MultiCat Program to offer developing countries a risk transfer alternative

by Artemis on November 2, 2009

The World Banks MultiCat Program has received a lot of coverage across the non-trade press and is rightly exciting finance ministers of developing countries. The hope is that it will open up the catastrophe bond market which has previously been difficult for them to access. There’s much talk about who will be the next countries to make use of the facility.

An insight into who could be next came in the form of a quote in Finanz und Wirtschaft (the German financial publication) by Reto Schnarwiler (Head Public Sector Business Development, Swiss Re). In the article Reto mentions that Swiss Re expects Malawi and Caribbean countries to be the next issuers to utilise the MultiCat Program. That’s interesting as many wouldn’t have placed these countries as next in line.

Malawi has a definite need for weather risk, drought and climate change protection. However they don’t suffer from major natural disasters as regularly as many other developing nations. Could the MultiCat Program be flexible enough to allow issuance of drought bonds? It would be fantastic for the developing world if it could. Meanwhile, the Caribbean does suffer from major natural disasters, however it has the Caribbean Catastrophe Risk Insurance Facility (CCRIF). The facility is supposed to be providing cover against just the type of risks MultiCat is designed to protect against, is this further evidence that the cover it provides is not sufficient yet or demonstrating the need for alternatives?

What this does make clear is that the developing world will not have its risk transfer needs met by one solution. It requires a concerted effort using flexible methods of risk transfer with multiple options available to the issuing nations to provide sufficient methods of hedging their weather and catastrophe risks. Perhaps MultiCat can be a large part of the new solution?

We had been expecting to see countries such as China and Turkey take advantage of the MultiCat Program first but it seems we’ll have to wait and see how the program evolves and adapts to meet differing developing countries needs.

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Simon Young November 17, 2009 at 12:46 pm

To clarify the position in the Caribbean, Reto was, I think, highlighting the possibility of CCRIF using the World Bank’s MultiCat vehicle to transfer some of its risk. CCRIF currently transfers some risk through a private ISDA swap deal with the World Bank Treasury; use of MultiCat would be a natural progression for this deal as WBT rationalises its dealings in the ILS space. Many developing countries do not have the economic scale to warrant direct cat bond issuance nor the technical capacity to implement it; CCRIF acts as a mechanism for aggregating risk and achieving the most cost-effective risk transfer of that risk and, as such, CCRIF-like regional pooling mechanisms will be a critical component in bringing developing world risk into the global risk transfer marketplace.

admin November 17, 2009 at 1:49 pm

Simon,
Thanks for the clarification. That makes perfect sense and would seem like a good way for the CCRIF to offer broader cover and provide access to cat bond facilities to the Caribbean nations.

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