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Philippines parametric insurance doubles, cat bond on the way: World Bank


The recently renewed Philippines parametric natural disaster insurance cover was completed at $390 million in size, around double the prior year, and the World Bank has confirmed that work is underway to issue a catastrophe bond to extend disaster protection for the country.

Philippines mapWe covered this renewal back in December, when we explained that insurance-linked securities (ILS) investment fund manager Nephila Capital and Swedish state sector pension fund AP3 both participated in the $390 million renewal of the Philippines regional parametric disaster insurance program.

Joining the two ILS investors in providing capacity to back the renewal of the natural disaster cover, were reinsurance firms Munich Re, Swiss Re, AXA, Hannover Re, Hiscox Re, Allianz, and SCOR.

Now the World Bank has commented, explaining that this important renewal will help the Philippines to respond to climate and disaster risks.

The renewal means that 25 provinces in the Philippines have the peso equivalent of US $390 million of insurance cover against major typhoon and earthquake events, with the protection structured on a parametric basis.

For the renewal, the World Bank entered into an agreement with the private reinsurers and ILS players to provide the coverage to national government agencies and 25 participating provinces in the Philippines.

Insurance payouts will be made when the pre-defined parametric triggers are breached, with the parametric insurance provided by the Philippines Government Service Insurance System (GSIS).

The product is designed to facilitate rapid payouts and disbursement of capital as soon as possible after disasters strike, to support rebuilding and recovery efforts.

The renewal almost doubles the $206 million of cover provided in the first year by the scheme, when a catastrophe swap underpinned the provision of reinsurance capital.

For 2019, the number of reinsurance counterparties doubled, after a competitive bidding process and to participate, these risk takers were able to access the transaction either through a derivative contract or a retrocessional reinsurance agreement.

The ability to enter into a standard retro agreement will have helped to expand the range of reinsurance firms that could access the program, which bodes well for its continued growth in the future.

This parametric natural disaster insurance product is a fine example of a country working with the World Bank to transfer public risk into the private markets.

“This initiative demonstrates the Philippines’ strong commitment to continue investing in innovative financial solutions that will mitigate the impacts of major earthquakes and extreme climate and weather-related events,” Mara K. Warwick, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand commented on the deal. “The program complements the country’s overall strategy and efforts in ensuring resilience against natural disasters and climate change impacts.”

George Richardson, World Bank Director for Capital Markets, added, “Today’s announcement marks another milestone in our partnership with the Philippines, and in our joint pursuit of leveraging capital market instruments to prevent the human and financial tolls of disasters. We look forward to deepening this partnership as we work together to harness innovative financial solutions to boost the country’s resilience against unforeseen events.”

The World Bank also confirmed this morning that work is underway to help the Philippines expand the amount of private market disaster risk transfer it benefits from with a catastrophe bond expected to be issued.

“The World Bank is also supporting the Philippines in preparing a sovereign catastrophe bond to complement the existing insurance program by providing cover for more extreme events,” the organisation explained.

Regular readers will be aware that we’ve been tracking the Philippines ambitions to become the beneficiary of a cat bond as long ago as 2010, and that the initiative has been actively discussed in Government circles again in recent months.

With the Philippines expected to incur $3.5 billion in asset losses on average each year due to the impacts of typhoons and earthquakes it is one of the countries most vulnerable to natural catastrophes and protecting public and government assets has become a key goal.

Leveraging the depths of the reinsurance and capital markets, as well as the appetite of ILS and cat bond investors, should help the Philippines to at least have an enlarged pool of responsive liquidity that can be paid out based on parametric factors related to storms and earthquakes being met, thus providing much-needed financing to support disaster response when the worst happens.

“Since 2008, the World Bank has issued, hedged, or facilitated over US$4.3 billion in transactions to transfer earthquake, wind, drought-related and pandemic risks from its borrowing member countries to the capital markets,” the Bank explained.

That figure is expected to keep rising and a Philippines cat bond will be a welcome and long overdue addition to it.

Also read:

Nephila, AP3 & reinsurers back upsized Philippines parametric renewal.

Nephila supports $206m World Bank Philippine cat swap transaction.

World Bank arranges $206m catastrophe swap for the Philippines.

Philippines parametric insurance pilot launched with World Bank support.

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