The Caribbean, largely made up of small island developing states (SIDS), could soon benefit from regional disaster risk financing, when a catastrophe bond now being designed to service the collective need of countries becomes available.
Following a tenfold increase in natural disasters since 1960, worsened by climate change which has been creating more volatile weather systems and incurring billions in annual losses to Caribbean countries, catastrophe (CAT) bonds are being targeted among instruments deemed most effective, offering quick finance recovery in the wake of serious cataclysmic events.
A CAT bond is a high-yield debt instrument that is designed to raise money in the event of a natural disaster. It allows the issuer to receive funding from the bond only if specific conditions, such as a hurricane, earthquake or any other disaster-related event occurs. They are typically used to protect against low-frequency, high-severity events in light of the usual high coverage they provide.
Speaking at a high-level forum on Wednesday, José Ángel Villalobos, senior financial sector specialist with the World Bank, said that since SIDS were particularly vulnerable and prone to natural hazards, they stand to benefit significantly from the use of CAT bonds as a mechanism for disaster reduction and to enhance sustainable developmen