When disaster strikes!
How the catastrophe bond market is supporting financial resilience in Jamaica
This following case study of the Jamaica CAT Bond was written by Carlos Felipe Jaramillo, the vice-president for Latin America and the Caribbean, and Jingdong Hua, Vice-President and treasurer, both from the World Bank.
First, Jamaica created a national public policy on disaster risk financing. With support from the World Bank and financing from the United Kingdom (UK), the policy aims to improve the financial resilience of Jamaica through pre-arranged financing instruments and includes a contingency fund, contingent credit, and catastrophe insurance from the Caribbean Catastrophe Risk Insurance Facility (CCRIF). While this protected Jamaica from smaller, less severe disasters, the country would still experience large financing gaps if severe hurricanes like Ivan occurred.
So why go through organisations like the World Bank for this approach? The World Bank is an effective issuer of cat bonds for the benefit of its sovereign members thanks to its experience and reputation in the capital markets, its AAA credit rating, and its uniquely flexible capital-at-risk notes programme that facilitates risk transfer solutions using capital markets. Credit rating agencies recognise that a comprehensive disaster risk financing strategy improves fiscal resilience. This cat bond transaction adds a significant protective layer against potential negative impacts on Jamaica's sovereign credit risk following a catastrophe event. Overall, improved credit-risk assessments can translate into lower and more stable funding costs for countries.