Philippines cat bond still planned, will expand new parametric insurance

by Artemis on August 23, 2017

The Philippines government is still planning to sponsor a sovereign catastrophe bond, in order to further enhance its national level disaster risk financing, and the recently announced parametric disaster insurance pilot is expected to be expanded to cover the entire country.

The recently arranged parametric disaster insurance pilot was launched with World Bank support and global reinsurance and ILS market backing covering just 25 of the Philippines 81 provinces.

The parametric insurance pilot is underpinned by reinsurance capital through a catastrophe swap arrangement, which has been backed by some of the world’s largest reinsurers and also the largest catastrophe and weather insurance linked investment manager Nephila Capital.

According to reinsurer Swiss Re, which supported the set up and reinsurance of the parametric disaster insurance scheme, the Philippines will aim to expand this out to cover the entire country, a move which could see the amount of capacity required to back the scheme multiplied by more than three times (based on the $200m+ of risk transferred for 25 provinces today).

Thomas Kessler, Head of Swiss Re’s Global Partnerships team for the South East and East Asia region, explained; “It is the country’s stated ambition to scale up the subnational coverage to all 81 provinces in the coming years, helping Philippines to transition from a highly risk exposed country to one with a comprehensive disaster risk financing strategy that few others can match.”

The Philippines is gradually putting in place a tiered approach to managing, financing and transferring disaster risks, with the goal being to help the national and local government players to better respond to disasters, while helping asset owners to protect themselves and ultimately to cover more lives and livelihoods.

At the national level the Philippines already has its $500 million catastrophe contingent credit line from the World Bank and access to sources of international aid, but the government has been working towards plans to put in place a sovereign catastrophe bond for some years now (we first began writing about its cat bond ambitions back in 2010).

We understand that the work got very close to a catastrophe bond being issued for the Philippines in 2015, but that political changes in the country delayed the process at the time.

It’s encouraging to learn then that the Philippines catastrophe bond remains firmly on the agenda, with a number of market sources suggesting that work is ongoing regarding this and a Philippine government source saying that a late 2017 issuance is possible, although not guaranteed as the country looks to augment its sovereign disaster risk protection using the capital markets.

A diagram published by Swiss Re also confirms that the catastrophe bond remains on the table, as part of the national level disaster risk financing strategy for the Philippines.

The diagram above also shows the long-discussed catastrophe risk pool for households, which would enable individuals and homeowners to acquire coverage for specific perils, such as typhoons and earthquakes. This pool was also expected to have launched some time ago with backing from global reinsurance markets, but has seemingly been delayed as well.

This tiered approach to disaster risk transfer and financing could, in the future, garner significant support from the capital markets and ILS investors.

The ILS market is already participating in the mid-tier subnational parametric insurance facility cat swap, through Nephila’s involvement. As this pilot gets rolled out to all 81 provinces the need for capacity to back the facility will grow dramatically, likely attracting more ILS fund managers to participate in reinsuring it.

The household level catastrophe pool for private assets could also benefit from a cat swap like structure to underpin the policies, which could again be suited to ILS market participation.

Finally, the top-tier national level catastrophe bond, which seems still to be on the cards, would also bring ILS capacity into the Philippines disaster risk financing arrangements.

Being a tiered structure, featuring parametric disaster insurance in the lower two levels (the cat pool and pilot), perhaps as these scale the benefits of additional capital market support may also be required, and a catastrophe bond become preferable to the cat swap arrangement.

If the parametric disaster insurance backing can be structured as a multi-year reinsurance arrangement the benefits of a catastrophe bond may become more apparent, as ILS investors would be more eager to support this. Then the Philippines could benefit from much broader syndication of its disaster risks.

It would also be interesting to see whether the Philippines can leverage the appetite of ILS investors and funds to support its disaster risk financing needs in order to grow the coverage provided by the lower two tiers.

Sovereign catastrophe bonds could be structured using triggers that closely match to the subnational and household level initiatives, meaning that cat bonds could provide the reinsurance required to back these efforts and also be utilised as an efficient source of capacity to help them scale up.

