Capital market helps risk transfer be competitive & efficient: World Bank CFO

Tapping the capital market for support from institutional investors, as we see in the insurance-linked securities (ILS) and associated reinsurance sectors, helps to make the provision of risk transfer and insurance more competitive and efficient, according to Joachim Levy, World Bank Group CFO.

In the global mission to enhance resilience in developing regions and nations, the use of insurance and risk transfer is widely accepted as a key piece of the puzzle, providing the incentives to become more resilient and the capital required to help recovery when disaster strikes.

Insurance and reinsurance structures and capacity have a unique role to play in addressing the evident protection deficits, where insurance has rarely been utilised, protection gaps, where insurance has a long way to go by increasing penetration, and also to provide innovative protection, such as coverage that responds more rapidly so as to be beneficial in aid situations.

Indeed, in humanitarian cases insurance is seen as one way to help boost support for preventative measures, as well as to provide rapid capital response after the event.

The World Bank has long been working in this sphere, helping countries to understand how risk transfer, insurance and reinsurance can help them, as well as offering a range of financial products designed to provide capital contingent on disasters occurring.

The capital markets play a significant and growing role in much of this work, enabling the World Bank to support client countries access to capacity in the most efficient manner possible, with the Bank acting as an intermediary to assist in tapping institutions for much-needed risk transfer and development support.

It’s not just about accessing more capacity either, speaking at a recent media event as part of the IIS event in London, Joachim Levy highlighted the importance of efficiency in disaster risk financing and financing to support resilience through risk transfer.

“We act as a neutral advisor, helping governments to connect to private sector capital and expertise,” he said, “Both to help build capacity and to help to foster a competitive and transparent catastrophe risk insurance market.”

The appetite of ILS fund managers, their institutional investors and the broader capital markets, to support these efforts continues to increase, helped partly by the dearth of opportunities in some other asset classes.

Levy noted that there has been a change in the capital markets, with capital now perhaps as abundant as it has ever been, resulting in a shift towards investors being willing to take on new risk assets, including the provision of capital to back World Bank structured risk transfer or financing deals.

Levy explained; “We have recently launched a pandemic facility. It was clear that it was not only traditional reinsurers but also a lot of investors who were ready to take this risk.

“This is good news and shows that if you have a good infrastructure, a good model, you may be able to attract a lot of different people to this space, helping competition and efficiencies.

“I think this showed new possibilities for having capital flowing to the insurance industry.”

It’s important to stress here that this is exactly what we are seeing, that the appetite of the capital markets to assume insurance risk, disaster risk and other contingent event-linked risk assets, is now adding efficiency to the product and helping to make the market for risk transfer more competitive as a whole.

Of course this has potentially negative results for the traditional re/insurance market, but the major players are learning ways to ensure they remain at the heart of developing activity in disaster risk reduction and financing, providing them with valuable sources of fees and a way to keep an interest in this growing segment.

Mobilising the expertise of the reinsurance and insurance-linked securities (ILS) markets, in order to facilitate the deployment of institutional capital into financing and transferring risks from natural catastrophes to pandemics, can over time provide the capacity needed in developing markets to underpin local insurance market growth.

By supporting the need to take away the potential economic pain that major disasters can cause, the ILS and capital markets can play a key role in increasing economic and societal resilience, which can put the buffers in place to allow local solutions to grow that create sustainable ongoing risk resilience and management practices.