Over the past decade, Jamaica has created layers of financial protection in the event of a natural disaster. Now, after Hurricane Melissa tore through the country, destroying homes, roads and basic infrastructure, the country's strategy may be paying off — and becoming a model for climate-vulnerable countries elsewhere.
Last year, the country issued US$150 million in catastrophe or cat bonds that are triggered by certain parameters related to how severe a hurricane is and where it passes.
“They are connected with the so-called.The central pressure of a hurricane when it makes landfall,” said Florian Steiger, CEO of Icosa Investments, a Swiss firm that focuses on catastrophe bonds. The trigger must be verified by a third party, but in this case there is no doubt that the required threshold has been exceeded.
“Based on everything we have seen, payments will be made.”
The funds could reach Jamaica in a matter of days. The country also has several eggs in its natural disaster risk basket, including insurance policies to cover extreme rainfall and tropical storms through a regional pool that provides disaster insurance for the Caribbean.e. In addition, he canon credit lines with the World Bank and the Inter-American Development Bank.
“Jamaica's strategy, in my opinion, is one of the most comprehensive of any country in the world at the moment. minute”, inid Conor Meenan, risk finance consultant at the UK Disaster Management Centre.
INIn addition, the Jamaican Ministry of Finance says it has approximately US$820 million in funding available to use in the days and weeks immediately following the disaster. This won't cover everyone probably bmillions of dollars in damage This is necessary, but insurance-related funding will come to Jamaica much faster and help quickly restore critical services such as roads, health care and telecommunications.
Category 5 Hurricane Melissa made landfall in western Jamaica on Tuesday morning, marking one of the most powerful Atlantic landfalls ever recorded. CBC's Joanna Wagstaff looks at how Melissa could be part of a new era of hurricanes: storms driven by record warm seas and slowed by a changing jet stream.
How does cat bonding work in Jamaica?
Jamaica's $150 million catastrophe bond was issued in 2024. World Bank assistance. The country financed the bonds itself, and investors, mostly investment firms from North America and Europe, bought them. The bonds mature in 2027, covering four hurricane seasons.
It was second cat bond issue for Jamaica. The first round, conducted in 2021, was donor-funded and provided the country with US$185 million in disaster relief. Jamaica decided to extend this original treaty last year.
If payment is not made, the US$150 million bondd behaves almost as usual: Jamaica will pay investors the full principal amount of the debt by December 29, 2027, plus interest. And given the risk of natural disasters, it had an attractive interest rate of about seven percent per annum.
And if that's the case, the total payout would be paid out to the country, not investors, based on the severity of the storm. It starts at 30 percent and continues up to the full amount of the deposit. The triggers are based on the air pressure at the hurricane's center and whether it passes over certain parts of the country.
Here's what sets this insurance apart from other forms of insurance: The insurance is not based on the amount of damage or the cost of restoration, but rather on the severity of the storm.
This card from the World Bank shows the air pressure limits over various parts of Jamaica to trigger a disaster connection:
“They're dividing Jamaica and some of the surrounding ocean into boxes,” said Steve Evans, owner and editor of Artemis, a publication specializing in insurance and securities.
“Each box has a different central pressure that needs to be overcome, so the storm should have a lower pressure than those boxes.”
Central air pressure at Hurricane Melissa's landfall what 892 mileslibars (smaller numbers indicate a more severe storm), indicating that the storm was severe enough to trigger the full payment of the bond.
Disastrous Investment
Losing US$150 million may seem like a big blow to investors, but the impact on the entire market won't be too significant.
“We are talking about one deal with a country worth US$150 million. For a market that exceeds US$50 billion,” Steiger said.
Most catastrophe bonds are issued in richer countries, especially the United States, he said. Analysts say a large bond market provides an opportunity for low-income countries to spread their climate risks.
In fact, they say there is an appetite in the market for much larger investments in catastrophe bonds for developing countries.
“They really believe they are delivering social good. The investors I talk to are very focused, and still are very focused, on topics like ESG,” Evans said, referring to investment standards related to improving environmental, social and governance performance.
Jamaica's strategy, according to analysts, could become a model for the rest of the region and other climate-vulnerable countries to quickly access money after a disaster.
They will be closely watching how the country uses various insurance and financing mechanisms in the coming days. It's an example of what governments can do to prepare for more powerful hurricanes like Melissa, which are increasingly fueled by climate change.
“Cat bonds are not the answer, but they may be part of the answer,” Steigler said.
“I hope that many people will see this as an example of what can help improve the resilience of economies around the world, as well as bring people together to better share risk around the world.”