The work of the World Bank and firms such as Swiss Re, GC Securities and the support of ILS market actors such as Nephila Capital, has been instrumental in getting the Philippines disaster risk financing strategy to this stage. It’s not been an easy task over the seven years or more that this work has been ongoing.

But the end-result, of a tiered disaster risk financing strategy that leverages the wealth of reinsurance and ILS capacity to provide responsive disaster risk insurance that protects assets at all levels and benefits the population as well, is worth the significant effort.

WMO opens new Regional Office in Singapore

The World Meteorological Organization (WMO) has opened a new office for the Asia-Pacific region in Singapore to improve coordination on hazards ranging from floods to fires and to strengthen meteorological services for rapidly evolving economic sectors such as air and marine transport. The Regional Office is being hosted by the Meteorological Service Singapore (MSS) and will serve as the nerve centre for WMO’s programmes in the region.

WMO Secretary-General Petteri Taalas and Singapore Minister for the Environment and Water Resources Masagos Zulkifli, officiated the opening ceremony of the new Regional Office for Asia and the South-West Pacific. The ceremony was held at the MSS Centre for Climate Research Singapore (CCRS), where the Office is co-located. This is the first time a WMO Regional Office will be located within Asia and the South-West Pacific and the second Regional Office to relocate from Geneva.

Many countries in the Asia-Pacific region are already feeling the impact of climate change, including more frequent heat-waves, more intense tropical storms, and coastal inundation resulting from sea level rise, threatening food, health and water security. Air pollution and trans-boundary haze, environmental degradation and water stress add to the challenges.

“Weather, climate and water know no national borders. We need regional cooperation to improve resilience and adaptation to climate change from human activities and to prepare for naturally occurring events such as the powerful 2015/2016 El Niño, which caused widespread drought in Asia and the Southwest Pacific,” said Mr Taalas.

“In the last decades, the countries of the Asia-Pacific region have been exposed to rising land and ocean surface temperatures and weather and climate events of increased intensity and frequency,” said Mr Taalas. “The year 2017 is proving to be no exception to that trend.”

Strengthening cooperation in Asia and South-West Pacific

Asia and the South-West Pacific is one of the world’s most dynamic economic regions, especially for information and communications technology, transportation and renewable energy. It is a vast region with a great diversity of geography, climate and ecosystems, but with widening gaps in economies, technologies and capacities.

An important priority for the Regional Office is therefore strengthening regional cooperation and coordination and implementing WMO’s capacity-development initiatives. This will benefit not just WMO Members but also the user sectors and stakeholders that they serve.

A key beneficiary is the aviation sector, one of the most weather-sensitive of all economic sectors. The sector is undergoing a transformation driven by rapid growth. Global air traffic is doubling every 15 years, with the strongest growth centred on the Asia Pacific region. There is an increasing need within the sector for more effective and efficient operations, while ensuring that safety is preserved. This in turn drives demand for cutting-edge aeronautical meteorological services, which need to be seamless and coordinated at the regional level.

Addressing challenges in the Region

Opening of new WMO regional office in SingaporeNatural and environmental hazards are another area of concern. The Regional Office will work with Members to foster greater cooperation in multi-hazard early warning for the region. Such efforts will be complemented by capacity-building programmes. The Regional Office will act as a forum for regional challenges such as trans-boundary haze arising from large-scale land and vegetation fires.

“Climate change, the impending exponential growth in global air traffic demand, and the transformation of global air management systems to be more interoperable and harmonised, will significantly change the operating paradigm for our national meteorological services. Maintaining status quo is no longer an option. Meteorological information must be of higher precision and accuracy to tackle these three new challenges effectively,” said Mr Masagos. “This is why Singapore has been investing heavily in cutting-edge climate research and building up our expertise to improve our understanding of the dynamic tropical weather patterns in our region. This will enhance the precision of our weather predictions.”

“By strengthening our capabilities, we hope to deepen MSS’ contribution and regional role in climate science, aeronautical meteorology, and transboundary hazards. We are excited to have WMO’s physical presence in this part of the world, and look forward to the many exciting opportunities ahead for regional collaboration and capacity-building efforts in the region,” said Mr Masagos.

