Philippines working with World Bank on options for disaster risk transfer

The government of the Philippines is working with the World Bank on its options for disaster risk transfer, as it seeks to find a way to protect itself against the financial impacts that natural catastrophes have on its economy.

National Treasurer of the Philippine Government Rosalia de Leon said that talks are ongoing as the government seeks an insurance mechanism for post-disaster risk financing. De Leon said that the World Bank was involved in discussions and is working with the Philippine government to identify options for risk transfer, according to the Philippine Daily Inquirer.

“We are currently working with the World Bank in developing a catastrophe risk model. This model will enable the Philippine government to evaluate options for risk transfers and insurance that will reduce the fiscal burden of relief and reconstruction efforts,” de Leon told the Inquirer.

This is the first step required in the process of establishing the most cost-effective risk transfer tools for the Philippines. By modelling the various catastrophe and weather risks that affect the country, it will enable the risks to be priced with more certainty which will help to establish which risk markets, traditional or perhaps the capital market, might be most receptive to taking on that risk.

The impact of super typhoon Haiyan (named Yolanda locally) has once again raised the need for the Philippines to have a disaster back-stop of some description. There have been a number of initiatives in the last few years which have attempted to price Philippine catastrophe risk and leverage traditional and alternative markets for risk transfer, but most have been focused on earthquake risks, seeking to emulate other successful parametric catastrophe risk facilities or on microinsurance and weather-index insurance programs.

There have also been a number of efforts to stimulate the use of catastrophe bonds to transfer Philippine catastrophe risks (some previous stories on these efforts here, here and here) to the capital markets and insurance-linked securities investors. If a suitably robust risk model can be created, allowing ILS investors to price Philippine catastrophe perils accurately and to a level which gives them sufficient comfort to deploy capital, then we could see this succeed.

With the World Bank’s experience in catastrophe bonds in Mexico with the MultiCat program, it is possible that the Philippines could become the next location for a MultiCat type cat bond deal. Any Philippine cat bond transaction, which is backed up with a model or perhaps parametric in nature like Mexico’s MultiCat, would likely be well received by the ILS investment community. Such a cat bond would bring a welcome source of diversification to the ILS market.

Pricing the risk will be the key factor here. Given ILS investors appetite for risk, and willingness to assume it at lower rates than traditional reinsurers due to their lower cost of capital, now might be the right time to renew efforts for cat bonds to assist the Philippines.

Read this article from earlier this week discussing the need for the reinsurance and capital markets to take leading roles in the international efforts to transfer more of the risks from natural catastrophes and weather disasters.