Hurricane Melissa will trigger a $150 million disaster bond in Jamaica to help rebuild

Hurricane Melissa, the most powerful Atlantic hurricane of the year, made landfall in Jamaica this week as a Category 5 storm. The strength of the storm means it will likely trigger a full payout of a catastrophe bond designed to provide the island with cash in the event of catastrophic weather events.

The $150 million catastrophe bond structured by Aonis intended to help the island’s population rebuild after natural disasters by providing Jamaica with parametric coverage against losses resulting from said storms. The policy came into effect this year and will run until 2027.

The government of Jamaica is the first government in the Caribbean, and the first of all small island states, to independently sponsor a cat association, according to Aon. Its likely payout demonstrates the value of a unique kind of safety net, financed by private markets.

To activate the full payment, the storm must meet a certain strength criterion. The storm’s central pressure should be at or below 900 millibars when it makes landfall and crosses the island.

Early data from the National Hurricane Center shows that Hurricane Melissa’s pressure remained below 900 millibars in several areas. These measurements are currently being verified by an independent calculation agent.

“While the final numbers are still being verified, early signs indicate that the transaction is doing what it was intended to do: quickly get critical funds into the country after a major disaster,” Chris Lefferdink, head of Insurance-Linked Securities for North America at Aon, said in a statement.

The review process typically takes two to three weeks and the earliest possible payout to Jamaica could occur within about a month, an Aon spokesperson said.

Payouts on previous parametric transactions took three months or more, but for this event Aon used an innovative data source to enable faster payments.

The catastrophe bond was placed using the International Bank for Reconstruction and Development’s ‘capital at risk’ program, which is used to transfer the risks associated with natural disasters to capital markets, allowing the country to quickly access funds after a major event.

‘What you have is a capital provider who puts money into the pool, and an insurer who puts the coupon for those funds into the pool [and] if the storm meets that criteria, they get the money much faster,” Aon CFO Edmund Reese told CNBC’s Contessa Brewer in an interview.

Catastrophe bonds and insurance-related securities were created in the mid-1990s in the aftermath of Hurricane Andrew’s devastation. Since then, they have grown in popularity, with the cat bond market growing more than 50% since the end of 2022 to almost $55 billion.

“Public-private partnerships like the one in Jamaica continue to highlight how parametric insurance can provide rapid, transparent relief in the aftermath of severe storms,” Lefferdink said.

Jamaica narrowly missed the requirements needed to receive a payout from a separate cat bond when Hurricane Beryl ravaged the island in 2024, resulting in $995 million in damage to homes, crops and infrastructure, according to the National Hurricane Center.