(Bloomberg) -- A strategy that’s delivered specialist investors huge returns is now facing scrutiny, amid concerns that its risk-reward dynamics might be...
-- A strategy that’s delivered specialist investors huge returns is now facing scrutiny, amid concerns that its risk-reward dynamics might be skewed against some 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. Issuers, meanwhile, have seen their costs soar.
“We recognize 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 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.
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. In the case of Jamaica’s cat bond, investors were protected because the conditions for triggering a payout “are hard and specific,” the V20 report said. “This rigidity protects investors but leaves Jamaica vulnerable to catastrophic risk.”
The “disappointing” payout outcome of Jamaica’s cat bond underscores the need for the World Bank “to reassess the usefulness of this complex and costly financial instrument and even perhaps for Jamaica to renegotiate the terms of its cat bond,” the report concluded. And with a total disaster safety net of $1.6 billion, Jamaica is particularly well-insured against the threat of hurricanes, according to Meenan. “They’re taking risk very seriously,” he said.
Jamaica World Bank Hurricane Beryl Private Investors Catastrophe Bonds Catastrophe Bond Bond Investors
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