SCOTT DETROW, HOST:
When disaster strikes - hurricanes, earthquakes, wildfires - rebuilding is expensive. But our Planet Money team has been reporting on the rise of an unusual type of financial deal that is helping pay for the cost of catastrophes. Here's Jeff Guo on how Jamaica found itself receiving a big payout after Hurricane Melissa in October.
JEFF GUO, BYLINE: Fayval Williams is the minister of finance of Jamaica, a place where the threat of natural disaster is always on people's minds.
FAYVAL WILLIAMS: We are in the belt - the hurricane belt. There isn't much we can do to change that.
GUO: But what the government can do is to make sure that there's money available to help people rebuild. So a few years ago, Jamaica turned to this unusual financial idea. It's been getting a lot more popular lately. It's called a catastrophe bond, and it's like a way of betting on natural disasters. With the help of the World Bank, Jamaica went around to international investors saying, hey, we bet a pretty big hurricane will hit Jamaica in the next couple of years. Do you want to take the other side of that bet? So these investors put up a bunch of money, and the deal is, if there's no hurricane, they get their investment back plus interest. But if there is a major hurricane, then Jamaica gets to keep their investment and use that money to help pay for the rebuilding.
WILLIAMS: It's an insurance policy. We do pay a premium for it - a periodic fee.
GUO: Jamaica pays its catastrophe bond investors about $10 million a year in interest. But this year, after Hurricane Melissa, those investors had to hand Jamaica $150 million.
WILLIAMS: It just blew a lot of minds. Everybody was talking about it. Who never knew about a cat bond knew about it then.
GUO: But it's not just Jamaica taking advantage of cat bonds. Catastrophe bonds were created by the insurance industry in the '90s as a way to transfer the risk of natural disasters onto investors. And in recent years, cat bonds have gotten really hot. They've turned into a $50 billion market. For one, there is a lot of demand from investors, including huge public pension funds. Ethan Powell is the chief investment officer at Brookmont Capital Management. He's been buying cat bonds for decades. One reason he likes them is that they behave so differently from your typical stock or bonds. Cat bonds, he says, are a way to diversify your portfolio.
ETHAN POWELL: Maybe instead of having all chicken eggs, you have one ostrich egg, and it ends up being harder and not breaking in the event that the basket falls, right?
GUO: Also, cat bonds pay investors a decent amount of interest. These days, a typical bond yields about 10% interest a year. But another reason cat bonds have gotten popular is that they help insurance companies solve one of their big problems right now, which is that natural disasters pose huge, concentrated risks, and climate change is making those risks worse. As hurricanes get more intense and wildfires become more frequent, cat bonds are a way for someone else - an investor halfway across the world - to help shoulder some of that risk.
Jeff Guo, NPR News.
DETROW: To hear Jeff's full reporting on the rise of catastrophe bonds, you can check out the Planet Money podcast feed. Transcript provided by NPR, Copyright NPR.
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