ADB examines disaster risk financing options for the Philippines

The Philippines has long been the focus of disaster risk financing and insurance discussions, given its exposure to typhoons, earthquakes, fires, rainfall, floods and drought, and now the Asian Development Bank (ADB) is examining options for disaster insurance facilities.

The World Bank has been discussing catastrophe bonds in the Philippines for years now, but with political changes in the country and costs of issuance still remaining high for sovereign issuers nothing has yet come to market.

The Asian Development Bank (ADB) is now looking at options for disaster, climate and catastrophe risk transfer and financing, with disaster insurance and also an option similar to the World Bank’s CAT DDO said to be on the cards.

According to an article in the Philippines Business Mirror, the ADB wants to find mechanisms for increasing its climate and disaster financing support for the Philippines.

Richard Bolt, who represents the Philippines at the ADB, told the newspaper that one of the options being considered is directly offering a disaster insurance solution to local government entities.

The ADB is discussing the specifics with the Philippines Department of Finance, which we understand has again seen catastrophe bonds raised as a potential way to back a roll-out of local government disaster coverage.

Also on the agenda has been the CAT DDO, or catastrophe deferred drawdown option, a product which pays out on occurrence of a catastrophe event (much like a catastrophe bond) but which is often cheaper to structure and service.

The World Bank entered into a $500 million Second Disaster Risk Management Development Policy Loan with a Catastrophe-Deferred Drawdown Option (CAT-DDO 2) with the Philippines in late 2015, providing a line of credit that is contingent on disasters occurring.

Replicating this at a more local or regional level could be a good way to provide greater financing for disaster risks in the country, however a tiered insurance, reinsurance, capital markets approach could offer greater long-term benefits, we’d suggest.

By cultivating a tiered approach to disaster risk transfer, with each tier supporting the one beneath, a more sustainable and also self-sufficient financial mechanism could be developed over time. It’s likely such an initiative would require subsidy and funding support to begin with, but in time premiums coming in from the lowest-level microinsurance, combined with those for commercial and local government coverage, should help to finance the use of reinsurance and capital market risk transfer.

And by generating a sufficiently large and diverse risk pool the appetite of reinsurance and capital markets could make such initiatives more cost-effective than might be thought at first consideration.

Bolt of the ADB said that there is a clear need to lower the burden on the government of the Philippines after disasters happen and explained that the ADB is focusing on larger cities in the country at this time, as they seem more likely candidates for a disaster insurance scheme.

With protection provided by the World Bank at the sovereign level through the CAT-DDO and catastrophe bond discussions ongoing, the ADB’s focus on local and regional government level risk financing would fit nicely with the goal of increasing the Philippines resilience.

Any steps taken to encourage Philippine cities to enter into disaster insurance arrangements are likely to be parametric in nature, which would dovetail well with the index microinsurance products the government wants to offer to farmers and other small business owners.

This tiered approach, while subsidised to begin, may be the best chance to grow an insurance and risk transfer ecosystem that can eventually self-sustain, with the support of reinsurance and capital markets.

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