Cedric Stephens | Analysing the new natural disaster risk-financing policy

It is fitting to start the 2023 Atlantic Hurricane Season by analysing Jamaica’s National Natural Disaster Risk Financing Policy 2021-2026.

When this column was rebranded three years ago, I had no clue it would discuss such a weighty topic. The Ministry of Finance and Public Service led the process that ended with writing the policy and the public dissemination of its contents.

The National Natural Disaster Risk Financing Policy, or NNDRFP, intended to guide decision-making and action, was built on the premise that it is well-known that the island of Jamaica is “highly exposed” to natural and other disasters.

Is this an accurate assumption? If so, why was it that only one of the country’s 17 finance ministers and their technocrats, since 1953, recorded guidelines to shape government policy on this vital subject?

Despite the many and continuing criticisms about the finance ministry’s handling of the public sector wage increases, few can question the quality of its leadership in developing the natural disaster risk-financing policy – a complex issue of equal importance to wage adjustments.

The policy, citing the International Monetary Fund, states that “Jamaica’s exposure to natural disasters ranks in the top-20 globally, given its low-lying coastal zones, mountains, and five major fault lines. Two recent earthquakes in neighbouring Haiti dramatise the island’s vulnerability. The country has withstood about 40 disasters between 1950 and 2017, averaging about one yearly disaster. Sixty per cent of these were hurricanes and storms, with floods, droughts, and epidemics accounting for the remaining 40 per cent.”

Our lawmakers developed policies through legislation on managing risks created by vehicles on public roads during the 1930s. Their actions led to compulsory third-party motor vehicle insurance.

Successive legislators have consistently failed to address the potentially more damaging natural disaster risks until nearly a century later. Would fewer persons have died, and the economic and other disruptions caused by Hurricane Gilbert, for example, have been less if the current policy had been in place in past years?

Health-related phenomena like epidemics (Chikungunya virus) and pandemics (COVID-19) are defined in the policy as natural disasters. Many of the government’s actions during the pandemic were, I believe, guided by the Disaster Risk Management Act 2015, known as DRMA, and, probably, the draft NNDRFP policy.

The DRMA invests authority with the minister of finance under Part IX to establish a national disaster fund. Over time, the policy’s goal is to “minimise the fiscal impact of natural disasters on the national budget.”

Minister of Finance Dr Nigel Clarke devoted parts of his speeches during the 2021/22 and 2022/23 budget debates to measures put in place to minimise the impact of natural disasters on the economy.

“As the policy evolves, it will become the guiding force behind building the country’s fiscal and financial resilience and will aid the Government of Jamaica in minimising the fiscal impact of natural disasters on the budget, the economy and the society,” he said.

In contrast, Ministry of Finance Paper No 41/88, written after Hurricane Gilbert, recorded that “the total (of assistance negotiated or under negotiation) was US$612 million available from international agencies and ‘friendly countries’ with 24 per cent (US$146.8 million) in the form of grants and 76 per cent (US$465.2 million) in the form of loans.”

Thirty-five years later, the country is still repaying those loans.

The former strategy for dealing with these risks, ex-post (after they occurred), is unsustainable, especially considering the increased threats posed by climate change to small island developing states like Jamaica. I was happy to read in last Monday’s Gleaner that the prime minister is now spreading the message about the importance of the NNDRFP and that failure to plan for future disasters was not an option.

The NNDRFP has 10 policy objectives and a range of strategies that are framed to achieve the goals, which are summarised as follows:

1. Identify, understand, and quantify the economic and fiscal impacts of disasters in Jamaica on the government, businesses, and people;

2. Achieve greater efficiency and transparency in the mobilisation and execution of public expenditure in disaster risk management;

3. Implement budgeting to promote disaster risk financing at municipal and sectoral levels;

4. Incorporate disaster risk analysis in public sector investments and planning from a physical planning perspective;

5. Identify and evaluate alternative DRF instruments to determine an optimal suite.

6. Implement a suite of DRF instruments;

7. Develop the local insurance market through increased access to affordable, appropriate insurance for households, businesses, and government;

8. Improve Insurance of Public Assets, including through public-private- partnerships;

9. Enhance management of implicit contingent liabilities related to social protection; and

10. Strengthen the institutional capacity of the Ministry of Finance and the Public Service and the broader public sector regarding disaster risk financing.

Global, regional, and local insurance market developments have made policy objective No. 7 unfeasible.

My April 30, 2023, article spoke about a regional insurance crisis. One month later, The New York Times provided more evidence of the problem on a bigger scale in its piece ‘Climate Shocks are Making Parts of America, Uninsurable’; while the article titled ‘It Just Got Worse’ pointed out that California’s largest insurer stopped selling coverage to homeowners everywhere in the state.

“Insurers are tired of losing money, are raising rates, restricting coverage or are pulling out of some areas altogether,” it said.

Similar things are happening in eastern Kentucky, Louisiana, and Florida. If insurers are moving out of California and Florida, two of the largest states with a combined gross domestic product of US$5 trillion, can small Caricom states with a total GDP of US$82 billion stop reinsurers from walking away? What are the short and long-term implications for small countries like Jamaica?

Several strategies were formulated to achieve the Jamaican policy’s insurance objective. These include enhancing natural disaster insurance availability, increasing insurance penetration and affordability, developing products for marginalised communities, and encouraging more citizens to buy natural disaster insurance.

These strategies, like the policy objectives they are intended to support, are no longer appropriate.

Notably absent from the strategies was the removal of GCT from natural disaster insurance premiums and granting of financial incentives to allow insurers to create tax-free catastrophe reserves, given the long-term nature of those risks.

A Reuters report recently said that NOAA, the US National Oceanic and Atmospheric Administration, predicted that the 2023 hurricane season would bring an average number of ocean storms and hurricanes this year.

NOAA forecasters estimate 12 to 17 named storms. Five to nine events will develop into hurricanes. One to four will become major hurricanes between June 1 and November 30.

The United Kingdom’s Met Office, on the other hand, forecasts 20 named tropical storms for this season. There’s a 70-per-cent chance that the number will range from 14 to 26. Eleven are predicted to become hurricanes, with a 70-per-cent chance that the number will be eight to 14. Five are expected to intensify into major storms.

The natural disaster risk-financing policy highlights the nature and immediacy of the crisis facing Jamaica and the rest of the Caribbean. We need to move beyond rhetoric and start putting our plans into action.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: aegis@flowja.com or business@gleanerjm.com