Philippines continues prep for cat bonds with the World Bank

by Artemis on April 11, 2014

The Philippines is continuing its investigation and feasibility studies with the World Bank, looking at the possibility of issuing catastrophe bonds to protect the Asian nation from natural catastrophes such as earthquakes or typhoons.

Finance Secretary Cesar Purisima said yesterday at a Washington IMF and World Bank meeting that the Philippines was talking with the World Bank about issuing catastrophe bonds to better protect the country from extreme weather events such as last years Super Typhoon Haiyan, according to Reuters.

These discussions have been ongoing for a number of years. Artemis first reported on the Philippines governments interest in issuing a cat bond more than three years ago. Then in mid-2011 members of the Philippines government had met with the World Bank and IMF in Washington to discuss disaster risk transfer and cat bonds again.

The latest round of talks began in late 2013, again putting catastrophe bonds for the Philippines back on the table with the World Bank’s assistance.

The length of time it is taking for the Philippines to get closer to issuing a cat bond, even with the support and assistance of the World Bank, is a clear demonstration of the complex process to model and price risks in emerging economic regions.

The level of uncertainty surrounding risk models covering the region is perhaps one reason for the slow process, even though any Philippine cat bond is likely to use a parametric trigger. Then again, the difficulty in calibrating a parametric trigger accurately enough that it is closely tied to the countries potential economic losses from catastrophe events is likely another reason.

Investor appetite is likely not as much of an issue in the current climate. With institutional investors, such as pension funds, money managers and ILS specialist funds, having a strong desire to access new and diversifying perils any Philippines cat bond is likely to be well-received by the investment community.

The need for a greater risk transfer capacity for Philippines catastrophe and weather risks is not in doubt, the country is exposed to severe earthquakes, typhoons and torrential flooding rains, all of which cause economic loss each year.

Purisima told reporters; “Given that the Philippines is among the countries that are hit by typhoons on a regular basis and given as we’re seeing across the globe the intensity and frequency of climate extremes  we’re looking at new types of financial instruments that will help us better deal with the challenges of climate change.”

“For example, we are looking at catastrophe bonds that would have like an insurance component to it. We’ve been working with the World Bank on these products,” Purisima expanded.

At some point the development of models, calibration of parametric triggers and of course timing will be right for the Philippines and we will see the country issue some type of catastrophe risk transfer instruments. There is a good chance that these will be the next step in the evolution of the World Bank’s MultiCat program, but they could also be something closer to a contingent capital issue, linked to economic loss as well as a catastrophe trigger.

Artemis will, of course, keep you posted should any progress be announced on a Philippine catastrophe bond.

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