Connecting WMO Members

Singapore was selected because of its central position relative to WMO Asia and Pacific Member states, flight connectivity, and modern and accessible IT infrastructure. The Regional Office is headed by WMO Asia-Pacific Regional Director Chung Kyu Park, who will relocate from WMO headquarters in Geneva.

“We are honoured and delighted that WMO decided to set up its Regional Office for Asia and the South-West Pacific here in Singapore. As the host, MSS will support and contribute to WMO’s capability-building initiatives for meteorological services in this region,” said Mr Masagos.

Listen to interview with WMO Asia-Pacific Regional Director Chung Kyu Park

Centre for Global Disaster Protection

20 July 2017 – Today, International Development Minister Lord Bates is speaking at a Global Insurance Forum event. He will outline the UK’s partnership with the World Bank and Germany for the Centre for Global Disaster Protection in London that will support the poorest countries to strengthen their disaster planning and get finances in place before disaster strikes so they can better manage the economic impact of emergencies and build their resilience.

The Centre will draw on UK and international expertise to provide neutral advice, innovation and cutting edge science to help build cheaper, faster and reliable finance in emergencies that delivers the most benefit for the poorest people and can halve the cost of disasters.

Hygiene kits and tarpaulins for temporary shelter supplied by UK aid being distributed in Haiti in 2016. Picture: Carey Wagner/CARE
Hygiene kits and tarpaulins for temporary shelter supplied by UK aid being distributed in Haiti in 2016. Picture: Carey Wagner/CARE

Why is this important?

New research shows that disasters like hurricanes and severe droughts cost $30 billion a year across 77 of the poorest countries. While in high-income countries almost half of these costs are covered by insurance, in poorer countries less than 5% are covered and humanitarian appeals remain grossly underfunded. With little financial protection, vulnerable people face devastating hardship – they stop sending their kids to school and in many cases are left with nothing. Every year, natural disasters force 26 million people further into grinding poverty.

Natural disasters are not surprises – more can be done before a disaster strikes to build resilience and reduce the impacts on people. This will not only save lives and reduce poverty, but makes good financial sense. Every £1 spent on working to actually prevent a drought or flood turning into a disaster saves around £3 in humanitarian assistance. The outbreak of Ebola in West Africa would have cost $5 million to contain when it was first detected in Guinea in 2014, but that cost spiraled to $1 billion eight months later.

To end poverty and help countries stand on their own two feet, we must take a new approach.

How will this work in practice?

UK aid is already supporting well over 20 million people to build their resilience to natural disasters and is investing in disaster preparedness and early warning systems across 20 countries. The new Centre will help ensure disaster responses are:

  • faster – time costs lives. If finance is prearranged before a disaster strikes, it can arrive in days whereas a humanitarian appeal can take months to mobilise funds needed.
  • reliable – prearranged finance is more reliable, allowing better planning in advance of a disaster and better preparedness and delivery of support.
  • cheaper – an earlier response can halve the costs of a disaster response and help countries and people recover more quickly.

The Centre will do this by:

  • investing in data, science and research needed to design systems that work for the poorest;
  • providing training and sophisticated risk analyses and financial analytics to help developing countries’ better understand and make informed decisions about how to manage risks; and
  • bringing together experts from finance, science and humanitarian communities to provide neutral advice and design new, innovative financial tools – including insurance – that are right for disaster planning and deliver the most benefit for the poorest when disaster strikes.

We’ve already seen this work in practice. Last year, the Caribbean Catastrophe Risk Insurance Facility paid out to four countries, including Haiti, after Hurricane Matthew. And now we are expanding this to more places in Africa too.

Linking this prearranged finance insurance cover to existing national systems that deliver public services, like health, nutrition, water, education, sanitation and hygiene, means in times of crises, governments are able to provide increased services to help people rebuild their lives and stand on their own two feet.

The Centre will also work to build insurance markets in developing countries through supporting improvements in regulation, data and capacity. These could generate billions of pounds each year in additional national investment to boost economic development, and in turn global prosperity, which is in all our interests.

Insurance Development Forum Applauds UK and Germany Leadership To Address Disaster Coverage Gap

Government Agencies Commit Support to Build Financial Resilience of Poorest and Most Vulnerable Economies

LONDON, July 20, 2017 – The Insurance Development Forum (IDF), a partnership of the World Bank Group, the United Nations Development Programme, and global insurers, applauds announcements by the development ministries of the United Kingdom and Germany to dedicate support to narrow the disaster protection gap for communities in the poorest countries.

