Philippines seeks TCIP type catastrophe pool: Could lead to cat bonds

by Artemis on July 29, 2014

In response to the occurrence of increasingly intense and frequent natural disasters throughout the Philippines, ratings agency A.M. Best has reported that the nation is considering an insurance pool similar in design to Turkey’s fund, the TCIP.

The Turkish Catastrophe Insurance Pool (TCIP) acts as a mandatory earthquake protection scheme for residents within municipal boundaries. The report from A.M. Best suggests that the Philippines are deciding on something very similar and are seeking the guidance of the World Bank, who help set-up the TCIP.

The National Reinsurance Corporation of the Philippines President and Chief Executive Officer (CEO), Augusto P. Hidalgo, commented; “The current agreement among trade association members is that we will propose a catastrophe pool along the lines of the Turkish Catastrophe Insurance Pool, which is to say mandatory. If it is mandatory then we would need legislation to pass.”

The Philippines is an extremely vulnerable region to natural disasters, highlighted in November last year when the devastating Super Typhoon Haiyan ripped through towns and villages causing total losses of around $10 billion, the same as roughly 5% of the country’s annual economic output.

Already this year, on July 15th, Typhoon Rammasun struck the main island of Luzon, although only a fraction of the intensity of Typhoon Haiyan and likely to incur small insurance losses, the storm still caused 370,000 evacuations across the region. So it’s clear that a catastrophe pool would be very beneficial in protecting homeowners and businesses alike throughout the region.

One of the benefits a catastrophe insurance pool provides is the potential for the introduction of catastrophe bonds and insurance-linked securities (ILS) capital into the country. The TCIP, aided by reinsurance giant Munich Re and GC Securities, successfully issued a $400 million cat bond under the name Bosphorus 1 Re Ltd., a transaction that enticed investors and grew in size by 300% from its original issuance.

If the Philippines successfully form a catastrophe insurance pool then they should also be able to copy the TCIP’s Bosphorus cat bond, bringing ILS capital into the region by providing reinsurance for any new catastrophe pool that forms.

Hidalgo spoke about the possibility of insurer and reinsurer PhilNaRe leading the management of the scheme but is unsure on any time scale, saying; “The timetable is dependent on the Philippine government. We are co-operating with the IFC, the Insurance Commission and the Department of Finance, to make this a reality.”

Hidalgo mentioned the Philippines government and, the introduction of the proposed scheme would be hugely beneficial to them also, as the pool would limit the financial strain earthquakes put on their budget.

Further benefits, which have been utilized by the TCIP, include risk-sharing by residents, encouragement of compliance to building standard practices and the establishment of a substantial reserve to finance future catastrophic events.

The Philippines has been discussing the potential use of catastrophe bonds, likely featuring parametric triggers, for some time. The government has met with the World Bank and other organisations and reinsurance market participants to discuss the possibility a number of times in recent years.

If a mandatory catastrophe pool is formed, the Philippines might just have the concentration of insurable risk required to issue its first catastrophe bond. No doubt the government is aware of the Bosphorus bond issued by the TCIP and such a possibility will be on its radar.

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