Philippines government discussing cat bond issuance again

by Artemis on October 15, 2018

The government of the Philippines is once again discussing the issuance of catastrophe bonds with the support of the World Bank, as it looks to the capital markets to secure insurance and reinsurance capacity to provide contingent financing for recovery from major natural disasters.

Philippines cat bond and parametric insurance pilotThe Philippines has been involved in almost annual discussions on this topic for at least 8 years, we first wrote about its ambitions to leverage the catastrophe bond structure for disaster risk transfer back in 2010.

These discussions have been affected in the past by political transitions in the country and the Philippines did get quite far down the line in its cat bond discussions in 2015, but no transaction came to market.

The country has a number of disaster insurance solutions in place, backed by both traditional and alternative reinsurance capital, but the level of exposure its government and people carry remains significant and as evidenced by recent events such as typhoon Mangkhut, there is a clear need to transfer more of that disaster risk to the capital markets.

The Philippines governments Department of Finance said at the weekend that it was actively engaged in discussions on catastrophe bonds once again, having had specific discussion on the issue at the Annual Meetings of the World Bank and the International Monetary Fund held in Bali, Indonesia.

Philippines Finance Secretary Carlos Dominguez III spoke with executives of Citigroup, including Jay Collins, Citi vice chairman for Corporate and Investment Banking and Javed Kureishi, head of Citi’s Public Sector Group, Asia Pacific Corporate and Investment Banking.

Citigroup has worked on the issuance of the $1.4 billion Pacific Alliance catastrophe bond, which saw four governments come together to benefit from disaster risk transfer for earthquake risks, as Peru, Mexico, Colombia and Chile joined forces to leverage the economies of scale with the support of the World Bank.

Collins noted that the Philippines could sponsor a catastrophe bond using the World Bank’s structuring and issuance capabilities, with the notes offered to global institutional investors.

Finance Minister Dominguez welcomed the catastrophe bond proposal, which could be included alongside other insurance packages the Duterte administration is currently exploring with Lloyd’s of London and the World Bank.

These other insurance covers, which we wrote about recent here, see the Philippines looking for infrastructure risk transfer with the help of Lloyd’s and the World Bank.

Catastrophe bonds could underpin the catastrophe component of these insurance products, transferring the cat risk to the capital markets in order to add efficient reinsurance capital to make the infrastructure products more cost-effective, perhaps.

Dominguez noted that the Philippines government could have multiple insurance and risk transfer mechanisms to help cover disaster-related risks for the national government and its local government units (LGUs) as well.

“I want the local executives to participate,” Dominguez explained, “Right now, we have a local autonomy law and quite a number of the LGUs are liquid that they can buy the insurance. What we want to do is structure a system where everybody can participate. But everybody pays their own share. The national government does, LGU can participate if they wish but they have to pay their own share.”

Dominguez also noted the potential for multi-country catastrophe bonds, that could emulate the Pacific Alliance’s success.

He said any Philippines catastrophe bond could later be expanded to include other countries from the Association of Southeast Asian Nations (ASEAN), so that the pooling of the risk could help ultimately to reduce the cost of insurance premiums for each country participating in the arrangement.

The Philippines has a clear need for more disaster risk transfer and hence accessing the capital markets for the reinsurance capital support to back its catastrophe insurance needs offers clear benefits for the country, as securing a multi-year source of risk transfer with the support of the World Bank will definitely be more cost-effective than going it alone.

With numerous disaster insurance and risk financing solutions already in place, it may also be beneficial to consolidate the reinsurance needs of these facilities under a cat bond, providing the efficient capital to back items like the Philippines local government level parametric insurance cover could help such initiatives to be expanded and be more cost-effective.

It sounds like it’s relatively early days in these discussions, but having done a lot of the background work for a catastrophe bond before it will be interesting to see how quickly the Philippines could get a transaction to market, with the help of the World Bank.

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