Speaking at the IDF Session at the International Insurance Society Global Forum in London, Stephen Catlin, chair of the IDF commented: “This is a big step toward activating our common mission as a critical public-private partnership empowered to take on the enormous problem of under-insurance in at-risk developing economies.” He added that the lack of an insurance safety net in much of the world “is a global problem no one organization, company or individual can solve alone.”

Building on Prime Minister Theresa May’s announcement at the recent G20 summit, Lord Bates, Minister of State at the U.K. Department for International Development, outlined plans for the UK partnership with the World Bank Group and Germany for creating a Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions. The UK and the World Bank Group are setting up a Centre for Global Disaster Protection in London, which will support the poorest countries to strengthen their disaster planning and get finances in place before disaster strikes so they can better manage the economic impact of emergencies and build their resilience.

The UK is providing £30 million for the Centre for Global Disaster Protection, which will draw on UK and international expertise to provide neutral advice, innovation and cutting edge science to help build cheaper, faster and reliable finance in emergencies that delivers the most benefit for the poorest people and ensures losses are not borne by people, business and government, which can slow growth and trap people in grinding poverty.

As part of the Centre for Global Disaster Protection, the World Bank Group will establish staff presence in London to support the Centre and benefit from closer connectivity to insurance and reinsurance market institutions. Germany will contribute €20 million as a first step to a linked World Bank Multi-Donor Trust Fund for country specific technical assistance and smart support with the aim to assist vulnerable countries to tailor disaster risk financing mechanisms.

Joaquim Levy, the World Bank Group’s Managing Director and CFO and Co-Chair of the IDF, who spoke at the meeting, said, “With climate posing an ever-greater risk, we can use insurance and risk financing solutions to strengthen developing countries’ financial resilience to a wide range of threats. By using well-designed financial instruments, we can ease the impact of disasters on the most vulnerable societies, reducing the cost and damage to development progress.”

Dr. Gerd Müller, Federal Minister for Economic Cooperation and Development (BMZ) welcomes the cooperation: “Climate risk insurance helps – in a fast and cost-efficient manner. Together with the United Kingdom, the World Bank Group and other partners, Germany is working on creating the Global Partnership on Climate and Disaster Risk Finance and Insurance Solutions, which the G20 leaders have welcomed at the Hamburg Summit.”

Ms. Ingrid Hoven, Director General for Global issues, sector policies and programmes at BMZ outlined at the International Insurance Society Global Forum in London the design of a €15 million InsuResilience Solutions Fund to support public and private sector collaboration on climate risk insurance programmes in developing countries.

These announcements by DFID and BMZ will contribute to the creation of a Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions. This was welcomed by G20 leaders at the Hamburg Summit this month. The IDF welcomes DFID, BMZ, and the World Bank Group joining forces to contribute first elements to such a Global Partnership and want to engage many more countries and stakeholders.

The Global Partnership builds on the G7 InsuResilience commitment to increase climate risk insurance protection to an additional 400 million people in emerging and developing countries by 2020. The V20, a forum of 48 developing countries vulnerable to climate change, which is supported by UNDP, as well as civil society and the insurance industry have all called for further improving such risk finance and insurance instruments and collaborating towards this goal. The announced developments are fully aligned with the World Bank Group’s mission of eliminating extreme poverty by the year 2030 and building shared prosperity by focusing on the needs of the people in the bottom 40 percent of each country’s income distribution. The impact of natural disasters and climate change are projected to have their most severe impact on the world’s poorest people and most vulnerable countries.

“The creation of the Centre for Global Disaster Protection is a critical step forward in realizing the promise of the IDF,” remarked Jo Scheuer, UNDP’s Director for Climate Change and Disaster Risk Reduction. “Insurance is central in helping countries deliver development and achieving the Sustainable Development Goals. We must build on the momentum created and look to further and deepen partnerships.”

