The United Nations Development Programme (UNDP) is evaluating the use of catastrophe bonds as part of a disaster risk transfer solution for use in the Europe and the Commonwealth of Independent States (ECIS) region.
The focus is on ECIS countries ( Central Asia, Southern Caucasus, Eastern and South East Europe, and Turkey) where underinsured natural disaster risks are costly burdens on government’s, society and taxpayers, drawing influential parties to focus on identifying macroeconomic solutions to minimise the cost of losses.
Between 2005 and 2014 this region of Eastern Europe and CIS faced 314 natural disaster events, which caused the deaths of more than 60,000 people, with 11 million affected by the disaster events.
The economic impact of these disasters is estimated to have been around US $25 billion, with little of the total covered by insurance leaving the burden on governments, taxpayers and people’s lives and livelihoods.
In the developed world, insurance and reinsurance capital and coverage help to minimise the economic impact somewhat, despite still as much as 50% of losses being uninsured even in the most advanced nations.
But in the ECIS region insurance penetration is extremely low still (less than 2% in many areas) and governments are not always able to shoulder the burden of economic disaster costs, without damaging their economic potential, making a risk transfer solution such as catastrophe bonds a potentially valuable source of just-in-time capital that could be distributed after major disasters occur.
Kirill Savrassov of Bermudian ILS specialist Phoenix CRetro who focuses particularly on the needs of CEE countries and is speaking at the conference explained, “The region needs a solution to the losses caused by natural catastrophes. Cat bonds present a very workable solution to this issue as well as offering investors, within and outside the region, with a useful and diverse investment opportunity.”
As a result, the UNDP is planning to explore the potential for cat bonds in the ECIS region and is holding a holding a conference designed to educate governments of countries in the region about cat bonds and how they can help to transfer the risk and provide contingent financing to aid with disaster recovery and post-disaster reconstruction.
Government sponsored catastrophe bonds are seen as a potential solution to the issue, with parametric triggers objectively designed and monitored by third-parties able to ensure that pay-outs could be made quickly after disaster strikes.
These funds can then be distributed through government schemes to provide emergence shelter, repairs and reconstruction financing.
Such schemes can be even more impactful if integrated with programs designed to encourage resilience measures as well.
The depth of the capital markets is an appropriate source of capacity to back these under-insured disaster risks and the use of such instruments could also help to support development of local insurance markets within the region.
The UNDP has set up a conference to be held in Istanbul on the 4th and 5th October 2018, when representatives from countries in the region will be invited to hear from a mix of international speakers, from developmental organisations, insurance and reinsurance industry, as well as the insurance-linked securities (ILS) market.
For the ILS market the prospects of another region of the world opening up to catastrophe bonds and perhaps other private ILS or collateralised reinsurance solutions is positive, offering further diversification opportunities should the initiative bear fruit.
Rom Aviv, co-founder and Managing Partner of Tel Aviv based investment manager IBI ILS Partners (also speaking at the conference), commented, “As investors seek to diversify their portfolios, each ‘non-peak’ issuance with no, too little, correlation to the rest of the ILS universe has the potential significantly to improve the diversification profile of a portfolio. Analytically, this would contribute to better risk-adjusted returns and improved tail risk metrics.”
Risk modelling and the challenges of developing accurate, trusted and accountable parametric triggers will be a focus during the day, as such triggers need to be independent from the government’s seeking coverage.
Clive O’Connell, ILS and cat bond experienced lawyer from McCarthy Denning in London (also a speaker at the event), said, “The parametric trigger needs to be objectively determinable and free from potential interference to allow both the protected government and the investors to have confidence in its integrity and its performance.”
The conference is designed to be a forum where such issues can be discussed, as well as to be an educational tool for governments in the region.
Of course questions remain over the costs of sponsoring catastrophe bonds, but with international development agencies and donor groups also engaged premiums would be expected to be shared across the region, perhaps with some international support.
As the use of catastrophe bonds grows in private markets and certain sovereign countries, it is encouraging to see a new region of the world taking close interest and this bodes well for stimulating continued interest in the catastrophe bond structure as risk transfer tool, as well as in insurance-linked securities (ILS) as an asset class.