The World Bank has significantly expanded the range of disaster risk transfer, management and financing options it offers to clients, adding coverage for risks outside of pure natural catastrophe events and also insurance or reinsurance options.
The World Bank has expanded the range of instruments it makes available for clients to enter into disaster risk transactions. The range of risks covered has expanded beyond pure weather and natural catastrophe risks, to now include pandemics, epidemics and other health related risks such as morbidity, mortality and longevity.
In the past the Bank itself could only offer its member countries risk transfer products that were structured as derivatives, meaning that for insurance, reinsurance and other solutions to be included in a transaction the Bank often had to call on outside help from private markets.
Now the range of structures available has been expanded to include both include insurance and reinsurance contracts, as well as other similar mechanisms that may be suitable for disaster risk management or transfer transactions.
Alongside the World Bank’s catastrophe bond abilities, through its Capital-at-Risk Notes Program where it uses the International Bank for Reconstruction and Development (IBRD) as issuer alongside its Treasury department, making the process much more efficient and cost-effective, the new options make its product set more aligned with the private reinsurance and capital markets for risk transfer.
Of course when the World Bank enters into any disaster risk transfer transactions with member countries it typically looks for the support of the private markets for reinsurance capacity, in order to share the risks rather than retaining them. That process is expected to continue, despite the addition of reinsurance as a product option, as it is in the Bank’s interest to ensure risk is widely diversified among markets.
World Bank Vice President and Treasurer, Madelyn Antoncic, commented on the new risk transfer options; “This additional flexibility will allow the Bank to better respond to client needs by continuing to enhance what we can offer in our role as intermediary with the markets. Our participation in what ultimately becomes a risk transfer transaction provides an important demonstration effect to crowd in the private sector as risk takers.”
By working with the World Bank for their disaster risk transfer needs member countries can find the costs of accessing risk capital much reduced, the process more efficient and the support the Bank can offer invaluable.
The World Bank provides clients with access to its technical expertise, standing in capital markets, credit rating profile and ability to intermediate. This protects member countries from credit exposure as well as making the process viable from a cost and effort perspective, where they would not be able to achieve the end result on their own.
A World Bank contact confirmed the recent reports that it is working on a large catastrophe risk transfer transaction at the moment, a rumoured $350m wind and quake deal for an emerging market government. The exact structure to be used in this arrangement is not known at this time, but could likely include an insurance or reinsurance layer.
For the World Bank’s catastrophe bond offering, the Capital-at-Risk Notes Program, the ability for the Bank to act as insurer or reinsurer could make these feasible for countries not currently with insurable exposure to securitise.
The first Capital-at-Risk Notes Program deal, the Caribbean World Bank – CCRIF 2014-1 transaction, the Bank was taking risks already insured by CCRIF and transforming and securitising them using the Program. A similar process was followed for the Mexican MultiCat cat bonds, where the risk was already insured by FONDEN.
The World Bank will now be able to work with countries which have no disaster insurance pool, provide them with that insurance or reinsurance cover and then transform the risk into notes if appropriate. That could be a real benefit for countries that would require a parametric solution and could make tapping the capital markets for risk transfer a much more efficient process for members.
To date the World Bank has played an important role in developing the market for disaster risk transfer and enabling emerging or developing sovereign governments to better protect their infrastructure and populations, with 18 transactions worth $1.4 billion in coverage completed so far.