. Adjusted for compounded inflation over the period, this represents a more than three-fold real per capita increase in the response to the most vulnerable, and worst affected, in the aftermath of a hurricane.

The GOJ will tap $5 billion from the disaster risk financing resources to provide housing grants referred to above, to finance the repair of schools, health clinics and hospitals, to support farmers and fishermen, and to clean Jamaica’s drains and gullies, among other hurricane-related expenditure.

Fiscal improvements aside, the enhancement of the GOJ’s capacity to respond has only been possible because funds have been saved funds annually for this purpose and maintained an optimised suite of financial products.

DISASTER RISK FINANCING POLICY

Jamaica faces a variety of natural disaster risks. As such, the disaster risk financing framework needs to be responsive to the full range of potential natural disaster outcomes – from low intensity to high intensity events and from low frequency to high frequency disasters. No one layer of protection can cover this range of possibilities. We need multiple layers. However, such a strategy is only effective if it is sustained over the long term and across successive political administrations.

For this reason, in 2022, with the approval of Cabinet, my ministry tabled a green paper in Parliament titled: The National Natural Disaster Risk Financing Policy (DRF Policy). The finance ministry, supported by dancehall artistes, engaged in public consultations in 2023 across Jamaica, in William Grant Park, downtown Kingston, Mandela Park, May Pen, and Montego Bay.

After the required period of consultation, the corresponding White Paper was tabled which was adopted by Parliament. The DRF Policy relates to disaster risk financing. We all own it.

The DRF Policy “promotes a risk-layered approach to funding disaster relief, recovery and reconstruction through the establishment of adequate reserves to address the costs associated with high frequency, low severity events such as floods or heavy rainfall, and the transfer of risks related to low-frequency, high severity events such as major hurricanes and earthquakes through a portfolio of financing instruments.”

MULTI-LAYERED STRATEGY

Domestic savings will ordinarily not be sufficient to finance relief and recovery from the most intense hurricanes, and most insurance products will not trigger for lower intensity events. Consistent with the DRF Policy, therefore, Jamaica retains the risk of higher frequency events which it finances through domestic savings, a credit contingent claim, and by retaining the option to reallocate budgets. For lower frequency events, which are often also of high intensity, Jamaica transfers the risk to third-party insurance and capital markets.

CONTINGENCIES FUND

The Contingencies Fund is provided by the Constitution and is intended to provide financial support for genuine contingencies, including natural disasters. In 1962, the maximum limit of this fund set by legislation was J$10 million. This limit was increased to J$100 million in 1992 and remained at this level for nearly three decades. In 2019, however, the Contingencies Fund limit was increased from J$100 million to J$10 billion and injected a capitalization of J$4 billion into the Contingencies Fund. The GOJ has further added to this amount annually and the balance in the Contingencies Fund stood at J$5.3 billion as at March 31.

NATIONAL NATURAL DISASTER RISK FUND

In June, with unanimous consent in Parliament, we amended the Financial Administration and Audit Act to create the National Natural Disaster Risk Fund (Disaster Fund).

This is intended to be the principal pool of domestic savings accumulated specifically to finance natural disaster relief and recovery. It will also become the repository of proceeds from disaster risk instruments that trigger payments. Importantly, the GOJ is legally mandated to save annually and contribute to the Disaster Fund. In the 2024/25 budget we made provisions to capitalize the Disaster Fund with J$1 billion.

JAMAICA’S CATASTROPHE BOND

Jamaica placed its first catastrophe bond in 2021, with the assistance of the World Bank. In an earlier Op-Ed I described this instrument, which also applies to its 2024 successor:

“A catastrophe bond transfers catastrophic natural disaster risk from a sponsor (in this case Jamaica) to international capital market investors …. Jamaica’s catastrophe bond globally pioneered the ‘cat-in-a-grid’ trigger approach, which places a grid over Jamaica, and surrounding waters, with each grid having a centralized air pressure threshold. Pay-out is triggered if a hurricane passes through a grid and has centralised air pressure [as measured by the National Hurricane Centre in the United States] at, or below, the threshold for that grid. (Note: The lower the centralised air pressure, the higher the intensity of the hurricane). The size of payout is related to how many such grids are breached and the materiality of such breaches.”

The attached figure shows the grids over Jamaica. Each of these grids is associated with a centralised air pressure threshold. For instance, the threshold applicable to grids 5, 6, 7, and 8 are 958 milli bars (“mb”), 945mb, 947mb and 932mb; the threshold in grids 10, 11,12,13, and 14 are 920mb, 940mb, 960mb, 969mb and 940mb and the thresholds applicable to grids 16, 17, 18 and 19 are 920mb, 926mb, 950mb and 920mb.

Hurricanes are generally categorised using the Saffir-Simpson Scale, which classifies them into five categories. A hurricane designated as a Category 2 will have centralised air pressure between 979mb and 965mb. The corresponding ranges of air pressures for Category 3, 4, and 5 hurricanes are 964mb – 945mb, 944mb – 920mb and lower than 920mb, respectively.

As such, Hurricane Ivan, which ravaged Jamaica in 2004, and which recorded centralised air pressures of 924mb and 923mb as it rampaged through grids 18 and 17 on the map shown, would have triggered Jamaica’s catastrophe bond with a 100 per cent payout of US$150 million or approximately J$24 billion today.

Similarly, Hurricane Dean, which pummelled Jamaica in 2007, and which recorded centralised air pressures of 927mb and 926mb as it barrelled through grids 18 and 17, would have triggered Jamaica’s catastrophe bond with a 92 per cent pay-out of US$138 million or approximately J$22 billion today.

Hurricane Gilbert, which made landfall in 1988, breached grids 12 and 13 with recorded air pressure of 960mb, would also have triggered the catastrophe bond with a US$103.5 million payout.

The centralised air pressure of Hurricane Beryl which also traversed through grid 18 was recorded by the National Hurricane Centre as 959mb, higher than the 950mb threshold required to trigger our catastrophe bond. Beryl was also recorded as having air pressure of 960mb as it moved through grid 10, again higher than the trigger threshold for that grid.

Our catastrophe bond covers Jamaica for the 2024, 2025, 2026, and 2027 hurricane seasons and the trigger mechanism is simple and transparent. People can retrieve hurricane trajectory and air pressures from the National Hurricane Centre website and determine, with a fair degree of accuracy, whether the catastrophe bond has triggered.

Jamaica has to continuously and consistently build on the existing DRF framework to ensure we are always fiscally prepared for the possibility of natural disaster events.

Dr Nigel Clarke is minister of finance and the public service, and member of parliament for St Andrew North West. Send feedback to opedjamaica@gmail.com or columns@gleanerjm.com