Chapter 1: What is the main topic discussed in this episode?
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Chapter 2: What unusual financial bet did the Jamaican government make regarding hurricanes?
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A few weeks ago, Faval Williams drove across Jamaica to the west side of the island to see the damage with her own eyes. She was headed to where the worst hurricane in her country's history had made landfall.
When she got there, there was a lady and she says, come with me. Let me show you. This is where my house used to be. And you go, where? It's like right here. There was nothing in the space. It was all gone. You saw persons just sitting and looking off into the distance, wondering what's next.
For Fayval, for all Jamaicans, this is unfortunately a familiar scene after hurricanes. Only Hurricane Melissa was worse. It was a Category 5, winds of 185 miles per hour. And now people were adding up what they had lost, trying to figure out how they would get it back.
I found myself just hugging people, assuring them that the government would take steps to help them to rebuild.
And Fayval, she is the government. She's actually Jamaica's minister of finance. So she knew that Jamaica had been preparing for exactly this kind of catastrophe. preparing so that the country could pay to rebuild the roads, to rebuild people's homes. And to do that, Jamaica had some financial tricks up its sleeve.
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Chapter 3: How do catastrophe bonds work and why are they becoming popular?
It is to fight poverty.
And about 10 years ago, the largest Ebola outbreak in history occurred in West Africa. More than 10,000 people died. Michael and his colleagues were sitting in that not-so-cushy office in D.C. thinking, what we really need is some kind of international pandemic insurance so that poorer countries could get some help.
So in 2016, he and his team came up with a creative new use for catastrophe bonds to share the risk of pandemics. They basically went around designing their own custom pandemic insurance policy.
And so we came up with a list of six disease types, which were believed by the medical experts to be most likely to cause a significant global type pandemic.
At the top of that list of threats was, of course, Ebola. Also on the list was pandemic influenza, like the type that swept through the world right after World War I, as well as, you know, a couple other types of viruses. The World Bank went around to investors asking them, hey, do you want to bet against a pandemic caused by one of these six types of viruses?
Okay, so of course they didn't literally say that, but that's the essence of what a cat bond is. And the World Bank ended up raising more than $300 million worth of these new pandemic cat bonds.
So investors agreed that if a global pandemic happened in the next few years, some or all of those $300 million would go to the World Bank to help developing countries. And in the meantime, the World Bank would be paying them a decent amount of interest, like tens of millions of dollars a year.
People thought this is an extremely innovative way to use the cap on market. No one had ever done it before.
The World Bank's first ever pandemic bond was set to last for three years, starting in 2017. By 2019, some people were criticizing the World Bank for this deal because here these investors were making fat profits. And what were the chances even that there would be a worldwide pandemic that could trigger this bond? One famous economist called the whole thing an embarrassing mistake.
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Chapter 4: Who is Karen Clark and what role did she play in the development of catastrophe bonds?
If we were to try to have insurance cover everything, it would be far too expensive.
So when Jamaica went to the market with its catastrophe bonds, the country knew what it was buying. It knew how much interest it would have to pay investors and how much insurance it wanted. And that it would only pay out if there was a hurricane the size of, well, the one that came next.
This year, Hurricane Melissa was like the definition of that once-in-a-generation hurricane. Within a week and a half, the cat bond officially triggered. And Favol says she was surprised at how tuned in the whole country was.
It was on the tongues of everyone. There are all kinds of interviews on radio and so on, articles written in the paper. Everybody was talking about it. Who never knew about a cat bond knew about it then.
Thanks to its cat bond, Jamaica is going to get $150 million. In fact, the money just hit the country's bank accounts this week.
I am hoping that investors globally will see this as a market to support because behind the dollars are people, real people with lives who would not have anything else to help them. And here we are now having resources to help us with the reconstruction.
You know, as this market for catastrophe grows, as catastrophe bonds become more and more mainstream, what it's doing is making the market for insurance bigger and hopefully more competitive.
So the more investors who get into cat bonds, then if markets work like they're supposed to, the better rates that countries like Jamaica can get. And the better rates insurance companies can get on the reinsurance they need. Right now, the price of reinsurance is actually going down, in part because of competition from cat bonds.
The whole point of cat bonds is to share risk with people outside of the traditional insurance markets. And as the weather gets more and more chaotic, as the risk of catastrophe grows, it's maybe not a bad idea to find more and more ways to share that risk.
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