Hurricane Melissa set to trigger $150 million Jamaica catastrophe bond to help rebuild

Hurricane Melissa, the strongest Atlantic hurricane of the year, reached Jamaica this week as a Category 5 storm. The strength of the storm means it will likely trigger a full payout from a catastrophe bond designed to fund the island in the event of catastrophic weather events.

$150 million catastrophe bond structured by AonIt aims to help the islanders rebuild after natural disasters by providing Jamaican parametric coverage against losses resulting from said storms. The policy came into effect this year and will last until 2027.

The Jamaican government is the first government in the Caribbean region and the first to sponsor a cat bond independently of any small island state, according to Aon. Its potential return demonstrates the value of a unique type of support financed by private markets.

The storm must meet a certain strength criterion for the full payout to be triggered. The storm’s central pressure must be 900 millibars or less as it reaches land and passes the island nation.

Preliminary data from the National Hurricane Center shows that Hurricane Melissa’s pressure remained below 900 millibars in many areas. These readings are in the process of being verified by an independent calculation agent.

“While the final figures are still being confirmed, early signs suggest the transaction is doing what it was designed to do: quickly deliver critical funds into the country in the wake of a major disaster,” Chris Lefferdink, Aon’s head of North American insurance-linked securities, said in a statement.

The review process usually takes 2 to 3 weeks, and according to a spokesperson from Aon, the earliest possible payment to Jamaica could arrive in approximately 1 month.

Previous parametric transactions took 3 months or longer to pay out, but for this event, Aon used an innovative data source to make payments faster.

The catastrophe bond was placed using the International Bank for Reconstruction and Development’s “capital at risk” program, which is used to transfer risks associated with natural disasters to capital markets, allowing the country to quickly access funds after a major event.

“What you have is a capital provider that pools the funds, an insurer that pools the coupon for those funds. [and] “If the storm meets that criteria, they’ll get the money a lot quicker,” Aon CFO Edmund Reese told CNBC’s Contessa Brewer in an interview.

Catastrophe bonds and insurance-linked securities were created in the mid-1990s following the devastation of Hurricane Andrew. It has since grown in popularity, and the cat bond market has grown by over 50% since the end of 2022, reaching nearly $55 billion.

“Public-private partnerships like Jamaica’s continue to highlight how parametric insurance can provide rapid and transparent relief in the wake of severe storms,” Lefferdink said.

When Hurricane Beryl hits the island in 2024, Jamaica narrowly missed requirements to receive payments from a separate cat bond, causing $995 million in damage to homes, crops and infrastructure, according to the National Hurricane Center.