Jamaica set for post-Melissa payout but experts warn of limits to hurricane insurance

After Hurricane Melissa devastated Jamaica this week on its way across the Caribbean, expert analysis suggests the island nation is in line for hundreds of millions of dollars in payouts from innovative forms of insurance policies like catastrophe bonds to help it recover.

Jamaica’s finance minister Fayval Williams said in June that the country had disaster financing coverage worth 130.6 billion Jamaican dollars (US$820 million). The country has insurance with the Caribbean Catastrophe Risk Insurance Facility (CCRIF) and a $150-million catastrophe bond, which experts say is likely to pay out in full.

Finance and climate researchers praised the Jamaican government’s foresight in arranging cover, which is likely to bring much-needed and relatively fast funds to help the country cope and rebuild. Sara Ahmed, advisor to the Climate Vulnerable Forum, commended Jamaica for “its leadership in deploying a mix of risk financing tools as climate change intensifies tropical storms and hurricanes”.

The executive director of the UN’s Green Climate Fund (GCF) Mafalda Duarte told Climate Home News on Thursday that, while the GCF currently has limited involvement in insurance, it is exploring more such investments. “A lot more needs to be done in this area,” she said.

But, while praising Jamaica’s government, other climate and finance analysts warned that the scale of the payouts is unlikely to come close to covering the losses from the hurricane and argued it is an injustice that small-island taxpayers who contributed little to the climate crisis are the ones who pay the insurance premiums – which are now likely to rise after this week’s disaster.

Catastrophe bonds

Catastrophe bonds originated in the US in the 1990s as a way to get investors – rather than insurance companies – to cover the risk of events like hurricanes and earthquakes deemed rare but severe. The World Bank has since promoted their roll-out to developing countries like Jamaica.

Earlier this year, finance minister Williams told Bloomberg: “We are situated in the hurricane belt and when the hurricane hits us, it can hit us very hard and damage roads, infrastructure – it takes us out for a while.”

She said Jamaica had issued catastrophe bonds because “the day the [meteorological] office tells us that a very severe hurricane is on the way towards us – it’s too late to do the planning; so you plan well ahead of the eventuality of that catastrophe.”

The scale of the economic damage from Hurricane Melissa is still unclear but is likely to run into tens of billions of dollars, according to preliminary estimates. Pepukaye Bardouille, special adviser on resilience to the government of Barbados, told a press briefing on Friday that a $150-million payout was a “drop in the ocean” but useful as part of a stack of solutions.

Connor Meenan, a disaster risk specialist from the UK-based Centre for Disaster Protection, told Climate Home News that “the real value” of insurance is that “on day one, they’ve got certainty about a significant amount of money that they can call on in the near term so they can focus on directing that where it needs to be spent”.

“It’s certainly put them in a better position than it would have been had they not made all these efforts to put their finances in place ahead of time,” he said.

Unsustainable and unfair?

Ritu Bharadwaj, IIED’s director of climate resilience and loss and damage, warned that as the Earth’s climate heats up and catastrophes become more frequent, investors become less willing to bet against them happening, demanding higher premiums to do so. “It will become uninvestable,” she said.

Critics also raised climate justice concerns. Jamaica is in line for payouts because its government has been paying insurance premiums, which have to be large enough to entice investors to take on the risk of a disastrous hurricane occurring. Many countries whose governments are paying catastrophe bond premiums do not suffer catastrophes and so lose their money.

Bharadwaj said it was “unfair” that taxpayers in countries like Jamaica are having to pay to insure against climate disasters they only played a small part in creating. Jamaica’s per-person emissions are about half the world average.

Conditions on when bonds pay out can also be strict, based on triggers like agreed wind speeds and central air pressure, with exact criteria varying in different parts of a country depending on historic precedents.

Last year, Jamaica missed out on a payment because, despite Hurricane Beryl causing about $1 billion of damage to the island, these triggers were not met.

Fending for themselves

Bharadwaj added that financial support from wealthy countries – like that in the UN’s new Fund for Responding to Loss and Damage (FRLD) – is insufficient to meet countries’ needs. The FRLD has $407 million in its bank account, which she said is likely far less than the losses suffered by Jamaica, let alone all the other countries in need of funding after climate-driven disasters.

Because of this “failure” of developed countries, multilateral development banks and the private sector to offer adequate funding, developing countries have to “fend for themselves”, she said.

As well as catastrophe bonds, she said governments should issue bonds – as Fiji has done – to raise money to invest in resilience measures. This can include dedicated resilience projects like flood defences and sea walls or making infrastructure like coastal hotels in Jamaica better able to withstand extreme weather, she said.

This spending, she said, should be seen as “not just doing good, not just impact investing [but] an investment that will yield benefit in the future” by preventing loss and damage.

Avinash Persaud, climate adviser to the president of the Inter-American Development Bank, argued in a recent article for Climate Home News that developing countries should have some of their debt written off if they invest in resilience.

Persaud’s native Barbados launched the world’s first of these debt-for-resilience swaps last year and a “multi-guarantor debt for resilience facility” is expected to be launched by international development banks at COP30 this month to make such swaps available to more countries.

Persaud and Bardouille have also argued for more lenders to introduce clauses saying that debt repayments will be paused when a disaster like a hurricane strikes.

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