The World Bank is exploring potential new transactions as part of its Capital-at-Risk Notes Program, where it issues catastrophe bonds on behalf of sovereign entities. The Bank is also considering ways to use the facility to provide health risk transfer as well.
At the ILS Bermuda Convergence 2014 event this week, Michael Bennett, Head of Derivatives and Structured Finance in the Capital Markets Department at the World Bank, acknowledged that the World Bank is in discussions with a number of parties about bringing potential new deals to market.
An example of such an interested country could be the Philippines, where a catastrophe bond has been discussed by the government a number of times and as a sovereign it has worked closely with the World Bank to define its risk transfer needs. Back in April we reported that the Philippines was actively engaged in investigation and feasibility studies with the World Bank on the possibility of issuing catastrophe bonds to protect the Asian nation from natural catastrophes such as earthquakes or typhoons.
The Philippines, with such massive exposure to huge natural catastrophe events and one of the biggest gaps between the economic and insured losses due to low insurance penetration, is clearly in need of capital support to finance its response and resilience to disasters.
Issuing a catastrophe bond to protect the Philippines against some specified disaster events, perhaps both typhoon and earthquake, or just one of these perils, under the World Bank’s Capital-at-Risk Notes Program, would be a real step forward in promoting the use of ILS and cat bonds as a source of post-disaster contingent risk financing.
A successful issue would help to promote the use of cat bonds in other disaster prone regions of the world and could result in more issuance in the future as well. Any such deal is likely to be well-received by an ILS investment community keen to access more risk and also keen to see new regions come to the market.
Bennett also said that there is a growing focus on health related issues such as pandemics at the World Bank now and that the Capital-at-Risk Notes Program could perhaps be used to provide financial protection for these types of risks. A contingent source of financing which triggered when a pandemic occurs could be issued in an ILS or catastrophe bond form, with the capital markets providing the risk financing.
It’s encouraging to hear that the World Bank is seeking to grow its Capital-at-Risk Notes Program, bringing real benefits to a countries that have large natural disaster exposures and also considering their use for other exposures such as health pandemics. The World Bank Capital-at-Risk Notes Program looks set to become a growing component of the ILS market.