World Bank looks at new cat bond risks, including cyber, famine, migration

The World Bank continues to explore ways it can expand the range of risks and perils that its member countries can hedge using risk transfer structures including catastrophe bonds.

To-date, the World Bank has helped its member countries to hedge more than $4.25 billion of natural catastrophe risk, as well as $320 million of pandemic risk, using both traditional insurance or reinsurance arrangements and capital markets backed deals through catastrophe bonds and swaps.

Almost 65% of the $4 billion has seen risk transferred to capital markets and institutional investors using the catastrophe bond structure and the World Bank has an ambition to make the risk transfer these products can provide even more useful, by expanding the range of use-cases to include other perils.

When disaster or other risks strike, the World Bank has seen that its member countries often have to divert funding from other priorities, meaning impacts can be felt more widely on their economies.

In addition, traditional insurance and reinsurance penetration is often seen to be low in developing member countries, meaning the government is forced to act as the insurer of last resort again causing a drain on economic resources.

As a result, transferring some of these risks to the capital markets using instruments such as catastrophe bonds and helped by the World Bank can simplify these countries access to risk bearing financing that can help them in their recovery.

Members benefit from the World Bank acting as a type of intermediary, leveraging its infrastructure and access to markets to secure the much needed financing.

The World Bank hedges its obligations to members under insurance contracts using catastrophe bonds as a form of reinsurance capital, which in turn allows the members to benefit from the efficiencies of the capital markets, plus diversified capital that is syndicated through the sale of securities to often specialised catastrophe risk or ILS funds and investors.

As this model becomes increasingly accepted by a growing range of sponsors, while the cat bond and ILS asset class is also expanding, the World Bank wants to increase the usefulness of the catastrophe bond for the benefit of its member countries.

One way to do this is by expanding the range of perils they can cover and the World Bank said it is focused on expanding the coverage cat bonds can provide and is investigating what other kinds of risk its members could be hedging against with the catastrophe bond.

Among the risks the World Bank is exploring, we’ve already covered the fact that the organisation is looking to other humanitarian risks such as famine.

The World Bank has already begun to work on the Famine Action Mechanism (FAM), alongside other organisations, with a view to being able to create the triggers that could one day support payouts of famine catastrophe bonds for affected countries.

In addition, the World Bank is looking at mass migration as a risk that could be hedged against using the catastrophe bond structure.

This is another area we’ve already discussed the potential for ILS and the capital markets to play a role, as the Red Cross has looked to the cat bond as a vehicle for migration and refugee financing.

The third area of new risks that the World Bank has now disclosed it is looking at is cyber risk.

Of course there has been much talk of cyber ILS and cyber catastrophe bonds, with the market widely anticipating that once the data and models are there to underpin it, transactions to transfer some area of cyber risk will come to market.

The World Bank also recognises the scale of global cyber exposure and as a result is investigating whether it is a risk that could be insurable for its member countries, with the cat bond providing access to the capital markets to support any hedging deals entered into.

It’s likely the World Bank will continue its explorations in these areas and others, given its mandate is to work towards ending extreme poverty and boosting shared prosperity, which makes addressing risks that can impact countries development a key part of its role.

It’s possible that the World Bank may be able to structure a cyber cat bond in such a way that it is more palatable to investors, given the sovereign level nature of the risk which could make designing parametric triggers simpler, than we see with traditional reinsurance attempts.

The need is definitely there and the cat bond or ILS structure can enable access to the deepest pools of risk bearing capital available, as well as to the specialist ILS fund managers that can work to understand these new perils and help the World Bank to assist their members in becoming more resilient to them.