Catastrophe Bonds Absorb ‘Black Swan’ Event Dealt by Melissa

7 minutes

(Bloomberg) — A rare thing is about to happen in the $55 billion market for catastrophe bonds: a trigger event will wipe out 100% of a bond’s principal.

Jamaica’s $150 million cat bond has been the subject of controversy since it failed to trigger last year after Hurricane Beryl destroyed large parts of the island. The development sparked calls for a fundamental rethink of the suitability of such financial instruments for developing countries on the frontlines of climate change.

Investors in cat bonds are now hoping that the trigger event forced by Melissa — a massive category 5 hurricane — will finally put such doubts to rest.

“It’s actually a good thing that this bond pays out,” Dirk Schmelzer, senior fund manager at Plenum Investments AG, a holder of Jamaica’s cat bond, said in an interview. “It shows how cat bond structures can help support countries get back on their feet again.”

But skepticism toward the instr