Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Will 2011 see another MultiCat catastrophe bond?


The World Banks MultiCat catastrophe bond program was launched back in September 2009 with the MultiCat Mexico 2009 Ltd. catastrophe bond which provides Mexico with three years of cover against earthquakes and hurricanes which impact their FONDEN disaster fund.

The deal was hailed as a first as it allowed a still developing nation to access the capital markets for natural catastrophe cover through the use of a catastrophe bond for the first time. The transaction was well received by investors and upsized before closing.

In November 2009 we wrote about rumours that the African country of Malawi and certain Caribbean countries were looking into the feasibility of issuing their own MultiCat transactions. We had also expected Turkey and China to express interest in the facility. Despite this, and much discussion of MultiCat at every ILS event during 2010, we have yet to see the World Bank facility be used to issue any more transactions. Now that the catastrophe bond market is looking a lot more healthy we wonder whether 2011 will be the year we see developing nations taking advantage of MultiCat?

MultiCat was designed by the World Bank to enable member countries to issue catastrophe bonds to insure themselves against the risks of natural catastrophes. It was designed so that it could support a wide variety of perils  and structures, including pooling of multiple perils in multiple regions. As a result it has a flexible structure and the added support of the World Bank acting as arranger helps developing nations access the capital markets.

The World Bank made it simple to initiate a MultiCat transaction by not putting a formal application process in place. The country seeking to hedge its risks signs a service agreement with the World Bank which details the proposed transaction and any steps required to comply with the country’s internal regulations. Then work to prepare and execute the transaction is supposed to begin. Given the lack of formal application we’d imagine the World Bank could have had many enquiries about MultiCat, possibly too many to service.

But there is still no sign of a second MultiCat transaction coming to market. 2011 could be the year that we see a follow up deal for a number of reasons. The cat bond market finished 2010 on a high and investor demand for new deals is high. Investor demand for a MultiCat follow up would be very high as it is a guaranteed diversification opportunity given the likely issuing countries. The involvement of the World Bank is also good for investor confidence and should encourage demand. Developing nations are increasingly aware of their natural catastrophe risks and increasingly keen to find effective ways to manage and transfer those risks to the financial markets.

Swiss Re, who assist in the MultiCat program and were heavily involved in the structuring of MultiCat Mexico 2009 suggested at their recent ILS media day that the World Bank was pushing new countries to do similar transactions. They also highlighted that MultiCat catastrophe bond issuances would be a source of further diversification within the market.

So the conditions are right, interest is said to be high among member countries who are desperate to hedge their natural catastrophe risks, the investor community are actively seeking out diversification opportunities and also the cost of issuing cat bonds has come down to a more affordable level and is closer to traditional reinsurance costs than ever. So you would think it was safe to assume that MultiCat would make a return this year, wouldn’t you?

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