World Bank confirms Philippines catastrophe bond discussions

by Artemis on September 18, 2015

The World Bank has confirmed that it is working on a multi-level approach to catastrophe insurance and disaster risk transfer for the Philippines, with catastrophe bonds one of the financial instruments options on the table.

According to World Bank vice president and special envoy for climate change Rachel Kyte, the Philippines government and the bank are looking at ways to implement “a much more robust, comprehensive financial resilience system that would offer insurance and risk transfer at the national government, local government unit and individual household level.”

This tiered approach to disaster insurance and risk transfer is needed as a catastrophe bond alone, while providing much-needed sovereign level capital after an event, is not the holistic solution that the catastrophe exposed Philippines requires.

We understand the World Bank is exploring both peak disaster risk transfer through instruments such as cat bonds, alongside supporting primary property insurance products and catastrophe risk pooling facilities.

Kyte wants the end result to be a “climate proofing” of development spending, combined with the necessary sovereign risk transfer, all of which will help to support lower level primary insurance product provision.

The Philippines already benefits from the World Bank Catastrophe Deferred Drawdown Option (Cat-DDO), alongside its development loans from the Bank, which provides a source of capacity that can be accessed post-catastrophe event.

A catastrophe bond will enhance the protection, putting the financial risk into the capital markets where investors are eager to bear the risk from catastrophic events in regions like the Philippines.

Kyte said at a briefing in the Philippines recently, “At the local level we’re looking at how to establish a catastrophe insurance facility. While at the individual household level, the IFC is working together with its clients in the Philippines to see whether or not it is possible to establish a national catastrophe risk insurance pool for small & medium enterprises and home owners.”

Kyte explained that the catastrophe bond is just one of the options available, as the World Bank tries to help the Philippines increase its resilience to disasters and its financial ability to recover.

Which financial instruments the World Bank decides to use, to support the Philippines in its quest for catastrophe risk transfer, will likely come down to price, to a degree.

A Philippines MultiCat cat bond, likely featuring a parametric trigger due to the sovereign nature of any issuance, may not be the most cost-effective option available. However, the benefits of opening up a line to the insurance-linked securities (ILS) specialists and capital markets would be ongoing, as evidenced by Mexico with its series of MultiCat cat bonds.

A Philippines government representative recently said that a the work on a catastrophe bond was getting nearer to fruition, with price discussions around the eventual coupon or interest payments ongoing.

The rumoured $100m to $300m cat bond discussions must be progressing, if pricing is being considered. That will likely be the key moment in the work to put some risk transfer in place, so if the market reaction and price indications are compelling we could see a bond within a matter of months.

Also read:

Philippines & World Bank nearing $100m – $300m cat bond: Purisima.

Philippines catastrophe bond issuance still on the table.

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