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(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 instruments persists.

It took a “black swan” event to trigger the bond, says Jwala Rambarran, a former governor of the central bank of Trinidad and Tobago. “Melissa supersedes everything.”

Rambarran is the co-author of a report by the Vulnerable Twenty Group, or V20 — a collection of nations most exposed to climate change — that last year called for an in-depth reappraisal of sovereign cat bonds. After Beryl, V20 warned that the bonds were becoming increasingly rigid in their structure, with narrow parameters that were shielding investors without helping poorer populations.

Catastrophe bonds are used by issuers — mostly insurers but sometimes also governments — to transfer risk to capital markets. Bondholders risk losses if a predefined catastrophe occurs, but also face sizable returns if it doesn’t. Jamaica agreed to pay investors in its bond a floating rate of 7% above US money market rates.

The last time a weather-related cat bond paid out in full was in connection with Hurricane Ian in 2022. The Swiss Re Global Cat Bond Index slipped about 2% that year, but has since delivered record gains. In the three years since Ian, the Swiss Re index has soared 60%.

Jamaica has what is probably the most robust disaster-financing program of all Caribbean nations. In addition to the $150 million it will get from its cat bond, it can tap $300 million in contingent credit from the Inter-American Development Bank and draw a $92 million payout from a parametric insurance program.

The insured costs of Hurricane Melissa’s damages to onshore property in Jamaica now range between $2.2 billion and $4.2 billion, according to data firm Verisk Analytics Inc. The actual cost, however, will be much higher with less than 20% of the Caribbean island’s residential properties insured, and a significant share lacking sufficient insurance, according to Verisk.

The funds being made available to Jamaica via its cat bond and other instruments “will never be enough to do the restoration and even to do the relief work right now,” Dana Morris Dixon, minister of education, skills, youth and information, said in a briefing on Oct. 31.

At the World Bank, which handled the issuance of Jamaica’s cat bond, Vice President and Treasurer Jorge Familiar said the island’s “comprehensive disaster risk management strategy and proactive approach serve as a model for countries facing similar threats and seeking to strengthen their financial resilience to natural disasters.”

The payout “underscores the role of catastrophe bonds in effective risk management strategies and their efficiency in transferring disaster risks to capital markets,” he said.

But Rambarran says that for highly destructive storms such as Beryl, the risk remains that cat bond triggers are “too hard and specific.” He says “we still need to continue to look at their design and strike a balance between providing a return and doing good.”

Meanwhile, investors exposed to Jamaica’s cat bond are unlikely to suffer any meaningful hits to their portfolios, according to Mara Dobrescu, director of fixed income strategies at Morningstar.

“No one had a huge amount” of Jamaica’s cat bond in their portfolio, she said. So investors will easily absorb any Melissa-related losses and continue to have “a stand-out year.”

At Plenum, the expectation is that losses associated with its holding of the Jamaica bond will leave a dent of only 0.23% on one of its two cat bond funds, while the other will be untouched. The asset manager has no plans to scale back its interest in World Bank-backed issuances, Schmelzer said.

“From an ESG perspective we have a lot of clients who like to see these transactions in the portfolio,” he said. “Losses are losses, but this is a better loss than other ones.”

Major holders of Jamaica’s catastrophe bond include Stone Ridge Asset Management LLC of New York, UK-based Baillie Gifford & Co., and Schroders, according to data compiled by Morningstar.

Stone Ridge didn’t respond to requests for comment. Spokespeople for Baillie Gifford and Schroders declined to comment.

The extent to which vulnerable nations should rely on capital markets to help deal with extreme weather looks set to shape the COP30 talks in Brazil. Such questions also feed into the so-called Baku-to-Belem Roadmap (a reference to Conference of the Parties summits in 2024 and 2025), which seeks to mobilize $1.3 trillion annually for developing countries.

A study published in 2024 found that three years after hurricanes hit in the Caribbean basin, debt levels were 18% higher than in a baseline scenario.

In the case of Melissa, “the extent of the destruction is going to be so large that even with the level of pre-arranged financing that Jamaica has, there won’t be enough funds to meet the extent of the loss,” Rambarran said.

Melissa’s impact on Jamaica “puts us in front of a bigger issue,” he said. “We need a global financial architecture that can support these countries in a deeper way.”

–With assistance from Lauren Rosenthal, Brian Eckhouse and Alexandre Rajbhandari.

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