Just because foreign donors have paid the premiums associated with Jamaica’s first catastrophic bond does not mean that it was a “handout” as explained by the country’s Finance Minister.
Jamaica’s first catastrophic bond, the recently placed IBRD CAR 130 The transaction was priced and saw the Caribbean island nation securing the expanded target of $ 185 million of coverage last week.
The World Bank and its Treasury helped Jamaica access disaster insurance from the capital markets, who facilitated the transaction and worked on the deal for about three years.
But just as important as the World Bank’s aid was funding from donors who paid premiums to compensate investors who backed catastrophe bond coverage.
As we explained last week, 66% of the cat bond notes issued under the Jamaica deal were taken by professional insurance-linked securities (ILS) funds, while insurance and reinsurance companies took 17%, asset managers 14% and pension funds 3%.
For these investors to bear the risk, premiums, similar to an insurance or reinsurance risk premium, must be paid to compensate them for assuming and maintaining the risk for the duration of their term.
In the case of Jamaica’s first catastrophic bond, donor funding was designed to support the payment of premiums, which came from a variety of international organizations.
Financial support to bring the cat bond to market came through the United States government, through the United States Agency for International Development (USAID), the World Bank’s Disaster Protection Program, funded by the United Kingdom, and also the Global Risk Financing Facility (GRiF), with the support of Germany and the United Kingdom.
We previously reported that The cat bond’s risk premium and associated transaction costs were estimated to be around $ 16.37 million..
Grants awarded by the organizations mentioned above. paid these costs, helping the Jamaican government secure the disaster insurance protection it sought.
However, as always, funded premiums are not always a sustainable way to implement a disaster risk insurance or reinsurance program or facility, as donor funding can evaporate and it is important to try to move towards a self-funded approach to disaster risk management. disaster risk transfer, to ensure that instruments such as Catholic bonds are integrated into country budgets and planning.
This is exactly how Jamaica views its catastrophic bond, recognizing the importance of self-financing for future issues.
Speaking recently with Jamaica Gleaner, Finance Minister Dr. Nigel Clarke explained that donor support is expected to be only for this initial cat bond issuance.
On this occasion, he explained that “we are being supported by the governments of Germany, the United Kingdom and USAID to pay the full premium of the bond.”
But he is also said to have said that the cat bond premium payments should not be seen as “handouts”, but rather that the instrument is designed to help protect the economic progress that Jamaica has been making in recent years.
The Caribbean island nation has been working to reduce its debt, compounded by the COVID-91 pandemic, and the catastrophe bond is designed to cover potential shortfalls in funds available to the government if a major hurricane hits Jamaica.
When it comes to future issues, it is clear that Jamaica is already thinking of the cat bond as the first in a series of deals that make it the cornerstone of its disaster insurance and risk management plan.
Dr. Clarke explained, “Once our debt is reduced, then we can pay for the renewal ourselves.”
The country aims to pay off its debt to free up more capital so that its expanding disaster risk financing and insurance arrangements can become self-sufficient.
It is important that the country can move from being donor-funded, or supported by grants, to being self-sufficient in its risk transfer arrangements, as it makes the arrangements much more likely to continue and become a centerpiece of its risk planning. disaster response and recovery.
You can read all about him IBRD CAR 130, Jamaica cat bond issuance in our complete directory of catastrophe bond agreements.