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**development of 'catastrophe bonds' to be issued on domestic and intemational capital markets.**

**b. The bonds which would pay higher than average yields have a risk of dropping their coupon rate and principal payments significantly in the event of a catastrophe (hurricane hit, major earthquake) to which bond payments are linked (e.g.: threshold windspeed or earthquake intensity).**

**c. The multilateral institution would guarantee the payments of the bonds to investors, through a partial risk guarantee involving the government and the private bond issuer to ensure liquidity or contractual payments as scheduled.**

**d. The domestic capital market would list the bonds on international exchanges to further transfer the risk into the global capital market. Since these risks are unrelated to typical stock market or other financial risks, they can prove attractive to international investors, and may provide them additional much needed diversity in their global portfolios.**

**e. The bonds would trigger lower coupon interest payments and possibly partial principal losses upon the triggering of key weather events (e.g.: windspeed, earthquake intensity/magnitude).**

**f. Trigger indicators would involve weather or storm indexes to be tracked via the installation in affected countries of weather station equipment with satellite links to 'recording centers', to track rainfall, windspeed, or other direct indicators of natural disaster adversity factors. These would serve as triggers for payout of such risk linked securities.**

Prior to structuring such weather indexed ('parametric') bonds, data on weather events and associated losses would be compiled to ensure that a sufficiently strong correlation was achieved between the index-triggered payment and actual losses based on historical experience. Such data compilation is essential for the structuring and pricing of such insurance contracts. The key element of such contracts' success, however, is the reliability and objectivity of the weather measurement mechanism.

In the Caribbean, the Miami Hurricane (Tropical Prediction) Center provides substantial hurricane tracking data which could potentially be used in constructing the weather trigger source for such contracts. However, if such sources are not sufficiently 'fine tuned', particularly for small island areas, then a hard installation of 'on-the-ground' wind speed and rainfall measuring equipment may be necessary in the participating countries. Such hard installations would not be very costly, but would require telecommunication/radio linkages (e.g.: via satellite) to a central recording center to assure objectivity of the data reported.

From a portfolio management viewpoint, international investors would find it desirable to hold some of these instruments in their portfolio in order to diversify the usual financial market risks (ie.: achieve some non-correlation with global markets). While holding such instruments in their portfolio, they would of course be liable for potential losses or yield reduction in the event of a catastrophe. This income (as well as the risk of payout) would be factored into their overall portfolio investment return, though they would have the added assurance that a drop say, in the world stock or bond markets would have little or no effect on the performance of the catastrophe instruments during the life of the bond.

# **_Combining both Schemes in a Joint Structure and the Catalytic Role for Multilaterals_**

Due to the complementarity of both of the above schemes, the simultaneous development and feasibility testing of these would be essential, in order to best capture the range of catastrophe protection tools which might be applied in the Caribbean region.