97449 MultiCat Program The MultiCat Program is a catastrophe bond issuance Highlights platform that allows governments to use a standard framework to buy catastrophe coverage on affordable  The MultiCat Program helps member countries terms through the capital markets. It is part of a broad issue catastrophe bonds to insure themselves spectrum of disaster risk financing instruments offered against the risk of natural disasters. by the World Bank to assist member countries in planning efficient responses to catastrophic events.  Supports wide variety of structures, including the pooling of multiple risks in multiple regions. Definition of Cat Bond The catastrophe bond, or cat bond, is a fixed income  World Bank acts as arranger: Assists in security that pays periodic coupons to the investor formulating disaster risk management policy; during the life of the bond and insures the sponsor of offers shelf documentation; supports preparation the bond against a predefined set of natural disasters of legal and operational framework; selects such as earthquakes or hurricanes. If a covered event service providers. occurs during the bond’s life, the sponsoring country retains the bond principal to fund emergency relief The World Bank helps customize the bond transaction and reconstruction work. These bonds pay investors and acts as arranger, which significantly increases higher interest rates/coupons than basic bonds to investor comfort. As arranger, it assists the country on compensate for the risk of the issuer not having to its overall natural disaster risk management policy and repay the principal in the event of a major any technical aspects related specifically to the catastrophe. Thus, cat bonds are an efficient tool for transaction and works together with other parties countries to transfer some of their natural disaster risk involved in the deal (underwriters, legal counsel, to the capital markets at attractive prices and are a modeling agencies, and other service providers) to viable alternative to standard insurance coverage for ensure a smooth and efficient execution process. less frequent but more catastrophic disasters. Cat bonds provide countries with multi-year coverage and Application Process replace the year-to-year volatility of annual insurance There is no formal application process. The country premiums with a fixed cost over the life of the bond. signs a service agreement with the World Bank, which As an asset class, cat bonds are attractive to investors details the characteristics of the proposed transaction because their yields are uncorrelated with financial and the steps to be followed in order to comply with markets. While this portends well for the development the country’s internal regulations. The work to prepare of the global cat bond market, many disaster prone and execute the transaction begins immediately after. developing countries are unable to access them due to Structure the instrument’s technical complexity and the expenses involved. A special purpose vehicle (SPV) sponsored by the government or government-owned entity issues the The MultiCat Program gives these governments access cat bond. The bond is placed with institutional to international capital markets to insure themselves investors through investment banks. The SPV invests against the risk of natural disasters. the proceeds in AAA-rated assets, and pays coupons to the investors from the returns on the investment and Key Features the premium paid by the country. If no event occurs The program supports a wide variety of structures, during the life of the bond, the SPV returns the entire including the pooling of multiple risks (earthquakes, principal to the investor at maturity. If the trigger floods, hurricanes and other wind storms) in multiple condition is met, i.e., a covered event occurs, the SPV regions. Each bond issued under the platform carries liquidates the assets it holds and pays the sponsor all the MultiCat brand name and uses a common or part of the proceeds, in accordance with the terms documentation and legal and operational framework. of the bond. Catastrophe Bond under MultiCat Program: Standard Structure Figure 1 The SPV receives bond principal from investors and invests the proceeds in AAA-rated assets. If no event occurs, investors receive return on AAA-rated assets plus the premium. At maturity, the SPV returns the entire principal to the investor. Principal Premium Capital Country X SPV (Issuer) Market Principal Investors Return Principal Coupons (Equal to Return on AAA Collateral Account Assets + Premium AAA Investments Paid by Country x) Issue date Future flows Figure 2 The SPV receives bond principal from investors and invests the proceeds in AAA-rated assets. If covered event occurs, then the SPV liquidates the assets of the collateral account and gives all or part of the principal to the country (based on the terms of the bond). Principal Principal Capital Country X SPV (Issuer) Market Investors Principal Principal Collateral Account AAA Investments Issue date Future flows Summary Term Sheet of Cat Bond under MultiCat platform Insured entity Government or government-owned entity Covered perils Any peril that can be modeled Trigger Parametric, indemnity, modeled loss Covered amount Depending on market appetite Term Normally 3-5 years, but can be up to 10 years Contacts Ivan Zelenko, Head of Structured Products and Derivatives, The World Bank, izelenko@worldbank.org, +1(202) 473-5445 Issam Abousleiman, Head of Banking Products, The World Bank, iabousleiman@worldbank.org, +1(202) 458-8955 Olivier Mahul, Disaster Risk Financing and Insurance Program Coordinator, GFDRR, The World Bank, omahul@worldbank.org, +1(202) 458-8955 www.gfdrr.org/drfi Updated January 2011 GFDRR is able to help developing countries reduce their vulnerability to natural disasters and adapt to climate change, thanks to the continued support of its partners: ACP Secretariat, Australia, Bangladesh, Belgium, Brazil, Canada, Colombia, China, Denmark, Egypt, European Union, Finland, France, Germany, Haiti, India, Ireland, Italy, Japan, Luxembourg, Malawi, Mexico, The Netherlands, New Zealand, Norway, Portugal, Saudi Arabia, Senegal, Spain, South Africa, South Korea, Sweden, Switzerland, Turkey, United Kingdom, United States, Vietnam, Yemen, IFRC, UNDP, UN/International Strategy for Disaster Reduction, and The World Bank.