Climate disasters are fueling a debt storm in the Caribbean. Insurance can help

When Hurricane Beryl struck Carriacou – part of the Caribbean nation of Grenada – in July, it almost flattened the entire island, damaging every building in the community of 8,000 people.

Grenada had to rebuild, but it is a scary prospect.

In 2022, the country used He recently paid off a $51.9 million loan, and is currently in debt distress – a financial term that means he is close to paying off the loan, or needs to be restructured. Paying for reconstruction could force Grenada to borrow more, putting it in the hole.

Beryl was the first Category 5 hurricane to form in the Caribbean, which shocked even an area accustomed to major hurricanes. It was fueled by unusually warm ocean waters and strengthened from Category 1 to 4 in just 24 hours, a phenomenon most likely due to climate change.

But in Caribbean island nations, the trail of destruction left by tropical storms extends to public debt — and their ability to borrow money to rebuild and restore.

It puts these vulnerable areas in an ever-growing cycle of expensive debt, which does not meet the huge costs of the growing climate disasters, while at the same time mortgaging the future of countries.

But new proposals at the COP29 climate conference in Baku, Azerbaijan – using insurance to protect countries from debt crisis and protect their fragile economies during natural disasters – could help them break the cycle.

What is a credit storm?

When Hurricane Maria hit the small Caribbean island nation of Dominica in 2017 caused $1.3 billion in damage to the US, more than double the entire national economy. About 17,000 of the island's 72,000 inhabitants eventually left.

“That's one country, one event in one year,” said Sasha Jattansingh, a climate communicator at Climate Analytics, a science and policy think tank, which has advised Caribbean governments on climate finance.

“We are seeing the scale of just one weather event and how that can wipe out the country's gains in economic and social development over the years.”

The next storm was the debt that Dominica was forced to start rebuilding. The debt burden continued to grow, and by 2022, the country was spending $30.2 million a year servicing those foreign loans. That's about the same as the $32.4 million it received in climate finance — and mostly in the form of loans — to prepare for the next disaster.

In fact, some of the poorest countries in the world send billions in debt payments to G20 countries, payments reaching $25.3 billion US in 2023, according to the report. analysis is the International Institute for Environment and Development (IIED), a think tank working on climate finance in vulnerable countries.

How are countries held?

Weather studies suggest that storms will occur intense due to human-caused global warming. That means more damage to the Caribbean islands, and more costs.

“The duration of these disasters is getting shorter and shorter,” said Jattansingh. “You have a cycle of rebuilding, rebuilding, long-term recovery and so on – it will all happen in another event.”

This leads countries to turn to foreign lenders again – but at higher interest rates, because hurricanes that destroy homes and infrastructure also damage the country's creditworthiness.

Ritu Bharwaj, principal researcher at IIED, calls it a “vicious cycle.”

“Because [these countries] they are already in debt, no matter how much money they borrow, the money they borrow comes with high interest. And no matter how much they want to crawl out of that hole, they won't be able to get up – unless you give them a hand, pull them out and bring them to a level playing field.”

More than 40 percent of Small Island Developing States (SIDS), a group of island countries around the world that face similar climate and development challenges, are close to or already in debt crisis – draining precious funds from services such as health and education to avoid bankruptcy. .

Is there a way out?

As climate disasters increase, SIDS countries are seeking reform of the global financial system that will get them out of this cycle of debt.

In 2020, the G20 presented a new framework for countries in debt crisis to restructure loans with their creditors. Zambia, in southern Africa, was the first country to negotiate under this process, and it took almost four years to reach agreements with all its creditors.

But that is not something that many nations on small islands can do, because of their size.

“You go to a SIDS country, the entire finance department is made up of three to four people,” Bhardwaj said. “Power [to negotiate] it's just a must.”

The IIED proposed a collective process for negotiating debt relief and restructuring, where countries could negotiate as a group on financial issues – which would be very difficult.

“We don't want to travel from country to country, because it is a cost to the country,” said Bhardwaj.

Bhardwaj says it is important to “layer” different types of financial aid on top of each other, building multiple walls to protect the most vulnerable island nations.

One suggestion: to increase insurance in countries that are hit by natural disasters.

The Caribbean Catastrophe Risk Insurance Facility is a “risk facility” established in 2007 to help countries in the region obtain insurance for natural disasters. States purchase protection against disasters such as hurricanes, and the policy pays out if a hurricane of a certain strength occurs, according to the policy.

By pooling the risks of multiple countries, the CCRIF can offer insurance policies that are much cheaper than if a single country went out and bought the insurance on its own.

Grenada adopted such a policy with the CCRIF and became paid $44 million just after Beryl to help repair power lines, hospitals, ports and other infrastructure, as well as pay for agricultural and fishing losses.

“In the event of a pre-defined event, countries are able to receive immediate payments to help them meet emergency needs,” Jattansingh said. “And that could include debt relief and support recovery efforts.”

Bhardwaj says that unlike a landlocked country, such as Canada, when a hurricane hits a Caribbean island, it usually hits the entire country. A single hurricane can also bring an entire economy, which may depend on tourism and agriculture, to a standstill.

So the insurance coverage should reflect that. He suggests that the economy of the whole country be guaranteed, so that the affected country can protect its GDP as important economic sectors stop, and we do not fall behind in meeting its debt obligations.

IIED estimates that if countries' SIDS insurance risks were combined, the cost of protecting their entire GDP would be $106.71 million per year.

Who is responsible?

Bhardwaj says the cost of those insurance premiums shouldn't fall on small island nations, especially since they have had little impact on the carbon emissions that have caused the climate crisis.

He suggests the money could come from global climate finance – and in particular the loss and damage fund, which was legal established at the COP28 climate conference in Dubai last year to compensate developing countries for damages caused by climate disasters.

The focus last year was who would pay for it. Under the UN Framework Convention on Climate Change, the global convention that guides climate action, industrialized countries with high incomes – such as the US, Canada and those in Europe – are responsible for providing funds to developing countries to combat and adapt to climate change. .

But rich countries argue that other emerging economies such as China, now the world's biggest carbon emitter, should also pay.

The debate on climate finance is being accelerated at COP29 right now. Countries had pledged about $700 million to the loss and damage fund, but this would be far short of the total losses experienced by low-income countries, given that one hurricane in one small country can cause billions of dollars in damage.

The loss and damage fund, however, can support insurance programs that begin to pull countries out of their debt cycle.

“These countries are not at a level to play,” said Bhardwaj.

“Global financial planning is biased and completely skewed in favor of the rich countries, and the poor countries are getting poorer and poorer. There's no way they can really graduate.”

With files from Anand Ram