Catastrophe bonds a win-win for governments & investors, says APEC

The Asia-Pacific Economic Cooperation (APEC) continues to see the development of a regional catastrophe bond market as positive, highlighting at a recent workshop that cat bonds are a win-win relationship for governments and investors.

The workshop last week was convened by The World Bank Treasury alongside the APEC Business Advisory Council (ABAC) and Asia-Pacific Financial Forum, to educate on the use of catastrophe bonds as disaster risk transfer instruments for the APEC Regional Disaster Risk Financing and Insurance Solutions Working Group.

The goal is to expand the understanding of the role catastrophe bonds can play, as well as the important role insurance and reinsurance risk transfer products play in protecting the fiscal budgets of countries against impactful natural disasters.

Improving the economic resilience of economies in the APEC region is a key goal for the group of countries at this time, not least after some years of significant disaster-related financial shocks, but now under the shadow of the COVID-19 pandemic the urgency to promote resiliency has increased.

The financial burden of natural disasters could significantly weaken government’s economic positions, at a time when they are already dealing with significant additional costs due to the spread of the coronavirus.

As a result, the focus on risk transfer tools, alongside risk mitigation measures and resiliency building, is resurging, making meetings such as this where government representatives can learn about the role of insurance and reinsurance risk transfer instruments, such as the catastrophe bond, so important.

“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,” explained 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,” added 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.

The need for private capital to help governments secure additional sources of disaster-linked financing is clear and proven. But, in a time of COVID-19 when government budgets are already significantly stretched, having disaster risk financing capacity in place is perhaps more important than ever.

“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,” Joanne de Asis, Co-Chair, APEC Business Advisory Council (ABAC) Finance and Economics Working Group and Chairperson for Globe Capital Partners explained.

Jingdong Hua, Vice President and Treasurer, World Bank and Pension Finance Administrator, at the World Bank Group, noted the risk of severe fiscal and monetary shocks, which risk transfer can help to at least soften the blows from.

“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,” Hua explained.

Just in the last three years, the World Bank has helped numerous government and sovereign sponsors of catastrophe bonds to secure insurance or reinsurance capital for risk transfer and financing.

World Bank clients have received $2.8 billion of insurance cover against disasters over that period, with transactions covering a range of risks, including earthquakes, hurricanes, tsunamis, and pandemics.

Details of every World Bank supported and issued catastrophe bond transaction can be found in the Artemis Deal Directory.