APEC reaffirms commitment to capital market backed disaster risk transfer

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At a recent meeting of the Asia-Pacific Economic Cooperation (APEC) finance ministers the group reaffirmed their commitment to exploring capital market backed disaster risk transfer tools, as well as other forms of insurance or reinsurance.

apec-logoRepresentatives from the 21 member economies of the Asia-Pacific Economic Cooperation (APEC) meet regularly to discuss issues of relevance and ways they can work together to achieve synergies, or to benefit the group.

One of the topics of regular discussion is disaster risk financing, with the group of countries aware of the opportunity to pool their risks, benefit from diversification of the pool and more efficient access to insurance, reinsurance and other sources of risk capital.

The APEC Finance Ministers’ process sees the group convening alongside central banks from the region, to discuss shared experience and how to work better together.

The Minister’s recognise the need to increase their economic resilience to catastrophes and in particular climate related weather risk.

Part of this is through driving improvements to their economies’ approaches to disaster risk financing and insurance.

It’s seen as critical by the Finance Ministers of APEC, as with the region particularly vulnerable to natural disasters and exposed to climate change related impacts securing disaster risk financing (of any form) can help those hit by disaster events to avoid inflating their government spending on recovery.

Chile’s 2010 earthquake is seen as a case in point, as the country experienced roughly nine years worth of insurance claims which were all settled within 10 months of the quake, thanks to insurance and reinsurance. The economic impact was close to 20% of GDP.

Catastrophe events of this magnitude can set back the economic development of APEC member countries, so by promoting disaster risk financing the Ministers hope to drive greater resilience and enable faster recovery when the worst does happen.

The importance of “shared experiences on disaster risk finance strategies and solutions to minimize governments’ financial exposure to disasters, risk transfer and risk sharing,” was stressed by Finance Minister Felipe Larrain of APEC host country Chile.

The group of 21 member economies concluded that as disaster risks threaten to inflate their government expenditure and hold back economic activities that financing these risks is key.

Pre-arranged risk financing, through insurance, reinsurance and other sources, are seen as vital to help governments reduce the fiscal costs associated with disasters.

Member countries reaffirmed their commitment to improving their approaches to disaster risk financing and insurance, saying that it’s key to work together to enhance their financial resilience through the development of innovative disaster risk financing and transfer mechanisms.

That includes through the capital markets and the group are all too aware of the potential for instruments such as catastrophe bonds to play a key role here.

They reaffirmed their interests to collectively work to leverage risk transfer instruments that can be secured through both the insurance and capital markets.

Multi-country catastrophe bonds and risk pooling backed by reinsurance could both be an interesting fit for the APEC members, given the diversification inherent within their membership.

We’ve yet to see any transactions coming out of the APEC economies as a group and it’s most likely that anything emerging from APEC would have a focus on its less economically well-developed members.

But with members including some that are experienced in use of catastrophe bonds, such as Mexico, Chile and Peru (as members of the cat bond issuing Pacific Alliance), as well as Japan, Philippines and others with significant experience in disaster risk transfer, it is to be hoped that as a gathering APEC can encourage greater use of such instruments to the benefit of its members.

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