Cat bond gives Philippine government faster access to post-disaster funds

The recently completed first catastrophe bond for the Philippines provides its government with faster access to post-disaster funding, enabling it to respond more rapidly and effectively to support the needs of its citizens when the largest catastrophes strike.

The Philippines government has made steady progress in setting up a layered, country-wide program for disaster risk transfer and financing in recent years.

From its efforts to make catastrophe and natural disaster insurance mandatory, to its catastrophe contingent line of credit with the World Bank, to its investigations into securing disaster insurance for its infrastructure, to its now $390 million regional parametric disaster insurance program, as well as more recent discussions on establishing the Philippine City Disaster Insurance Pool (PCDIP), the government of the Philippines has shown itself willing to embrace modern risk transfer techniques as well as the capital markets to secure necessary disaster risk financing protection.

The Philippines catastrophe bond, which was issued with the support of the World Bank, has been a long time coming, given discussions began almost a decade ago.

But now issued and in-force, the $250 million of tropical cyclone and earthquake protection is set to be a responsive layer of disaster protection for the country, enabling the government to have access to funding rapidly on occurrence of a qualifying natural catastrophe event.

It is the speed of access to capital after disasters that is key in making such risk financing solutions as useful as possible.

For governments, a cat bond can deliver capital liquidity at a time when its own finances could potentially be locked up and hard to mobilise, and can also be much faster than other forms of post-disaster response capacity.

The modelled loss trigger of the Philippines cat bond could result in a payout within a matter of weeks, we understand, should a significant disaster event trigger the need for the post-event loss calculation process to be activated.

That could provide a much needed injection of liquidity to the government at a time when it can make the biggest difference to the country of the Philippines and its people.

Speaking at the time of the launch of the Philippines first catastrophe bond, Mara K. Warwick, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand, explained, “Since the cat bond does not depend on a loss assessment, which takes time to carry out, this financial instrument gives the Philippine government faster access to post-disaster funds that can support the life-saving work of emergency response and recovery.”

Warwick explained that it is estimated that 74% of the population of the Philippines is exposed to natural disasters of some kind, such as typhoons, earthquakes, flooding, storm surges, tsunamis, volcanic eruptions and landslides.

“Poor families suffer the most from these calamities because they often depend on disaster-vulnerable livelihoods, like farming and fishing, and they live in unsafe areas, like mountainsides and coastal zones. They are less able to secure their resources and homes, and therefore lose more when disasters strike,” Warwick continued.

The World Bank has been working closely with the Philippines government on initiatives related to disaster risk reduction and climate change adaptation, to help strengthen the country’s resilience against natural disasters.

This work has become an increasingly critical part of the World Bank’s initiatives in the Philippines, with urgency rising as it becomes increasingly clear that parts of the world are facing the accelerating effects of climate change.

“This cat bond complements a suite of diverse financial instruments and programs for enhancing resilience, allowing the Philippines to transfer natural disaster risks to the capital markets while enabling the authorities to respond quickly to the needs of citizens when calamities strike,” Warwick said.

Adding that, “The Cat Bond demonstrates once again, the Philippines’ remarkable capability to develop innovative financial solutions to mitigate for the impacts of extreme climate and weather-related events as well as major earthquakes.

“We congratulate the government of the Philippines, for the successful launch of the catastrophe bond here at the Singapore Exchange.”

As climate and disaster resiliency rises up the agenda for sovereign governments around the world, the World Bank’s efforts to connect them with the capital markets as a source of risk financing capacity, using instruments such as. catastrophe bonds, will only become more important.

Structuring these instruments to deliver their pay-outs as rapidly as possible, when an event meets the pre-defined parameters, is a key piece of this work in making the resulting financing as useful as possible to the beneficiaries of the protection.

You can read all about the landmark Philippines catastrophe bond, the IBRD CAR 123-124issuance, in our comprehensive catastrophe bond Deal Directory that includes details on over 600 transactions.