APEC wants regional catastrophe bond market for Asia-Pacific

A regional catastrophe bond market for the Asia-Pacific region has become a focus of the business focused arm of the Asia-Pacific Economic Cooperation (APEC).

APEC has long been a supporter of the use of insurance-linked securities (ILS), such as catastrophe bonds for disaster risk financing using the capital markets as a source of reinsurance, and also of the benefits of countries leveraging structural innovations such as parametric triggers to enable robust transfer of the risks.

At a meeting last year, Finance Ministers from the 21 member economies of the Asia-Pacific Economic Cooperation (APEC) discussed the use of the capital markets for disaster risk transfer, highlighting the need to increase their economic resilience to catastrophes and in particular climate related weather risk.

At that meeting the group said they aim to collectively leverage risk transfer instruments that can be secured through both the insurance or reinsurance and capital markets.

This was again reaffirmed at a recent meeting of the APEC Business Advisory Council (ABAC), a business sector specific group made up of private sector leaders from each APEC economy, who said the region needed to look to catastrophe bonds.

ABAC actively encourages APEC members to collaborate and integrate economic activities for regional effect and to drive economic resilience and growth.

That goes for disaster risk financing or insurance as well, given the benefits that could be reaped due to economies of scale across the APEC membership, as well as the natural diversification that could bring to a risk pool which could help in terms of access to necessary reinsurance capital.

The ABAC representatives from the Philippines are now leading the push, having learned from the country’s own recent sponsorship of a World Bank facilitated catastrophe bond issuance.

The $225 million IBRD CAR 123-124 cat bond transaction is the Philippines first and the country hailed the issuance as an example of it “climate proofing” itself, as well as an endorsement of its natural disaster resilience strategy.

The ABAC Philippines members are now working to encourage other APEC members to also embrace the catastrophe bond for disaster risk transfer and financing, encouraging collaboration to drive more effective issuance as well.

By developing a catastrophe bond market for the entire region APEC members can not just benefit from more efficient access to natural catastrophe insurance, but also work together to find ways to secure climate risk transfer for other perils than the more typically seen typhoon and earthquake coverage.

As the region becomes increasingly exposed to the benefits of the catastrophe bond, helped now by the Philippines recent experience, it is likely we see new efforts to either pool risks, or for other APEC member countries to look more closely at the cat bond and the capital markets as sources of disaster risk finance.