World Bank looks to cat bonds for other kinds of risk

by Artemis on October 12, 2016

The World Bank has been helping countries to access the capital markets for catastrophe insurance and disaster risk transfer for over a decade, but now the organisation is looking to the catastrophe bond structure as a way to help mitigate other kinds of risks.

World Bank logoThe World Bank first got involved in disaster insurance and risk transfer more than a decade ago, with the launch of the Turkish Catastrophe Insurance Pool among its first initiatives in 2000.

Following that the World Bank helped to launch weather-index crop insurance in India in 2003, index-based livestock insurance in Mongolia in 2005, weather index insurance in Malawi in 2005, as well as numerous other disaster, weather and climate insurance initiatives at both macro and micro level.

On the sovereign catastrophe risk transfer side, the World Bank first assisted with a catastrophe bond in 2006 with the CAT-Mex Ltd. earthquake cat bond for Mexican sovereign disaster fund FONDEN.

Other cat bonds include the Multi-Cat pair of transactions, also for Mexico, MultiCat Mexico 2009 Ltd. and MultiCat Mexico Ltd. (Series 2012-1), as well as the more recent World Bank Treasury issued World Bank – CCRIF 2014-1 cat bond for the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a parametric insurance facility that the World Bank provided technical assistance to.

Outside of catastrophe bonds the World Bank also helped the World Food Programme (WFP) to put in place a weather derivative based risk transfer to assist Ethiopia in times of drought, the Treasury assisted with a catastrophe swap for the CCRIF (prior to the 2014 cat bond), provided the CAT DDO (catastrophe risk deferred drawdown option) to a number of countries and a number of other weather and catastrophe insurance pools, facilities and initiatives.

Now the World Bank is looking further outside of natural catastrophe and weather risk, to other risks that affect its member countries and where it can provide technical assistance, issuance support or financing to help sovereign’s achieve risk transfer with the help of capital markets capacity.

Already the World Bank has expanded its work on cat bonds to include multi-country coverage, as the CCRIF transaction provided, and is now working on applying catastrophe bond technology to pandemic risks.

That application, of disaster risk transfer and catastrophe bond tech to pandemics as a risk-linked capital markets bond, is perhaps just the first such innovation, as the World Bank looks to how else these risk transfer tools can be used to help countries around the world.

Speaking recently World Bank Group President Jim Yong Kim discussed the need to be “better prepared for the threat posed by pandemics.”

“What we have created is an entirely new pandemic insurance instrument linked to an entirely new pandemic bond,” Kim explained.

This development emerged from the World Bank’s work and “from innovations that we had made in disaster risk management,” he continued.

“We are now looking to see if we can use these instruments for mitigating other kinds of risks,” Kim said.

Kim explained that access to insurance is one of the greatest inequalities in the world and that “It is our responsibility to make these kinds of financial tools available for many more poor people.”

Differently to catastrophe bonds, the pandemic bond and insurance facility can have an impact on the subsequent magnitude of an event. Kim explained that with a volcano or earthquake you cannot alter or influence the magnitude, with the best the Bank can do being to provide disaster risk capital as rapidly as possible.

“But you can impact the magnitude of pandemics,” Kim said, adding that “Our role is to take the work upstream, to bring innovative financial tools that can reduce the likelihood of disasters happening in the first place.”

The pandemic bond use-case will demonstrate a new use for the catastrophe bond, or insurance-linked security (ILS) structure, showing how the instrument can transfer risk to capital market investors in such a way that the capital can influence the outbreak of a pandemic and lessen its impact.

Other risks affecting society may also be suitable for risk transfer to the capital markets, ranging from drought, to climate related risks, resilience financing, renewable energy related risks, conflict risks, health risks and perhaps certain development risks as well.

Core use-cases that the World Bank might explore include, assisting with access to finance for adaptation to climate change as well as mitigation, and enabling stronger disaster risk management, which are areas the Bank has been tasked, along with the IMF, to focus on.

Recently the Development Committee, a ministerial-level forum of the World Bank Group and the International Monetary Fund, asked the World Bank and IMF to “focus on building resilience while expanding insurance schemes,” a key area that the application of catastrophe bonds and availability of capital markets funding can certainly assist with.

Being able to structure a financial product which can distribute capital at just the right time it is required is one of the key traits of a cat bond, with index or parametric trigger. Applying the concept of a capital markets funded instrument, linked to a transparent pay out trigger set to respond at just the time a country needs the capacity, could see the catastrophe bond structure being much more widely used in years to come.

It’s encouraging to see the World Bank is exploring new use-cases as the ILS market is ready to back any well designed and structured efforts that provide opportunities to assume new risks.

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