CASE STUDY Insuring the Philippines against Natural Disasters OVERVIEW The Philippines, as one of the most disaster- prone countries in the world, requires considerable fiscal resources to support rapid response and recovery after severe typhoon and earthquake events. To alleviate fiscal pressures and meet these needs, the World Bank partnered with the Philippines to design and implement a parametric catastrophe risk insurance product that provides immediate financial liquidity required by the national government agencies and 25 individual Residents affected by typhoon Haiyan (Yolanda) carry on with their daily activities provinces after a disaster. Photo: Dominic Chavez/World Bank accessing such insurance and decided to partner Background with the World Bank to design a customized The Philippines is among the world’s most disaster- approach. prone countries, with high exposure to tropical cyclones, earthquakes, and other natural hazards. 1 Financing Objectives In recent years, the government of the Philippines The Philippines government worked with the World has improved its capacity to finance disaster Bank to meet several aims: response by establishing national and local level • Gain access to international reinsurance markets funds as well as contingent credit lines. However, the • Create a mechanism allowing national financing needs of severe disasters continued to government agencies and local government exceed these resources and left the country units to obtain more cost-effective insurance vulnerable during the critical emergency response coverage phase. • Design a customized policy for quick Catastrophe risk insurance can be used to provide disbursement of post-disaster payouts financial protection against natural disasters. As an • Combine currency hedging with insurance to emerging economy, the Philippines faced challenges provide payouts in Philippine pesos 1The UN Office for Disaster Risk Reduction reports that between 1995 and 2015, the Philippines endured a total of 274 natural disasters, including earthquakes, volcanic eruptions, tropical cyclones, and floods, making it the fourth most disaster-prone country in the world. The events affected a total of 130 million people. Financial Solution The Philippines obtained a parametric catastrophe risk insurance policy 2 offering earthquake and typhoon coverage to national government agencies and typhoon coverage to 25 individual provinces. Total annual coverage in the first year of the program (2017/2018) was US$206 million; coverage nearly doubled to $389 million in the program’s second year (2018/2019). The World Bank acted as an intermediary to transfer the risk out of the country by reinsuring the risk and simultaneously executing catastrophe swap transactions with the international market. Structure of the Transaction Outcome This transaction was the first of its kind in the Philippines and also marks the first time that the World Bank entered into a reinsurance agreement with government agencies. In addition, it was the first time a catastrophe risk transaction was executed in local currency. The transaction was designed to provide the government with rapid post-disaster liquidity—to support emergency response and maintain essential services until additional resources become available—from a AAA-rated counterparty. In the first year of the program, the policy paid out approximately US$1.6 million following Typhoon Vinta in December 2017. Several conditions made the transaction possible: • Existence of catastrophe risk models at the national and subnational levels that met international market standards 2 Parametric insurance is a type of insurance that makes a specified payment upon the occurrence of a triggering event that meets pre- agreed criteria, such as a specific earthquake magnitude or typhoon intensity. Since the payment of claims depends on parametric triggers, and not on actual losses that would take time to assess in the field, claims can be paid quickly—usually within weeks, compared to several months for traditional insurance. The Philippines’ policy pays outs to the government within 24 days after notification of a covered event. For information: Miguel Navarro-Martin, Manager Banking Products mnavarromartin@worldbank.org, +1 (202) 458 4722 • Strong appetite for emerging market risk in the international markets • Strong relationship between the World Bank and international insurance and reinsurance companies • Strong political leadership and long-term policy dialogue on disaster risk finance and disaster risk management in the Philippines • Close internal and external collaboration among various stakeholders in the transaction • Leveraging of donor funds to support program preparation and development World Bank’s Role using the World Bank’s MultiCat Program, which helps The World Bank offers client countries sovereign and subsovereign entities pool multiple perils comprehensive insurance and other financing in multiple regions and reduce insurance costs. In 2015, solutions to address the potentially high cost of when Mexico was hit by Hurricane Patricia, the second- disasters and climate shocks. In the Philippines, the most intense tropical cyclone on record worldwide, it World Bank focused on knowledge transfer and received a US$50 million payout. Mexico has additional technical capacity building while working in close protection against earthquakes and named storms in partnership with the government to develop, design, the form of a World Bank–issued $360 million and execute this catastrophe risk insurance catastrophe bond; following an 8.2 magnitude transaction. The country achieved the favorable earthquake in southern Mexico in September 2017, the terms and conditions for the transaction by country received a US$150 million payout. leveraging the World Bank’s position in the In Uruguay, the World Bank executed a US$450 million international markets and its placement capacity. weather and oil price insurance transaction for The World Bank’s multilateral legal status allows it to Uruguay’s state-owned electricity company UTE. The act as an intermediary to simplify catastrophe risk transaction insured the energy company for 18 months transactions. In addition, the World Bank can perform against drought and high oil prices. the following roles: • Accommodate different legal and regulatory The World Bank helped Pacific Island countries develop environments their disaster risk insurance policies, not only providing • Standardize documentation to reduce technical assistance but also acting as an intermediary intermediation, legal, and modeling costs as to place the country-specific catastrophe risk policies on well as placement fees the international reinsurance market as a single, well- • Guide the outreach and investor discussions diversified portfolio. Cyclone Ian (2014) in Tonga to promote more competitive pricing resulted in a payout of US$1.27 million, and Cyclone • Build the capacity of clients to undertake Pam (2015) in Vanuatu led to a payout of US$1.9 future transactions on their own million. Expanding access to parametric catastrophe risk In the Caribbean, the World Bank provided cat swap insurance is one of the many ways the World Bank coverage from 2007 to 2014; in 2014, it issued a three- Group helps member countries build resilience year catastrophe bond linked to hurricane and against economic and natural disaster risks. IBRD’s earthquake risk in the Caribbean Catastrophe Risk AAA credit rating, market presence, and convening Insurance Facility (CCRIF) member countries. power allow the World Bank Treasury Banking Throughout the life of the coverage, 10 member Products team to develop innovative products that governments received 21 payouts totaling help clients maximize financing and mitigate risk. approximately US$68 million. Examples of Catastrophe Risk The World Bank issued a US$1.4 billion catastrophe Coverage around the World bond to provide earthquake cover to Chile, Colombia, Mexico, and Peru on February 7, 2018. Mexico issued a multi-peril catastrophe bond For information: Miguel Navarro-Martin, Manager Banking Products mnavarromartin@worldbank.org, +1 (202) 458 4722