Grave questions about the design of World Bank-brokered catastrophe (‘cat’) bonds have been raised after Hurricane Beryl, a Category 4 storm and one of the strongest hurricanes ever to hit Jamaica – with the entire island being declared a disaster area in early July – failed to trigger its ‘parametric’ payout criteria for Jamaica’s catastrophe bond.
Cat bonds are intended to provide immediate relief following catastrophic events, which are increasing in frequency and severity due to climate change. The World Bank assisted Jamaica by pricing its first three-year cat bond in 2021, and in renewing it for another four years earlier this year. Private investors can reap significant profits from cat bonds, currently averaging about 15 per cent returns, when they fail to pay out. If it had triggered, the bond could have paid out up to $150 million to Jamaica.
The problem with catastrophe bonds
As detailed in July by the Polycrisis Dispatch, a weekly newsletter, the failure of Jamaica’s bond to trigger is not an outlier. Cat bonds must be sufficiently profitable to attract investors, which means they can be potentially costly for climate-vulnerable countries already suffering from a severe lack of grant-based and concessional climate finance. The conditions for triggering Jamaica’s cat bond was also extremely specific: a threshold of low air pressure, which in a hurricane is associated with higher wind speeds. Similar issues arose previously, as Jamaica was hit by hurricanes in 2021 and 2022, causing considerable damage, but this did not trigger payouts of its 2021 cat bond.
The positive outcomes for vulnerable states are scarce, as the conditions and triggers are defined to benefit investorsIolanda Fresnillo, Eurodad
In a report authored for the Vulnerable Twenty (V20) Group in July 2024, Sara Jane Ahmed and Jwala Rambarran noted that “the conditions for triggering a payout are hard and specific. This rigidity protects investors but leaves Jamaica vulnerable to catastrophic risk.” However, according to George Richardson, director of capital markets and investments at the World Bank Treasury, “there is a trade-off”: lower thresholds would mean cat bonds pay out more often, making them less attractive to investors.
The track record of cat bonds in helping states deal with environmental and other catastrophes has frequently fallen short of expectations. In 2020, during the Covid-19 pandemic, the Bank scrapped its Pandemic Emergency Financing Facility (PEF) bond after payments to bond-holding countries were delayed despite the outbreak of a global pandemic, leading to investors seeking to sell off their bonds in order to avoid losses (see Observer Autumn 2020).
“Financial innovations like cat bonds are sold by the World Bank as solutions to the financing gap for climate action, but experience shows these financial market innovations lack efficacy,” notes Iolanda Fresnillo of Belgium-based civil society organisation Eurodad. “The positive outcomes for vulnerable states are scarce, as the conditions and triggers are defined to benefit investors, instead of favouring communities that suffer from climate impacts and other shocks.”