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The first paragraph of my March 17 article, ‘Others Must Follow GOJ’s Robust Climate Change Responses’, noted that hurricane forecasts for 2024 would be published soon even though the Atlantic Hurricane Season will not start until June 1.
The forecasts arrived last week.
The Colorado State University’s Tropical Meteorology team, led by Dr Phil Klotzbach, has issued its first 2024 forecast: 23 named storms, 11 hurricanes, and five major hurricanes with Category 3 wind speed of 111 miles per hour or higher were projected. Landfall probabilities, that is, the number of events likely to hit land, were also predicted.
The CSU team has called 2024 a “very active hurricane season”. The March 17 article quoted a more colourful phrase from a different source – “a hurricane season from hell”.
Here are abstracts from the CSU predictions that are of particular significance for Caribbean interests:
• Sea surface temperatures in the eastern and central Atlantic are currently at record-warm levels and are anticipated to remain “well above average” for the season. (A recent news report said temperatures recorded last month were at their highest level in history.)
• A warmer-than-normal tropical Atlantic provides a “more conducive dynamic and thermodynamic environment for hurricane formation and intensification”. Put more simply, this means warmer sea surface temperatures are likely to result in the formation of more and stronger storms.
• The forecast is of “above-normal” confidence’ for an early April outlook. This is the forecasters’ way of saying that even though the season begins in two months’ time and runs until November, their current level of confidence about its accuracy is higher than normal.
• Current conditions suggest a “well above-average” probability for major hurricanes making landfall along the continental United States coastline and in the Caribbean.
• There is a 62 per cent chance of major hurricane landfall for the entire US coastline. The 134-year average is 43 per cent.
• There is a 34 per cent probability of a major hurricane landfall for the United States east coast, including the Florida peninsula. This can be compared to the 134-year average which is 21 per cent.
• There is a 42 per cent chance of major hurricane landfall for the Gulf Coast from the Florida Panhandle westward to Brownsville, Texas. The 134-year average for this region is 27 per cent.
• There is a 66 per cent probability of major hurricane landfall for (islands in) the Caribbean. The 134-year average for the region is 47 per cent.
Bottom line: The likelihood of a major hurricane hitting an island or group of islands in the Caribbean during 2024 is, on average, higher than it has been for over a century.
Insurers, reinsurers, and other risk takers use forecasts from the CSU team and other experts to help them make decisions about how much of their resources they should allocate to assume risks and what prices to charge for providing insurance coverage against hurricanes. Smart buyers use the same tools to formulate their risk-financing strategies.
It came as no surprise when I learned last week from another overseas source that our government, through the Ministry of Finance and Public Service, “returned to the catastrophe bond market as anticipated, with an initial target to secure at least US$150 million in parametric named storm disaster insurance protection from the capital markets through a cat bond”. It is designated as IBRD CAR Jamaica 2024.
The source revealed that this action is intended to protect the country over four hurricane seasons. The finance ministry, I assume, will be aiming to conclude its negotiations with the capital market before the start of the 2024 hurricane season. It also stated that “it is good to see Jamaica returning to secure more disaster insurance protection from the capital markets through a parametric catastrophe bond structure. Jamaica’s return had never been in doubt, given the strong statements made by its finance minister and the preparations the country has made in terms of its robust disaster risk financing framework.”
I wrote three articles about cat bonds between October 2019 and July 26, 2021. The bond was defined in the first one as a financial instrument that was invented during the 1990s. It pays the issuer – in this case, the Government of Jamaica, via the Ministry of Finance – a fixed amount when a pre-defined disaster risk occurs. A Category 3 hurricane and a magnitude 7.0 earthquake are examples of disaster risk.
Cat bonds offer investors, such as hedge funds, pension funds, and mutual funds, the opportunity to earn an attractive return on their investment in exchange for assuming disaster risks. Bonds are issued for a fixed period, usually three years. Yields on CAT Bonds were estimated at 11.99 per cent on March 31.
Should the specified disaster occur, the investors would lose the principal, and the issuer would receive that money to cover its losses. Catastrophe bonds use triggers with defined parameters that must be met to start accumulating losses. Only when these specific conditions are met do investors begin to lose their investment. Insurers and reinsurers also use the capital markets to transfer risks.
Cat bond IBRD CAR Jamaica 2024 was preceded by a US$185 million bond, IBRD CAR 130, which expired at the close of 2023. In the years prior to the execution of the current ex ante risk-financing strategy, successive governments sought capital market funds ex post, or after disaster events.
Local and regional interests should emulate the finance ministry’s lead and formulate medium-term plans to manage the many risks they face instead of executing annual, ex post plans. This is one of the many lessons that COVID-19 should have taught us.
Finally, students at the School of Media and Communications, University of the West Indies, have earned a big shout-out. I learned on social media about their research survey about attitudes and behaviours on hurricane preparedness across the Caribbean. Those efforts confirm that last week’s criticisms against the College of Insurance and Professional Studies were not off the mark. Information from the survey can help to increase insurance penetration.
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
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