This paper describes a modeling methodology that embeds climate damages from natural disasters and risk management strategies into a macroeconomic model for Jamaica. The modeled damages take the form of capital destruction, and the risk management strategies considered are (i) adaptation investment in hurricane resilient infrastructure, (ii) commercial disaster insurance for the government, (iii) the formation of a contingency fund, and (iv) lower debtvia higher future primary balances to create fiscal space for disaster recovery.
The paper concludes that the economic impacts of each strategy depend on initial conditions, such as the size of the contingency fund, existing fiscal space, current levels of adaptation and insurance premiums. In general, reducing debt and running an efficient contingency fund costs less than taking out private insurance. However, for very large and frequent climate shocks, a contingency fund might be limited in terms of the cover it can provide. Finally, the economic gains of adaptation depend on the parametrization of the protection function. The modeling results show that adaptation smooths consumption and GDP for small shocks. The level of protection dissipates for large shocks.