Jamaica ready for CAT bond, minister says

JAMAICA is now ready to sponsor the issuance of a catastrophe bond (CAT) to enable the country to transfer some of its hurricane risk to the international capital markets in time for the 2021 Atlantic hurricane season.

Finance Minister Dr Nigel Clarke made the announcement in his 2021/22 opening budget presentation in the House of Representatives on Tuesday.

The CAT bond will provide the country with three years of annual protection, by shoring up financial securities to help the Government respond to certain levels of damage and dislocation in the event of hurricanes.

Government has been gearing up to have the bond issued, with technical support from the World Bank and grant funding from Canada, the United Kingdom, the United States and Germany.

Dr Clarke said analytical work and the design and preparation of the instrument has been ongoing since early 2020, but that on the advice of the World Bank, the market placement was put on hold in 2020 due to the onset of the novel corornavirus pandemic, which caused significant price volatility in CAT bond pricing.

“Natural disaster risk is a risk with which we must contend and prepare for as natural disasters have the potential to destabilise our economy. The fiscal risk of natural disaster comes into sharper focus given the historic shock delivered by the COVID-19 pandemic. We certainly cannot afford to leave ourselves completely exposed to the fiscal risk of natural disasters, especially during a time that we are recovering from the COVID-19 pandemic,” the finance minister said.

Under the CAT bond, Jamaica will pay annual premiums funded by grants from the Global Risk Financing Facility (GRiF), the United States Agency for International Development (USAID) and Canada over three years, and in the event of a hurricane within the period, above a particular threshold, the bond will pay out the principal amount to the Government.

The Financial Administration And Audit Act is to be amended to create a national disaster risk fund as part of an accountability framework to ensure that CAT bond payouts are spent in a manner consistent with the objective of mitigating the impact of natural disasters.

Dr Clarke advised that the World Bank is providing technical assistance on the utilisation, accumulation, and investment management of the amounts in the national disaster risk fund and the institutional set-up of the fund.

In December, the Government received a payment of $500 million from its excess rainfall insurance policy with the Caribbean Catastrophe Risk Insurance Facility (CCRIF), to cover damage related to rainfall associated with tropical cyclones Zeta and Eta, which severely impacted the island in October and November, causing loss of lives and devastating sections of the road network.

— Alphea Saunders

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