Philippines catastrophe bond issuance still on the table

The government of the Philippines is once again contemplating issuance of a catastrophe bond as it looks to boost its ability to finance the nations recovery after impactful catastrophe events, such as typhoons or earthquakes.

The Philippines has been in discussions with organisations such as the World Bank and United Nations for some years now, with the country thought to be the likely next beneficiary of a MultiCat catastrophe bond or a direct issuance through the World Bank’s Treasury unit (similar to the CCRIF’s cat bond), as it seeks to tap alternative sources of reinsurance capital.

The local insurance and reinsurance markets do not have the capacity alone to support the Philippines disaster risk financing requirements, hence it had been assumed that catastrophe bonds would be a suitable tool.

At the same time the local insurance penetration rate remains low, with reinsurance capital deployed in the Philippines also not significant, hence a sovereign level risk transfer tool has always been thought the best way to remove some of the burden of disasters from the government and ultimately taxpayers and the populous.

Market sources had suggested that a Philippine cat bond was being readied in late 2014, with a deal almost formalised and launched, but this deal never came to fruition.

We first documented the Philippines appetite to tap the capital markets for disaster risk financing through a catastrophe bond as far back as 2010 or 2011. It’s not clear why it has taken so long to get a transaction to market.

The discussions with the World Bank have been ongoing for all these years, while the Philippines has been hit by a number of severe disasters. The need for disaster risk financing is clear, as well as insurance pooling in order to protect the local market, with catastrophe bonds a suitable tool to secure risk transfer and financing at the pool or sovereign risk level.

In 2014 it was thought that the Philippines might have some type of sovereign catastrophe risk transfer structure set up, in force and ready to announce around the anniversary of typhoon Haiyan, at the same time as a UN conference was occurring in the country.

But for some reason that rumoured cat bond transaction never made it to market.. Sources said at the time that the deal would roll over into 2015 to be issued this year, but we have yet to see or hear of anything concrete.

At a press conference held in Manila on Monday of this week by the Philippines Insurance Commission, the topic of catastrophe bonds was raised again. The event was held to discuss the Asia-Pacific Economic Cooperation (APEC) Cebu Action Plan, an initiative involving the 21 APEC members focused on increasing the region’s inclusiveness and resilience.

At the press briefing according to the Manila Bulletin, Deputy Commissioner of Insurance for the Philippines Vida Chiong, stated that the government Department of Finance is once again “contemplating” issuing catastrophe bonds, as a way to gain a source of sovereign disaster risk transfer.

With the peak of the Philippines typhoon season about to begin it would be a very good time to have the protection in place. Whether anything could be arranged for this year is uncertain at this stage.

Sources told Artemis that discussions with the World Bank have continued to take place and the desire to become a sovereign sponsor of a catastrophe bond remains high in the Philippines. Either the World Bank  MultiCat program or Capital-at-Risk Notes Program could be used to help the Philippines government secure disaster risk financing from capital markets and ILS investors.

The fact that the Philippines cat bond discussions have been going on for so long perhaps demonstrates just how complex a task it is to get a sovereign cat bond to market for a new sponsor.

However the need for a source of risk transfer and financing capital for peak disaster and catastrophe risks in the Philippines is clear.

The country has suffered many billions of dollars of unfunded economic losses from weather and natural disaster events in the past. It’s time the arrangements were put in place to ensure the Philippines resilience and ability to recover can be boosted, through the provision of risk capital that responds when the worst occurs.