World Bank starts work on up to $190m Nepal parametric quake catastrophe bond project

The World Bank has begun work on a proposed project to deliver a parametric earthquake catastrophe bond for Nepal, targeting US $80 million to US $190 million of fully-collateralized disaster risk financing from the capital markets for the South Asian country.

The Nepal Catastrophe Bond Project appears to be in its nascent stages, with preparatory analysis looking at the feasibility and assessing the potential impact of delivery of a parametric earthquake cat bond for the country.

US $20 million of financing is projected as the total cost of the project, to cover the risk transfer premiums and costs of the work.

We understand the proposed project envisages delivery of the design, structuring, and issuance of a three-year parametric catastrophe bond for Nepal.

The goal is to raise the disaster resilience of the country, by putting in place a response source of capital markets backed insurance or reinsurance like protection, through the issuance of insurance-linked securities (ILS).

The parametric earthquake cat bond would provide Nepal with valuable financing and protection in the event of major losses from quakes hitting the country.

The World Bank would intermediate the transaction, as well as support its design, delivery and impact assessment.

Presumably this would involve utilising the World Bank Treasury’s IBRD Capital-At-Risk Notes Program, as has been seen in other recent catastrophe bonds brought to market by the World Bank.

The World Bank will intermediate the capital market investors, which typically would involve meaningful participation from dedicated ILS fund managers, as well as other institutional investors and some insurance or reinsurance companies.

The parametric Nepal cat bond would be designed to payout based on pre-defined physical earthquake parameters, such as magnitude and the severity of ground shaking, rather than actual assessments of financial and economic losses, it is anticipated.

The project envisages a parametric catastrophe bond that could provide around $80 million of coverage for Nepal in the event of a 1-in-20 year quake, up to $190 million for a 1-in-100 year earthquake occurring.

It’s seen as a way to address a critical gap in Nepal’s current disaster risk financing framework, leveraging the appetite of capital market and ILS investors to provide rapid and responsive fully-collateralized funding and liquidity for low-frequency, high-severity earthquake events, we have learned.

Nepal is a country that faces significant seismic exposure and earthquakes have caused meaningful damages and mortality to its population. A 2015 earthquake event caused damages that amounted to around one-third of Nepal’s GDP, which serves to highlight the value a responsive source of parametric disaster risk financing, in sovereign catastrophe bond form could provide.

If this project goes ahead it would result in the first catastrophe bond to cover risks in Nepal and a rare cat bond covering South Asian exposures.

With the catastrophe bond market expanding at pace these days, investor appetite for well-modelled and structured insurance-linked securities now extends to most regions of the world.

The efficiencies of private capital markets can help reduce the burden of risk transfer for other funding sources for a sovereign sponsors, extending valuable capacity support and financial liquidity in times of need. Something a parametric catastrophe bond is well-suited to.

Also read:

– World Bank cat bond on the table in new $400m Morocco Climate & Risk Finance Program.

– Jamaica secures $200m of parametric hurricane insurance with third catastrophe bond.