Nigel Clarke | Tackling the Fiscal Risk of Natural Disaster – Jamaica’s Catastrophe Bond | Remark


Implementing and sustaining a strategy to counter the fiscal risks of natural disasters are as important to Jamaica’s economic security as preserving the adequacy of foreign exchange reserves and debt sustainability.

The Ministry of Finance and Civil Service has therefore elevated disaster risk financing to a strategic priority, and we have since made significant progress in implementing a multi-level strategy.

MULTI-LAYER STRATEGY

In line with past practice, we are providing fiscal space, in annual and supplementary budgets, to enable a response to high frequency, low impact natural disasters.

However, in 2019 we went beyond this traditional approach and capitalized our contingency fund with J $ 4 billion (US $ 27 million), which was a landmark decision at the time given that the provident funds held, for decades, only a maximum of J. $ 100 million. By parliamentary resolution, we also increased the contingency fund cap from J $ 100 million to J $ 10 billion, signaling future intent.

Prior to that, in 2018, we entered into a US $ 285 million (C $ 43 billion) conditional credit claim with the IDB that disburses in the event of a hurricane disaster, and we renewed the reinsurance facility against Caribbean Disasters (CCRIF), which provides approximately $ 81 million (J $ 12 billion) of hurricane coverage, approximately $ 125 million ($ 19 billion) of earthquake coverage, and approximately $ 31 million ($ 5 billion) J $) cover against excessive precipitation.

In July, we advanced Jamaica’s strategy with the successful placement of a US $ 185 million (A $ 28 billion) catastrophe bond in global financial markets through the World Bank.

These layers – budgetary provisions; the capitalization of the Provident Fund; conditional credit claim; the CCRIF; and now the Catastrophe Leap – addresses different layers of natural disaster risk, from high frequency, low impact events to low frequency, high impact events.

We plan to cover high frequency events such as annual rainfall, below a certain threshold, but at a level that sometimes leads to flooding, from budget allocations and reallocations. On the other end of the spectrum, during a low frequency, high impact natural disaster, we would expect all layers to be triggered in part or in full.

FITCH EVALUATION

Natural disasters force governments to commit emergency public spending. The strata of the Jamaican strategy collectively provide fiscal buffers for the fiscal shock that natural disasters inevitably cause. These buffers increase Jamaica’s resilience and strengthen our ability to recover from natural disasters without significantly harming our economic trajectory. This reduces Jamaica’s risk and lowers the cost of investment.

Fitch, the international credit rating agency, in its published analysis of our catastrophe bond earlier this week, said the catastrophe bond “significantly strengthens (Jamaica’s) disaster risk mitigation strategy.” Fitch further noted that it was the first catastrophe bond ever to be independently sponsored by a small country. More importantly, Fitch pointed out that of all the catastrophe bonds issued by the World Bank, this is the largest relative to the size of the sponsoring country’s economy.

WHAT IS A BOND DISASTER?

A catastrophe bond transfers the risk of catastrophic natural disaster from a sponsor (in this case Jamaica) to international capital market investors. It is a form of insurance that achieves our objectives by creating securities in which investors can invest the capital, take advantage of the premiums paid during the term of the contract and accept the risk that in the event of a natural disaster exceeding the thresholds, some or all of the capital they endanger is returned to the promoter. (Although the terminology “bond” is convenient, a catastrophe bond does not increase Jamaican debt stock).

In traditional insurance, after a natural disaster event, adjusters first assess the amount of damage before compensating. It can be a complicated process that takes several months and sometimes up to two years. A catastrophe bond is a form of parametric insurance in which payment is triggered if / when observable and measurable characteristics of the natural disaster exceed agreed thresholds. As a result, a catastrophe bond is paid in the weeks following a natural disaster without the need to assess the actual loss suffered.

JAMAICA’S DISASTER OBLIGATION

The Jamaica Catastrophe Bond is a pioneer of the “cat in a network” triggering approach globally because we are the first in the world to use it. The cat-in-a-grid trigger places a grid over Jamaica and surrounding waters, with each grid having a centralized air pressure threshold. Payment is triggered if a hurricane passes through a grid and has centralized air pressure equal to or less than that grid’s threshold. (Note: The lower the centralized air pressure, the greater the intensity of the hurricane).

The size of the payout is related to how many of these grids are violated. This granular approach allows us to optimize and, for example, provide higher thresholds for geographies where losses are likely to be higher in the event of a direct hit, eg Kingston and Montego Bay.

The World Bank Treasury acts as an intermediary between Jamaica and our catastrophe bond capital market investors. They collect premiums from Jamaica and deliver those funds to investors in the form of bond coupons. They also hold custody of the capital invested by investors and will return it to Jamaica if a natural disaster exceeds established thresholds.

The governments of the United Kingdom, Germany and the United States are helping Jamaica with grants that pay the full premium of the catastrophe bond over the three hurricane cycles it covers, including the ‘current. The commitment and expectation is that Jamaica will fund renewal premiums as our fiscal dynamics improve.

It is important to note that Jamaica’s tiered strategy for natural disaster fiscal risk management only works for the Jamaican people if it is consistently sustained, over the long term, beyond the life of any administration. For this reason, we are institutionalizing the approach, including providing updates on Jamaica’s disaster risk financing in the annual and interim fiscal policy papers, which are tabled in Parliament, as well as standard commentaries on Jamaica. economic, budgetary and monetary results.

Managing the fiscal risk of natural disasters should be an ongoing strategic priority for Jamaica.

– Dr Nigel Clarke is Minister of Finance and Civil Service and Member of Parliament for St Andrew North Western. Send your comments to [email protected]


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