Cat bonds come under scrutiny
Jamaica’s cat bond was not triggered despite heavy destruction.
Catastrophe bonds are coming under scrutiny after one was not triggered for Jamaica after it was hit hard by Hurricane Beryl in July.
Bloomberg News reported that issues were now concerned that the insurance linked securities ight be skewed against issuers.
“Catastrophe bonds, which are issued by insurers, reinsurers and governments seeking an extra layer of disaster coverage, have been handing investors double-digit returns,” the report said. “Issuers, meanwhile, have seen their costs soar.
“Grievances surfaced in July, after it emerged that Jamaica’s catastrophe bond wasn’t triggered by the devastation wrought by Hurricane Beryl.
“Though the entire Caribbean island was officially declared a disaster area, the carefully calibrated terms of the bond meant its holders were shielded from losses. In the event, it was decided that the precise level of air pressure required for a payout wasn’t achieved.”
Bloomberg noted that cat bond investors are reaping an average return of around 15% this year after enjoying 20% returns in 2024.
Caribbean heads of government within the Caricom trade group recently discussed the financial ramifications of Beryl. This month, the group said it will be seeking “an examination” of cat bonds and other insurance-linked securities, and wants the region’s finance ministers to take a closer look at which markets governments should choose and which they should avoid, Bloomberg said.
“We recognise that at the end of the day, investors need to make returns,” Jwala Rambarran, a former governor of the central bank of Trinidad and Tobago, said in an interview. “But at the same time, fairness and equity says it can’t be all the time that the investors are making the returns. It’s a one-way street.”
The Jamaican Ministry of Finance didn’t respond to requests for comment.
The country’s $150 million cat bond — arranged by the World Bank and bought by private investors — was issued this year to replace a 2021 bond. The new bond costs the government 60% more per unit of coverage, which reflects the heightened risk posed by climate change as well as higher reinsurance costs, according to Conor Meenan, a risk finance specialist at the London-based Centre for Disaster Protection.
Cat bonds make it possible for issuers (also referred to as sponsors) to pass part of their risk over to capital markets. Sales of the instruments have soared lately, with factors including climate change, population density and inflation adding to their appeal. Investors face potentially substantial losses if a bond is triggered, but can generate market-beating returns if a predefined catastrophe doesn’t occur.
For the $47 billion cat bond market, Beryl proved an early win for investors navigating their way through a hurricane season that’s expected to be unusually active.
Zurich-based Plenum Investments AG, one of the private-market buyers of Jamaica’s cat bond, said it was drawn to the opportunity to diversify away from the US market. “We also like the parametric trigger structure, which minimizes uncertainty post event,” Plenum said in an emailed response to questions.
Issuers turning to cat bonds get a very specific type of coverage whose terms should be clear to all stakeholders at the point of purchase, according to the World Bank.
Cat bonds are “for tail events,” which are rare disasters outside the norm, said Michael Bennett, head of derivatives and structured finance at the World Bank treasury. “The parameter isn’t the fine print, it is the print.”
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
