Kristen Gyles | Better safe than sorry

Jamaica is very highly prone to natural disasters and specifically hurricanes, considering its position in the Atlantic hurricane belt. Although the last time we got a direct hit from a hurricane prior to Hurricane Melissa was in 1988, we have had to deal with the effects of numerous hurricanes that have passed near our shores. Several hurricanes which have not directly made landfall in Jamaica have brought our agricultural sector to its knees and created significant infrastructural damage in many communities. Notable ones include Hurricane Ivan in 2004, Hurricane Dean in 2007 and Hurricane Beryl in 2024.

What does a small island developing state like Jamaica do when all it takes to totally destroy decades of infrastructural development and financial progress is one powerful hurricane? Well, one way to go about it is to get an insurance policy.

During his tenure under the last government administration, former Finance Minister, Dr Nigel Clarke, proposed a National Natural Disaster Risk Financing Policy. The policy presented an overall framework to minimise the financial strain the country would feel in the event of natural disaster. It primarily outlines risk retention and risk transfer strategies that the government could rely on to combat the effects of natural disaster.

A few of these initiatives included the initiation of a National Disaster Fund, a credit contingent claim with the Inter-American Development Bank and parametric insurance with Caribbean Catastrophe Risk Insurance Facility (CCRIF). Most importantly, however, is that Jamaica was the first country to independently sponsor a catastrophe bond.

INSURANCE POLICY

How does it work? Despite being referred to as a bond, it is perhaps more like an insurance policy. With a traditional bond, an investor (or lender) provides an amount of money to a borrower who then pays the lender small interest payments on a periodic basis until the bond matures. Upon the maturity of the bond, the borrower pays back to the lender the full amount they borrowed. The benefit of this arrangement to the lender is the series of small interest payments that they receive throughout the life of the bond.

The Jamaican-sponsored US$150 million catastrophe bond is a bit different. If a disastrous hurricane meeting certain predefined criteria does not occur, the principal is returned to the investor. This is the likely outcome since extremely disastrous hurricanes do not occur often. However, in the rare event of such a hurricane, the principal is paid to the issuer (in this case, the government) which can use the funds to cover relief and recovery costs.

So, international capital market investors posted the principal amount, through the World Bank, and in exchange, receive an annual premium from the Jamaican government. The Jamaican government simply needs to make its annual payment (much like an insurance premium) in exchange for risk coverage. In this particular circumstance, the size of the payout would depend on how much of the country is affected by the hurricane and the severity of the impact. Based on the path and central atmospheric pressure of the hurricane, it is expected that the Jamaican government will receive the US$150 million principal.

It is good to note that Jamaica first entered into this arrangement in 2021 and again in 2024. So, for a few years leading up to the passage of Hurricane Melissa, Jamaica had been paying for ‘insurance coverage’.

This form of insurance by the finance ministry proved to be a sound risk management initiative. At the time when the policy was put in place, not much attention was given to it, because unless there is a catastrophic hurricane like Melissa, the benefits of it are not likely to be felt. But thankfully, we were (at least somewhat) prepared for the worst.

LEARNING MOMENT

This is a learning moment for many of us. The lesson is that putting measures in place to ensure that risks are properly managed should not be seen as an academic exercise or as needless spending. It is better to be safe than sorry.

Some Jamaicans commonly describe motor vehicle insurance as a waste of money and insist it should not be mandatory. After all, the risk of a catastrophic event occurring while driving on the road is pretty small. However, it is often not until a collision occurs that writes off the insured vehicle, that one realizes the insurance policy was worth it. In a world where we all know the future, no one needs insurance. But unfortunately (or fortunately) none of us have a crystal ball that can tell us when disaster will strike.

This horrific hurricane, which has cost dozens of citizens their lives, and countless more their homes, is now shaping up to result in a chronic food shortage and an estimated repair bill of over US$7 billion. However, we shouldn’t let perfection become the enemy of good. The reality is that between international donations and disaster risk financing payouts that the country expects to receive, Jamaica can achieve quite a bit in the short term. Full scale recovery may take several years but there is a lot that we can do now.

The immediate focus should naturally be on providing immediate relief to Jamaicans who now need food, clean water, shelter and clothing. Many are still living out of cars, navigating dirty floodwaters and coping with the uncertainty of where their next meal will come from. The government’s intervention has to be both urgent and transparent.

Thankfully, the disaster risk management efforts by the finance ministry have done us well, and as such, there should be no difficulty accessing the funds we need to give immediate help to our people. The expectation therefore, is that before long, Jamaica will, in fact, rise again.

Kristen Gyles is a free-thinking public affairs opinionator. Send feedback to kristengyles@gmail.com and columns@gleanerjm.com