The World Bank Treasury and the APEC Business Advisory Council (ABAC)/Asia-Pacific Financial Forum co-organized a virtual workshop on catastrophe bonds for the APEC Regional Disaster Risk Financing and Insurance Solutions Working Group, aimed at broadening the understanding and use of the catastrophe bond market in the Asia Pacific Region.
Building economic resilience against shocks is a top priority for the World Bank and the APEC. With most of its members situated along the Pacific Ring of Fire, APEC economies are under constant threat of strong earthquakes, tsunamis, super typhoons, and volcanic eruptions. These disasters put governments under a significant fiscal burden to finance response and recovery efforts. The workshop convened APEC’s 21 member countries, international organizations, multilateral development banks, insurance regulators, and commercial entities. The platform allowed participants to learn and share views on the benefits of using catastrophe bonds to transfer disaster risk to capital markets and reduce the financial burden that such events have on national economies. Something all countries are experiencing these days due to the COVID 19 Pandemic.
“Recent natural disasters have enlightened economies on the need for and importance of supplemental sources of finance, such as the long-term insurance and multi-year catastrophe bonds. These instruments allow economies to mitigate and transfer risk and provide significant financial protection in case natural catastrophe occurs, especially now as we are facing the COVID-19 pandemic. This workshop which gathers experts from different sectors and countries will help us expand our appreciation of such instruments. ” said Paola Alvarez, Chair, APEC Regional Disaster Risk Financing and Insurance Solutions Working Group, and Assistant Secretary in the Department of Finance, Republic of the Philippines.
“Looking at the APEC region, we have experienced many devastating disasters. The economic losses in our regions accounted for 80% of global damages in the past two decades. Furthermore, climate change could increase vulnerabilities in the long run. Besides natural disasters, other types of risk are emerging. Future pandemic is one of them. There is growing awareness of better risk management to make our economies more resilient. CAT bonds channel governments and investors and create a win-win relationship.” said Takaya Kishi, Co-chair, APEC Regional Disaster Risk Financing and Insurance Solutions Working Group, and Deputy Vice Minister of Finance for International Affairs in the Japan Ministry of Finance.
During the workshop, representatives from Mexico’s Ministry of Finance and the Philippines Bureau of Treasury as well as the Federal Emergency Management Agency in the United States, who sponsored some of the most recent sovereign catastrophe bonds in the region, shared their experiences and lessons with other APEC economies.
“ABAC strongly believes that private sector participation is critical in diversifying risk mitigation solutions and helping economies address gaps in disaster risk insurance. We hope to continue this discussion to develop a robust APEC catastrophe bond market drawing lessons from the Pacific Alliance catastrophe bond and sharing best practices from other countries, including the Philippine experience” said Joanne de Asis, Co-Chair, APEC Business Advisory Council (ABAC) Finance and Economics Working Group and Chairperson for Globe Capital Partners.
“The combination of high frequency of natural disasters and low level of insurance penetration means new insurance solutions are needed. Given the recent severe health-related shocks from COVID-19, the potential for compound shocks and the widespread negative impacts of climate change, the need for capital markets-based solutions to close the insurance gap is a major priority.” said Jingdong Hua, Vice President and Treasurer, World Bank and Pension Finance Administrator, World Bank Group.
The World Bank Capital at Risk Notes program facilitates risk transfer solutions for the World Bank and its clients using the capital markets. In the last three years, catastrophe bonds issued by the World Bank have provided clients with US$2.8 billion of insurance cover against disasters. Transactions have covered a range of risks, including earthquakes, hurricanes, tsunamis, and pandemics. In the last year, the World Bank issued US$0.7 billion catastrophe bonds transferring risk from the Asia-Pacific region to capital markets. This included a US$0.5 billion catastrophe bond for the Government of Mexico in March 2020, which was the largest catastrophe bond transaction for Mexico since its first issue in 2006, and it has the longest tenor of any sovereign catastrophe bond issued. It also included a US$0.2 billion catastrophe bond for the Republic of the Philippines in November 2019, which was the first catastrophe bond sponsored by an Asian sovereign and the fist catastrophe bond listed on an Asian stock exchange.
Catastrophe bonds are only one of the market-based risk management solutions the World Bank offers to clients to help design, develop, and execute comprehensive disaster risk financing strategies and increase their financial resilience to disasters.