The Caribbean, largely made up of small island developing states (SIDS), could soon benefit from regional disaster risk financing, when a catastrophe bond now being designed to service the collective need of countries becomes available.

Following a tenfold increase in natural disasters since 1960, worsened by climate change which has been creating more volatile weather systems and incurring billions in annual losses to Caribbean countries, catastrophe (CAT) bonds are being targeted among instruments deemed most effective, offering quick finance recovery in the wake of serious cataclysmic events.

A CAT bond is a high-yield debt instrument that is designed to raise money in the event of a natural disaster. It allows the issuer to receive funding from the bond only if specific conditions, such as a hurricane, earthquake or any other disaster-related event occurs. They are typically used to protect against low-frequency, high-severity events in light of the usual high coverage they provide.

Speaking at a high-level forum on Wednesday, José Ángel Villalobos, senior financial sector specialist with the World Bank, said that since SIDS were particularly vulnerable and prone to natural hazards, they stand to benefit significantly from the use of CAT bonds as a mechanism for disaster reduction and to enhance sustainable development.

Currently individual island states, such as Jamaica, has already taken steps to secure financing arrangements via these instruments as it seeks to unlock financial protection against various forms of shocks.

“We are now working on a potential Caribbean or regional CAT bond based on the very successful experience with Jamaica. The aim is to have this ready when the Jamaica bond expires in December 2023,” Villalobos said, indicating that his entity in undertaking current assessment of private and public sector assets in these countries is looking to determine how much capital these countries can set aside in order to fund their own risks.

“Right now we are working with four countries, Jamaica is one, and we expect to include four other countries which may want to explore the possibility,” he stated.

Trevor Anderson, principal director of the fiscal branch in the Ministry of Finance, said that while he did not have all the information on the crafting of this regional CAT bond, this activity will most definitely boil down to an assessment of the different risk profiles across Caribbean territories and to find a way in bringing them together in a coherent and systematic way.

The senior government technocrat in providing details on Jamaica’s cat bond arrangement said the three year arrangement managed by the World Bank was implemented as a response to the country’s frequent exposure to natural hazards. He said that with the country being affected by more than 30 tropical cyclones over the last three decades and resulting in US$580 million in losses or 8 per cent of gross domestic product (GDP), the need for a more systemic approach to disaster risk financing was desperately needed.

“The instrument provides up to $185 million against losses from named storms for three Atlantic tropical cyclone seasons, ending December 2023,” he stated.

He said that the issuance of the catastrophe bond was consistent with government’s multi-layered approach to disaster risk financing aimed at mitigating the adverse fiscal impacts of tropical cyclones as well as bolstering the country’s physical, financial and socio-economic resilience.

“The catastrophe bond successfully launched by Jamaica, supported by international partners— compliments the suit of disaster risk financing instruments and narrows the country’s risk financing gap,” he concluded.