Asian Development Bank renews calls for catastrophe bonds for Asia-Pacific

Once again the Asian Development Bank (ADB) has renewed calls for catastrophe bonds to play a part in providing risk transfer and financial protection to enable recovery from major natural catastrophes in the Asia-Pacific region. The ADB has been growing increasingly concerned about the impacts a changing climate will have on the region where 7 out of the 10 countries most exposed to climate change and natural disasters are located.

As much as 60% of the Asia-Pacific regions people rely on climate-sensitive employment, in farms, fisheries and forests for their livelihood and survival. Between 1980 and 2009 the region bore the brunt of global natural catastrophe related economic losses, with as much as 38% of the losses impacting the region. Statistics show that people in Asia-Pacific are four times more likely to be affected by natural disasters than those in Africa and 25 times more likely than those in Europe and the U.S.

The ADB recently published a report which showed that people in Asia-Pacific are becoming more exposed to major storms and floods and that these events are becoming endemic to the region. Whenever major catastrophe events impact a country in the region the economic impact can be huge and recovery can be slow and difficult. It is the poorest and most vulnerable citizens who suffer the worst and hence the ADB is calling once again for climate resilience and disaster recovery preparations to be at the fore.

Investing in disaster risk reduction is just one area that the ADB is focusing on. The other main area is on disaster risk insurance to enable recovery from events to be better funded and quicker. The region needs a disaster risk insurance scheme, says the ADB in a recent article, they also say the region will benefit from the introduction of instruments such as catastrophe bonds. The ADB says that these innovative forms of risk transfer can “increase resilience by forcing communities to model, price and manage the risks of climate change.”

The ADB hopes that these issues will be discussed at the 18th Conference of Parties of the United Nations Framework Convention on Climate Change, which runs until the 7th December in Doha, Qatar. We hope that there are representatives from the global reinsurance and risk transfer market present who can ensure that the use of risk transfer and instruments like cat bonds are raised as potential solutions for funding disaster recovery across Asia-Pacific.

The main issue here will once again be a lack of modelling for some of the more exposed countries within the Asia-Pacific region. Catastrophe bonds may not be feasible to protect against flood risk specifically but they could be structured with parametric triggers to protect against windstorms, typhoons and earthquakes which would be a good starting point. There is certainly an appetite amongst capital market investors to gain access to catastrophe risk from new regions and perils, such as in Asia-Pacific, and we believe that any plan to structure cat bonds providing protection in the region would be well received. MultiCat Asia-Pacific?