Philippines government and IBRD forge path ahead for cat risk transfer to capital markets

The World Bank's International Bank for Reconstruction and Development (IBRD) has issued two tranches of catastrophe-linked bonds (cat bonds) to provide the Republic of the Philippines with financial protection of up to $75m for losses from earthquakes and $150m against losses from tropical cyclones for three years. The bonds, which are the first to be sponsored by an Asian government, were issued under the IBRD’s 'capital at risk' notes programme, which is used to transfer risks related to natural disasters and other risks from developing countries to the capital markets. Payouts will be triggered when an earthquake or tropical cyclone meets the predefined criteria under the bond terms. The Philippines is among the most disaster-prone countries in the world. In 2013, Typhoon Yolanda (also known as Typhoon Haiyan) resulted in the loss of 6,300 lives and caused an estimated $12.9bn of damage – about 4.7% of the country’s GDP. “Many countries in Asia are highly vulnerable to natural disasters, which makes finding innovative, capital markets solutions a major priority to address the impact on their economies,” said Jingdong Hua, World Bank vice-president and treasurer. “The World Bank cat bonds for the Philippines are the first to be sponsored by the government of an Asian country and are the result of a close and long-term partnership between the World Bank and the Philippines government,” he added. Mara Warwick, World Bank country director for Brunei, Malaysia, Philippines and Thailand, explained that this was not an overnight process, but rather the result of a sustained effort to help the Philippines better identify, manage and ultimately transfer its natural catastrophe risk. “The World Bank has been working with the Philippines government for the last eight years to help strengthen the country’s resilience against natural disasters,” said Ms Warwick. “Through the intermediation of the World Bank, these cat bonds allow the Philippines to transfer natural disaster risks to the capital markets while enabling the authorities to respond quickly to the needs of citizens when calamities strike. This once again demonstrates the Philippines’ capability to develop innovative financial solutions to mitigate impacts of extreme climate and weather-related events as well as major earthquakes,” she added. “The World Bank cat bond is a vital building block in our long-term disaster risk and insurance strategy, which we have been steadily establishing since the aftermath of Typhoons Ketsana and Parma in 2009,” said Rosalia V de Leon, national treasurer of the Philippines. “This instrument addresses the financing gap for immediate post-disaster needs for extremely high-risk events. It complements the government’s existing disaster risk financing mechanisms designed to ensure comprehensive financial protection for the Philippines,” she added. GC Securities, a division of MMC Securities, and Swiss Re were joint structuring agents, joint bookrunners and joint managers. Munich Re was a joint structuring agent, placement agent and joint manager. AIR Worldwide is the risk modeller and calculation agent. David Priebe, chairman, Guy Carpenter & Company, said he hopes this bond will spark other Asian governments into action in this critical area of risk transfer. “GC Securities/Guy Carpenter congratulate the World Bank and Government of Philippines on this landmark and successful transaction, as the first cat bond with exposure to natural perils affecting the Republic of the Philippines, as well as the first cat bond listed on the Singapore Exchange. We hope that this pioneering transaction provides a springboard for greater use of insurance-linked securities to close the protection gap in Asia and promote sustainable economic development in one of the most dynamic regions of the world,” he said.

Philippines government and IBRD forge path ahead for cat risk transfer to capital markets

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