By Dr. Glen Brown, President & CEO, Global Accountancy Institute, Inc. and Global Financial Engineering, Inc.

As the Caribbean braces for increasingly intense hurricane seasons, the importance of financial instruments like catastrophe bonds (cat bonds) cannot be overstated. These instruments are designed to provide essential financial relief following natural disasters. However, the effectiveness of cat bonds hinges on the precise calibration of their trigger mechanisms. The recent case of Hurricane Beryl underscores the need for a reevaluation of these parameters to ensure timely and adequate payouts.

The Case of Hurricane Beryl

Hurricane Beryl, one of the most powerful storms to hit Jamaica, caused extensive damage across the Caribbean. Despite the devastation, investors in Jamaica’s catastrophe bonds did not face losses because the parametric triggers were not met. Specifically, the required air pressure for the payout was not reached. This scenario highlights a critical flaw: the current triggers did not adequately capture the storm’s impact, leaving affected regions without necessary financial support.

Key Features and Weaknesses of the IBRD CAR Jamaica 2024 Catastrophe Bond

The IBRD CAR Jamaica 2024 cat bond aims to secure at least $150 million in disaster insurance, covering four hurricane seasons. The bond’s trigger mechanism is based on storm location and minimum central pressure, with payouts on a sliding scale from 30% to 100% of the principal. While this approach offers a structured method of risk transfer, it has notable weaknesses:

1. Trigger Sensitivity and Specificity:
   • The current parametric trigger, based on central pressure, may not be sensitive enough to reflect the actual risk and impact of hurricanes like Beryl.
2. Parametric Box Division:
   • The division of the Caribbean Sea into parametric boxes might not adequately account for the interconnected and widespread impacts of a storm.
3. Risk of Under-Compensation:
   • The linear sliding scale may not provide sufficient compensation for severe but non-qualifying events under the current triggers.

Recommended Adjustments for Future Catastrophe Bonds

To enhance the effectiveness of catastrophe bonds for Jamaica and other Caribbean countries, the following adjustments are essential:

1. Adjusting Trigger Parameters:

Incorporate Additional Metrics:

• Wind Speed: Implement triggers based on sustained wind speeds. For example, payouts could trigger if wind speeds exceed 130 mph.
• Storm Surge: Include storm surge heights as a parameter. Payouts could trigger if storm surges exceed 15 feet.
• Rainfall: Add cumulative rainfall as a trigger. Payouts could activate if cumulative rainfall exceeds 10 inches within 24 hours.

Rationale: These additional metrics will capture a broader range of hurricane impacts, ensuring more comprehensive coverage and timely payouts.

2. Redefining Parametric Boxes:

Redefine Geographic Division:

• Consider larger or overlapping parametric boxes that better reflect the interconnected impacts of storms across the region.

Rationale: A more holistic geographic division can ensure that the bond captures the widespread effects of hurricanes, providing better coverage for all affected areas.

3. Enhancing Payout Structure:

Dynamic Sliding Scale:

• Implement a more dynamic sliding scale that adjusts payouts based on the severity of multiple impact metrics (wind speed, storm surge, rainfall).

Rationale: A flexible payout structure can provide more appropriate financial relief based on the comprehensive impact of the storm, not just a single parameter.

Additional Section: Specific Data Analysis and Practical Adjustments

The IBRD CAR Jamaica 2024 cat bond, supported by the World Bank and IBRD, aims to provide $150 million in parametric named storm disaster insurance protection. This bond employs parametric triggers based on storm location and minimum central pressure. Here’s a deeper analysis of the specific data and practical adjustments needed:

Specific Data and Weaknesses

1. Trigger Mechanism:
   • Current Setup: Utilizes storm location and minimum central pressure data from the NHC’s automated tropical cyclone forecasting system.
   • Weakness: The parametric trigger based solely on central pressure does not account for the multifaceted impact of hurricanes.
2. Payout Structure:
   • Current Setup: Payouts on a linear sliding scale from 30% to 100% of the principal, depending on the storm’s central pressure and location within predefined parametric boxes.
   • Weakness: This structure may result in under-compensation for severe storms that do not meet the central pressure criteria but still cause extensive damage.
3. Geographic Distribution:
   • Current Setup: Jamaica and the surrounding Caribbean Sea divided into parametric boxes with different payout factors.
   • Weakness: The geographic division may not reflect the true impact area, especially for storms affecting multiple regions.

Practical Adjustments and Recommendations

1. Comprehensive Trigger Mechanism:

• Enhanced Metrics:
  • Wind Speed: Add a trigger based on sustained wind speeds. This metric directly correlates with the destructive power of hurricanes.
  • Storm Surge: Include storm surge heights as a trigger parameter to address coastal flooding and damage.
  • Rainfall: Incorporate cumulative rainfall to account for flooding and landslides.

