The World Bank sees the ability of its Treasury to mobilise fixed income capital to fund sustainability as a key piece of its mandate, with disaster risk transfer, in the form of catastrophe bonds, insurance and weather risk trades, seen as important tools to protect against the erosion of specific countries development gains.
“At no time in history is it more obvious that, we must transition to a sustainable, inclusive, low carbon, resilient global economy. While a focus on sustainability can help us tackle income inequalities, populist tendencies and climate risk, it presents vast investment opportunities, will drive innovation and create new jobs,” explained Arunma Oteh, Vice President and Treasurer at the World Bank, during a recent conference speech.
The World Bank is focused on two objectives related to sustainability, ending extreme poverty and boosting shared prosperity among the poorest 40% of the world.
While working to develop inclusive and sustainable economies, promoting and financing development, investing in people and ensuring good governance are all key, these efforts can be undermined without the work to help countries to better withstand or become more resilient to shocks and threats.
Disaster risk financing and transfer sits firmly within the World Bank’s work to help countries become more resilient, acting as a financial buffer to protect the development gains made.
“We bring our unique combination of financing, knowledge and experience to promote sustainability and to tackle complex challenges such as climate, forced migration, pandemics, and natural disasters,” Oteh explained.
The World Bank has worked as an intermediary in many natural disaster and weather risk transfer arrangements, including catastrophe bonds. But since 2014 the Bank has been taking a more direct role, facing off increasingly directly with sovereign counterparties to ensure risk transfer is as efficient as possible.
Oteh highlighted the reason the disaster risk transfer activities are so important, saying, “This is a critical challenge, because the impact of natural catastrophes, like earthquakes, hurricanes and droughts, holds the very real risk of rolling back years of development gains.
“In fact, the impact of extreme natural disasters is equivalent to a $520 billion loss in annual consumption globally and forces about 26 million people into poverty each year.”
Due to the increasing importance of this issue, Oteh said, “We have greatly stepped up our work in this area.”
She highlighted the World bank’s execution of, “Transactions that in the aggregate have passed more than USD3.5billion of catastrophe and weather risk from our member countries to capital markets investors.”
Oteh discussed some of the highlights of the World Bank’s work in recent years, such as, “A truly ground-breaking $425 million pandemic risk transaction launched in June 2017, that provides insurance to the 77 poorest countries in the world against the out-break of epidemic influenza, SARS, Ebola and other deadly diseases.”
She also cited the recently triggered Mexican earthquake catastrophe bond, saying, “Another transaction we executed this year passed $360 million of Mexican sovereign earthquake and hurricane risk to the capital markets.
“This transaction was launched in August 2017 which turned out to be timely since one month later, a massive 8.1 earthquake just off the Pacific Coast of Mexico triggered a $150 million payout to Mexico that will help the country rebuild vital infrastructure.”
Finally, Oteh highlighted the just priced Pacific Alliance catastrophe bond, that will provide parametric earthquake risk insurance to a group of Latin and South American countries.
“A few days ago, we announced landmark CAT bond transactions covering earthquake risk in Chile, Colombia, Peru and Mexico, simultaneously. The transactions which together amount to more than USD 1 billion create an opportunity for investors to get exposure to diversified catastrophic risk factors,” she said.
The Pacific Alliance catastrophe bond has grown to $1.36 billion in size, demonstrating the World Bank’s ability to secure large amounts of risk capital to back sovereign disaster exposures.
Oteh noted that third-party capital is a vital partner in these endeavours, saying, “Notwithstanding the success of the World Bank at fostering sustainability and resilience, it is clear that the aggregate financial resources of the Bank, and our peer institutions in the public sector, are simply too limited to play the central role in the transition to a more sustainable, global economy.
“The Bank is principally a catalyst in this endeavor, pioneering new forms of financing and creating accommodative investment environments. Ultimately, it is private investors, and specifically the capital markets, that can meet the sizable funding requirements.”
Insurance-linked securities (ILS) and catastrophe bonds are now performing the role of a vital conduit between sovereign disaster risk and the capital markets, with the World Bank and its International Bank for Reconstruction and Development (IBRD) global debt facility acting as key facilitators in this growing market.