Trelawny Parish is located in the rural agricultural region of Western Jamaica, bordering the country's largest contiguous rainforest. Under normal circumstances, the parish is relentlessly green—covered with lush vegetation and long rows of orange trees—but the aftermath of Hurricane Melissa “almost completely destroyed” the area, according to firefighter Ronell Hamilton. “Everything here is brown now. It looks like California.”
The strongest storm to hit Jamaica in recorded history, Melissa arrived on the island last week as a Category 5 storm with winds of 185 mph. At press time, at least 67 people had died—32 in Jamaica, 34 in floods in Haiti and one in the Dominican Republic—and thousands of homes had been destroyed. In Black River, a coastal community south of Trelawny that has been described as the storm's epicenter, about 90 percent of its buildings were destroyed. Thirty miles north in Wakefield, Hamilton reported that even buildings built for hurricane shelter, such as a school and fire station, were severely damaged.
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Climate change is making monster storms like Melissa more powerful by intensifying the meteorological elements in which they thrive: warming ocean waters feed hurricanes, as well as warming air. Research has shown that for every degree Celsius of warming, the atmosphere can hold 7 percent more moisture. Increased wind speeds allow storms to carry more moisture, leaving behind devastating floods. Rapid analysis of Imperial College London found climate change has made a storm as severe as Melissa 4 times more likely. Another report The World Weather Attribution research team found that this increased wind speeds by 11 percent and precipitation by 16 percent compared to a world without global warming.
Early estimates indicate the hurricane could have caused insured losses of up to $4 billion and O Jamaica only has $7 billion in total. Much of the country remains without electricity or cell phone service, and many roads remain impassable, so the full scale of the destruction has yet to be assessed.
As harrowing as the storm was, Jamaica is well aware of its vulnerability to global warming and has spent decades carefully planning for just such a scenario. As a result, it is in a unique position to secure many of the resources needed for its recovery. The country created a multi-layered financial safety net after Hurricane Gilbert in 1988, and experts say its response could serve as a model for other island nations seeking to build secure financial infrastructure that will enable them to respond quickly to natural disasters.
At the center of this system is $150 million.”disaster bond“, which the country first issued to investors in 2021 and renewed last year. They will now be repaid in full to help support the country's recovery. Catastrophe bonds are attractive to investors because they offer high rewards in the form of higher interest rates in exchange for high risk, namely the risk that a catastrophe will occur and trigger monster payouts from investors. The bonds typically expire in three to five years. Unless a catastrophe occurs within that period, investors will pay back his initial investment, as well as the exorbitant interest he accumulated. But if the storm does hit, all the money will go to the affected country.
These bonds are attractive to buyers because they are completely isolated from the rest of the financial market; For example, during the Great Recession that began in 2008, catastrophe bonds became a popular financial instrument because they continued to provide high yields even though benchmark interest rates were nearly 0 percent. And if all goes well, they can generate huge profits. They are attractive to countries like Jamaica because they can be activated according to parametric standards, meaning once a storm reaches a predetermined limit, such as a central pressure of 900 millibars or below, the money is automatically released.
The catastrophe bond market has been growing since Hurricane Andrew hit Florida in 1992. At the time, it was the costliest natural disaster in US history, and insurance was unable to cover the full cost of the hurricane. “The idea was to then transfer some of that risk to the financial markets,” said Caroline Kouskey, associate vice president for economics and policy at the Environmental Defense Fund. Jamaica is unique, Kuskey said, because it “made a really nice shot glass [of financing tools] to cover disasters.”
In addition to catastrophe bonds, the country created its own emergency budget, took out parametric insurance through the Caribbean Catastrophe Risk Insurance Facility (CCRIF), and pre-arranged a disaster line of credit. (CCRIF policies quickly pay compensation for a range of types of hurricane damage, while catastrophe insurance is activated only for the most severe hurricanes.) This level of planning, Kuski says, grew out of “a growing recognition that relying on disaster relief is not the best strategy because disaster relief often takes a long time to arrive and can sometimes be poorly matched to need.” A steady flow of pre-secured cash can help vulnerable countries better cope with such terrible events.
“The question is whether it will be available again,” said Sarah Jane Ahmed, managing director and financial adviser to the V20 finance ministers representing the world’s most climate-vulnerable economies, who warned such large payouts could scare away financial interests. Ahmed added that rebuilding with more resilient infrastructure could help make new bonds more attractive.
Investing in catastrophe bonds is essentially playing Russian roulette with air pressure—even a storm as powerful as Hurricane Beryl, which made landfall near Jamaica last year as a Category 4, failed not really reach the payout threshold. And as climate change brings more storms, investors may move away from catastrophe bonds or push for even higher interest rates and stricter payout targets.
“People are looking for a silver bullet for all of these things, and everything has a trade-off,” said Jeff Schlegelmilch, director of the National Center for Disaster Preparedness at Columbia University.
“The biggest problem with catastrophe bonds is that they come after a catastrophe, not before it, to prevent it from happening. [which] “If these same companies are investing in catastrophe bonds and don't want to see the payout, then investing in preventing catastrophe from the start is the best way to protect that investment. We need it from all sides.”
The question of how to attract investors to the adaptation market is an “ongoing challenge,” Kuski said. “When you invest in climate change adaptation and risk reduction… you reduce future losses, but the losses avoided are not really cash flow.”
One solution would be to modify catastrophe bonds to direct a small amount of their interest back to the issuing state or country. For example, on Oak Island in North Carolina, the North Carolina Insurance Underwriters Association sponsored disaster link, which includes a resilience function. When a disaster does not occur and investors receive an annual income, a portion of their profits is used to finance home upgrades such as hurricane-resistant roofs.
“We will always have disasters,” Schlegelmilch said. “But they don’t have to be as bad as they are now.”
How Jamaica's recovery will play out on the ground remains to be seen. The damage looks likely to exceed even the country's carefully planned financial safety net. A week after the storm, “there's still no power, no water,” said Hamilton, a Trelawny County firefighter. “The food is running out.”
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