Example Adjustment:

• A cat bond could trigger if wind speeds exceed 130 mph, storm surges exceed 15 feet, or cumulative rainfall exceeds 10 inches within a 24-hour period.

2. Holistic Geographic Division:

• Redefine Parametric Boxes:
  • Use larger or overlapping parametric boxes to capture the interconnected impact of storms.
  • Ensure the boxes reflect areas of highest risk and potential damage.

Example Adjustment:

• Implement a flexible grid system that can adapt to the path and impact area of the hurricane, ensuring all affected regions are covered.

3. Dynamic Payout Structure:

• Flexible Sliding Scale:
  • Adjust the sliding scale to consider multiple impact metrics simultaneously.
  • Provide higher payouts for combinations of severe metrics, even if individual thresholds are not met.

Example Adjustment:

• A payout structure where:
  • 30% payout for meeting one threshold (e.g., central pressure).
  • 50% payout for meeting two thresholds (e.g., central pressure and wind speed).
  • 100% payout for meeting all three thresholds (central pressure, wind speed, and storm surge).

Conclusion

The current structure of the IBRD CAR Jamaica 2024 catastrophe bond, while beneficial, reveals significant weaknesses that could undermine its effectiveness in the face of complex and multifaceted natural disasters like Hurricane Beryl. By incorporating additional trigger parameters, redefining parametric boxes, and enhancing the payout structure, these bonds can offer more robust and reliable financial protection.

As we face the reality of more frequent and intense hurricanes, it is imperative that we refine these financial instruments to ensure they provide the necessary support when it is most needed. For Jamaica and other Caribbean nations, this means embracing a more nuanced and comprehensive approach to catastrophe bond construction, thereby safeguarding against the unpredictable nature of future storms.

Professional Profile of Dr. Glen Brown

Dr. Glen Brown stands at the forefront of the financial and accounting sectors, distinguished by a career spanning over a quarter-century marked by visionary leadership and groundbreaking achievements. As the esteemed President & CEO of both Global Accountancy Institute, Inc., and Global Financial Engineering, Inc., he steers these institutions with a steadfast commitment to integrating the realms of accountancy, finance, investments, trading, and technology. This integrative approach has solidified their status as pioneering entities in global multi-asset class professional proprietary trading and education.

Financial Engineering Expertise: Holding a Doctor of Philosophy (Ph.D.) in Investments and Finance, Dr. Brown possesses profound expertise across a broad spectrum of financial disciplines. His knowledge extends from financial accounting and management accounting to intricate areas of finance, investments, strategic management, and risk management. As a Chief Financial Engineer, he excels in the design, development, and implementation of innovative financial products and strategies. His role transcends traditional leadership; as the Head of Trading & Investments, Chief Data Scientist, and Senior Lecturer, Dr. Brown embodies the spirit of hands-on innovation and scholarly excellence.

Innovative Leadership and Holistic Philosophy: Dr. Brown’s guiding philosophy, “We must consume ourselves in order to transform ourselves for our rebirth,” encapsulates his holistic approach to professional and personal development. It underscores a belief in the transformative power of self-reflection, creative imagination, and the relentless pursuit of spiritual and intellectual growth. This ethos is the bedrock of his dedication to not just navigating but shaping the future of finance and investments with innovative solutions.

Commitment to Continuous Learning and Innovation: Beyond his executive and academic roles, Dr. Brown is a fervent advocate for continuous learning and innovation. His leadership has catalyzed a culture of forward-thinking at Global Accountancy Institute, Inc., and Global Financial Engineering, Inc., propelling them into the vanguard of financial education and proprietary trading. Under his guidance, these institutions not only adapt to the evolving financial landscape but actively contribute to its development, offering state-of-the-art solutions to the industry’s most complex challenges.

Dedication to Nurturing Future Financial Professionals: Dr. Brown’s commitment to excellence is matched by his dedication to nurturing the next generation of financial professionals. Through his visionary outlook and unique philosophical approach, he inspires a cadre of students and professionals alike to transcend conventional boundaries, fostering an environment where innovation, leadership, and success flourish.

In essence, Dr. Glen Brown is not just a leader but a pioneer, educator, and innovator whose life’s work continues to impact the global finance and accounting industries profoundly. His legacy is defined by the relentless pursuit of excellence, the transformation of challenges into opportunities, and the unwavering belief in the potential for rebirth and regeneration in the professional realm.

Read his latest article entitled: Designing a Cat Bond in the Best Interest of Affected Countries: A Comparative Analysis

General Disclaimer

General Disclaimer: The information provided in this article is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, or other professional advice. Readers are encouraged to seek professional advice tailored to their individual needs and circumstances. Dr. Glen Brown and his associated institutions do not endorse any specific financial instruments or strategies mentioned in this article. While every effort has been made to ensure the accuracy of the information, there can be no guarantee of the accuracy or completeness of the information provided.