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With footage coming out of Jamaica after major hurricane Melissa made landfall yesterday showing the damage left in the extreme storms path, rating agency AM Best has said reinsurance capital will take a meaningful share of the losses suffered, while broker BMS Group’s Andrew Siffert said the industry loss could exceed $5 billion.
Hurricane Melissa made landfall yesterday with sustained winds of around 185 mph, according to the National Hurricane Center.
The hurricane was one of the most intense ever recorded prior to slamming into Jamaica and now a long road of recovery begins for the Caribbean nation.
As we reported in our update at landfall, it seems likely that Jamaica’s $150 million World Bank facilitated IBRD CAR Jamaica 2024 parametric catastrophe bond will have been triggered and payout, with the data suggesting a complete exhaustion of this coverage to support Jamaica’s recovery.
The level of any payout to be made will be confirmed in time, but all of the cat bond market sources we’ve heard from are anticipating the full $150 million will be paid out, given the low central pressure levels reported as Melissa made landfall and crossed Jamaica.
Other parametric insurance structures covering Jamaica itself and some commercial operations on the island, such as hoteliers and resorts, are also expected to be activated and given the intensity of Melissa’s winds, the pressure level reported and extreme rainfall, it’s expected the majority will pay out too.
It’s important to note that hurricane Melissa remains an extremely dangerous major storm and is strengthening again as it now makes landfall in Cuba, with the eastern portion of that country facing a potentially devastating impact as the storm still has 120 mph sustained winds.
Following that, Melissa will head through the southeastern or central Bahamas and beyond it will move near to Bermuda, although at this stage it’s not clear how close a passage it will make, or how much it will have weakened as it moves faster into the Atlantic.
Meaning further damage and losses are expected from hurricane Melissa, so the story of this historic storm is not yet over.
But as is typical, insurance and reinsurance industry thoughts turn to the cost of claims in Jamaica and how quickly they can be paid, where risk capital will play a vital role in helping the country recover.
In his latest update on hurricane Melissa, BMS Group Senior Meteorologist Andrew Siffert provided helpful colour on how to think about the industry loss from this storm.
Siffert explained that, “One factor that complicates overall insurance loss estimates is that hurricanes typically make landfall from east to west along the Jamaican coastline, as was the case with Gilbert (1988), rather than from south to north. Only one major hurricane has made landfall from the south, which was the unnamed 1912 hurricane. This means the overall development of stochastic track catalogs, with strong category 5 hurricanes making landfall along Jamaica’s southern coastline, is more limited in its understanding of potential loss, which is why, at this time, it is best to wait and see what event selection the catastrophe model vendors provide for reliable loss guidance.”
Further stating that, “However, the extreme nature of Melissa making landfall as a strong Category 5 hurricane makes this a tail event. Such events tend to result in industry losses of over $5B. With the Jamaican GDP of just about $20B, you can see this will be a significant event for the island.
“This means the overall economic impact could be 30–250% of GDP, and the fallout could include a deep recession, significant unemployment, a temporary blow to tourism, and stress on local banks and insurers, which puts heavy pressure on public borrowing to rebuild. Maybe another way to put this type of loss into perspective is that 30% of U.S. GDP would be a $8.85T dollar loss, so, as one can imagine, the economic impacts will be significant.”
That helps to drive home the meaningful effects hurricane Melissa will sadly have on the island of Jamaica, with a long road to recovery now ahead of the island. It also drives home the wide insurance protection gap.
Rating agency AM Best has said in a report that, given insurers in the Caribbean region and specifically covering risks in Jamaica tend to be heavily reliant on reinsurance, it suggests a meaningful proportion of the insurance industry loss will fall to reinsurance capital providers.
The impacts to Jamaica’s important tourism industry are likely to hamper the country’s economy as it tries to recover, but insurance penetration is generally low across the population, AM Best explained.
AM Best highlighted that reinsurance partnerships are key to insurers ability to underwrite risks across the Caribbean region.
“There are several local insurers that will be impacted by this storm, but as is the norm for the Caribbean islands, insurers there rely heavily on reinsurers. Reinsurance partnerships are the cornerstone that provides the capacity for insurers to profitably write property business in the Caribbean, especially in catastrophe-affected years. According to Jamaica’s Financial Services Commission, there were 17 registered general and life insurance companies as of the end of 2024; AM Best rates two insurers domiciled in Jamaica. It remains to be seen how this event will affect reinsurance pricing going forward,” the rating agency said.
AM Best also commented on Jamaica’s catastrophe bond coverage, saying that, “It’s also likely that a $150 million Jamaican parametric cat bond — IBRD CAR Jamaica 2024 — will trigger. This is part of the World Bank’s catastrophe risk insurance program for the region.”
AM Best also highlighted the CCRIF parametric disaster insurance pool, from which Jamaica also has protection.
That coverage is expected to pay out in full for Melissa, according to our sources, given the CCRIF policies are designed to trigger for events less severe than where Jamaica’s cat bond cover would be activated.
AM Best said, “Events like these highlight the need to build awareness of the protection that insurance can provide across the Caribbean region. While facilities such as the Caribbean Catastrophe Risk Insurance Facility have provided some economic relief to the governments of member countries, which include Jamaica, a combination of macro-initiatives and microinsurance may have greater potential in narrowing the region’s protection gap. However, catastrophe models in the Caribbean are generally not as robust as the ones used to model for US hurricanes. Modeling in the Caribbean region presents greater challenges, owing to disparate building codes and data quality, as well as their proximity and vulnerability to catastrophic events. Models need to consider the correlation of events between geographies in the region, as catastrophe risk can potentially be spread across the entirety of the Caribbean.”
While insurance, reinsurance and catastrophe bond risk capital is all likely to support Jamaica’s recovery from major hurricane Melissa, the storm will again evidence the significant protection gaps that exist around the world, highlighting the need to redouble efforts and innovation to further expand much-needed coverage for natural catastrophe events.
There is ample capital in the reinsurance and insurance-linked securities (ILS) market to support delivery of more disaster risk financing to disaster exposed states.
But the challenge, as ever, is in building the insurance penetration to sufficient levels where this capacity can be put to work more meaningfully, so that capital can flow more readily to support recovery when tragic events like Melissa happen.
As AM Best suggested, it will take the innovation and resources of the traditional insurance, reinsurance and ILS industry, working alongside development finance organisations, entities like the CCRIF and World Bank, to steadily build risk transfer coverage for areas of the world such as the Caribbean to narrow the gap between the extreme economic impacts that can be experienced and the ability of markets to support recovery and redevelopment.
Hurricane Melissa losses in Jamaica likely to fall to reinsurers, says AM Best. BMS suggests $5bn+ was published by: www.Artemis.bm
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