NEARLY a week after Hurricane Melissa delivered a devastating hit to western Jamaica, Moody’s is estimating that economic losses from the storm could exceed US$20 billion or $3.20 trillion, the value of Jamaica’s total output or gross domestic product (GDP) in 2024. This dwarfs the government’s initial preliminary estimate of US$6-7 billion, signaling a far graver economic crisis than first anticipated.

Moody’s RMS™ Event Response Services published the update on Thursday in which it highlighted that, beyond the property and infrastructure damage, economic losses would be compounded by the interruption to commerce from the Category Five storm. Several parishes in western Jamaica continue to be affected by disruption to electricity, slower communication, and the damage to economic sectors like tourism and agriculture.

“This loss estimate reflects property damage and business interruption to residential, commercial, industrial, and automobile lines of business; considers post-event loss amplification (PLA), including potential super-cat impacts due to widespread infrastructure damage to roads, power networks, etc; as well as non-modelled losses from extended business interruption and precipitation-induced flooding,” Moody’s stated.

Moody’s RMS™ Event Response Services has also estimated that private market insurance losses from Hurricane Melissa could range from US$3 billion to US$5 billion ($48.02 billion to $80.04 billion), with a best estimate at US$3.5 billion. That estimate accounts for the losses associated with wind impacts in Jamaica and other impacted Caribbean islands, like The Bahamas, Haiti, and the Turks and Caicos Islands.

These insured losses are said to be driven by wind damage with minor contributions from precipitation-induced flooding and storm surge. The insured wind losses were stated to be “predominantly for commercial lines, including hotels, resorts, commercial multi-family dwellings, and high-rise buildings severely affected in this event, with a significant portion of loss attributed to business interruption coverages”.

Jeff Waters, Moody’s director of North Atlantic Hurricane Models, said: “While the capital city of Kingston was largely spared from damaging winds, many other towns were devastated by a combination of catastrophic winds and widespread inland flooding. Being an island, repairs and recovery will inevitably go through significant supply chain challenges, even as several key ports on the island remain operational. For these reasons we expect recovery efforts to take several months, if not years.”

While insurance is expected to help individuals recover from an unexpected event, this benefit is not equally translated across the island. Moody’s referenced the Insurance Association of Jamaica (IAJ) statistics which pointed to only 20 per cent of residential properties in the country being insured and an estimated 95 per cent of already insured properties being underinsured. This means that the payment from a policy would not be enough to assist a homeowner with the recovery process.

“Most insured buildings are well-built, traditionally designed for seismic risk with concrete or reinforced masonry structures, which are also resilient to high winds. In contrast, uninsured residential buildings largely exhibit less stringent build quality or enforcement of wind design provisions, due in part to a lack of major hurricane landfalls since Gilbert in 1988. As a result, as Melissa’s catastrophic winds tracked across the island, immense damage was caused to several communities,” stated Raj Vojjala, Moody’s managing director of modelling and analytics.

Insurance penetration was stated to be highest amongst hotels which have near-total coverage and strong limits to reflect their economic importance. Even with most businesses having some form of insurance coverage there could be significant underinsurance due to inadequate limits. The lack of insurance protection is expected to be manifested largely in single-family dwellings outside of affluent neighbourhoods in urban areas.

Even with the impact that has been realised from the Category Five hurricane, the reinsurance programmes that general insurance companies have is expected to absorb the risk from these policy payments. Reinsurance is a method by which general insurance companies cede part of their risk to a reinsurer, which involves the company transferring a portion of the premium paid by a client. General insurers were stated to have $108 billion in total assets and $31.3 billion in capital/equity as of June 30, according to data by the Financial Services Commission.

Strong governance pays

Although Moody’s noted that Hurricane Melissa will cause a severe but temporary contraction in the country’s GDP, the disaster risk financing strategy should help to cover immediate financing needs.

The World Bank confirmed on Friday that Jamaica will receive the full US$150 million from its catastrophe bond due to the storm.

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is also set to pay out US$91.9 million ($14.8 billion) due to the excess rain and wind.

These facilities, along with contingent credit lines from the Inter-American Development Bank (IDB), are equivalent to about four per cent of Jamaica’s GDP.

In its latest periodic review of Jamaica’s ratings, Moody’s made note of the Government’s commitment to economic and fiscal reforms over the last decade. These reforms contributed to greater macroeconomic stability and placed government debt on a downward trend. However, the Government’s policy response to Hurricane Melissa was stated to be crucial to mitigate the impact to credit fundamentals.

Moody’s last upgraded Jamaica’s credit rating in October 2023 to B1 with a positive outlook, a rating not seen since March 2009. S&P Global Ratings upgraded Jamaica’s credit rating to BB with a positive outlook in September, while Fitch Ratings maintains a BB– rating with a positive outlook.

“A downgrade of the rating is unlikely given the positive outlook. However, deterioration in government debt metrics would weaken the prospects for an upgrade and, if not reversed, would put downward pressure on the rating,” Moody’s stated on November 3.