The Philippines has secured a new catastrophe contingent line of credit, to support its management of the risks posed by natural disasters, with a $500 million Second Disaster Risk Management Development Policy Loan with a Catastrophe-Deferred Drawdown Option (CAT-DDO 2).
The World Bank said that the catastrophe contingent CAT-DDO 2, which is essentially a renewal of the CAT-DDO, will help the Philippines to “strengthen investment planning and regulations to reduce disaster risks and help manage the financial impacts when disasters strike.”
It will provide a source of capital contingent on disaster being declared, so similar to an insurance or reinsurance policy, except that this facility opens up a loan, or line of credit, that has to be repaid.
Finance Secretary of the Philippines Cesar V. Purisima commented; “The Philippines is among the most vulnerable countries in the world. Together, the 20 most vulnerable countries face escalating losses of $44.9 billion due to climate-related natural disasters alone. Inaction is set to cost us even more. With the number set to multiply almost ten-fold by 2030, amounting to $418 billion, we turn to innovative financing mechanisms to boost our resilience.”
The Catastrophe-Deferred Drawdown Option will allow the Philippines to access a line of credit after a “state of calamity” is declared by the President. Hence the contingent nature of the CAT-DDO 2 facility, enabling the Philippines to access the $500 million of capital after the most severe disasters or natural catastrophes strike.
The contingent nature of the CAT-DDO makes them similar in their response to disasters to a catastrophe bond, or even an insurance or reinsurance policy, although they are a loan which is repayable.
Interestingly, as regular readers will be aware, the Philippines government has been in discussion with the World Bank regarding becoming a catastrophe bond sponsor, likely under the MultiCat program, for some years now.
Purisima himself said that the Philippines was nearing completion of a cat bond with the World Bank’s help back in September, while the World Bank had confirmed the discussions as well.
The World Bank explained that the CAT-DDO 2 provides the Philippines with the flexibility to use the $500 million of contingent loan capital as needed. The facility has a drawdown period of three years and can be renewed up to four times for a total of 15 years. Anything repaid from the loans received during the drawdown period can then be available to the Philippines for subsequent withdrawal, allowing the CAT-DDO 2 to be topped up again.
Clearly the cost to the Philippines of establishing such a catastrophe contingent line of credit is going to be lower than sponsoring a catastrophe bond, which perhaps explains why the cat bond has been rumoured to be in the works for over two years now.
Whether a Philippines catastrophe bond ever comes to market remains to be seen, but it is to be hoped that the country and its government sees the benefit in diversifying its catastrophe risk financing capacity into the capital markets and that it sees the benefits in a parametric structure which it would not have to repay if triggered.
The Philippines was the first country in the Asia and Pacific region to access a catastrophe contingent loan facility, with the first CAT-DDO in 2011. With this second CAT-DDO the government of the Philippines has capital on tap post-disaster to help it to continue to implement its disaster risk reduction and management program, even after a catastrophe event.
“Financial shocks caused by natural disasters undermine economic growth and poverty reduction. This is the environmental equivalent of the middle income trap. Governments need to be agile in mobilizing resources if we are to break free from disaster-traps that knock back the poorest and most vulnerable,” added Secretary Purisima.
The Philippines is also working with the World Bank to develop a subnational insurance pool to provide local government units with immediate liquidity following disasters, as well as a property catastrophe risk insurance pool for homeowners and businesses.
It’s possible that once these insurance pools are established then the use-case for a catastrophe bond becomes clearer, and perhaps the project will accelerate, for providing a single source of responsive reinsurance protection for the pooled disaster risks.
At national level the government of the Philippines has a plan to leverage different types of financial instrument to provide financial liquidity after the largest disasters, so the Philippines catastrophe bond may still come to market in the future.