As an early priority of the IDF Working Groups, more than 200 people from industry, NGOs, regulators, academia and international institutions have donated more than 5,000 hours of their input to support the design and development of these critical facilities. The Forum will continue to support their progress. These new facilities will be closely linked to the science and academic communities, to help develop best practices and transparency in the role of financial tools, like insurance, in sustainable development and disaster resilience.

Rowan Douglas, Chair of the Implementation Committee of the IDF said: “The IDF looks forward to working with the newly formed Centre of Global Disaster Protection, and the German efforts by BMZ such as the InsuResilience Solutions Fund, to develop and implement plans to deliver the services necessary to proactively prepare for and insure against disasters – a far more effective approach than rushing aid to the scene after devastation occurs.”

Download the report: Understanding risk to create resilient platforms for sustainable growth and human dignity

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The Insurance Development Forum (IDF) is an unprecedented public-private partnership led by the insurance industry with the United Nations Development Programme and the World Bank Group. Its initial focus is to contribute to closing the protection gap — the gap between insured disaster losses and the actual economic costs of disasters — by optimizing and extending the use of insurance and its related risk management capabilities to build greater resilience for people, communities, businesses and public institutions that are vulnerable to climate change, disasters and related economic shocks.

The IDF is chaired by Stephen Catlin. It is co-chaired by the UN Development Program (UNDP) and Joaquim Levy, the World Bank Group Managing Director and Chief Financial Officer. The Steering Committee includes industry leaders, UN agency leaders, international institutions and others to establish priorities and mobilise resources, and the International Insurance Society (IIS), Geneva Association, International Cooperative and Mutual Insurance Federation (ICMIF) and Association of Bermuda Insurers and Reinsurers (ABIR) are ex-officio members. The Implementation Committee of the IDF is chaired by Rowan Douglas, Willis Towers Watson and co-chaired by UNDP and Samuel Munzele Maimbo, World Bank Group.

Follow the IDF on Twitter at @InsDevForum. For more information contact David.Rylatt@XLCatlin.com or visit www.theidf.org.

Climate Progress Dashboard forecasts global warming of more than 4°C

Climate change will be a defining driver of the global economy, society and financial markets over the coming years, decades and beyond. Schroders has developed a Climate Change Dashboard to measure progress towards a decarbonised world.

Global temperatures are on course to rise by up to 4°C, twice as far as safe levels, according to a Climate Progress Dashboard developed by the Schroders Sustainability team.

The unique dashboard tracks the progress governments and industries are making towards meeting the 2°C temperature rise commitment global leaders made in the Paris Agreement, which came into force in November.

It looks past headline noise and rhetoric to provide an objective gauge of change across the breadth of fields that will matter to addressing the climate challenge.

How the dashboard works

The dashboard measures progress across political, industrial, technology and energy indicators, to create a unique, comprehensive view of change. The 12 individual indicators are shown below; some measure aspiration while others gauge action.

“Political ambition”, for example, captures the pledges governments have made to reduce carbon emissions. The dashboard points to a 2.8°C rise in temperatures based on current ambitions.

The dashboard also captures actual progress – the implementation of policies – under “political action”. Slower action here would lead to a 3.6°C rise in temperatures, underlining differences between headline statements and tangible action.

Least progress has been made on oil and gas production, which points to a rise of over 6°C, implying major changes will be needed to hit long term targets. Use of these fossil fuels will have to fall significantly in future, ultimately to zero.

Production of coal – typically cast as the villain of climate discussions – has already started falling, although not far enough to meet the two-degree target.

The full dashboard, designed for use by professional investors, also opens up to chart recent progress and scenarios of what it means for future trajectories of global warming.

The basic dashboard will be published quarterly at www.schroders.com/sustainability

Climate change dashboard

Why climate change should matter to investors

Andy Howard, Head of Sustainable Research, led the work on the dashboard. Here, he explains why it was developed:

“Climate change will be a defining driver of the global economy, society and financial markets over coming years, decades and beyond. While the issue has moved up investment agendas, the change in strategies has not kept pace.

“The danger is that investors think the problem is being tackled, and that their exposure to climate change risks is reduced, when this is not necessarily the case.

“We developed the Climate Progress Dashboard as part of our efforts to manage the risks and identify the opportunities climate change presents. It provides an objective and transparent view of change to help investors base decisions on the outcomes that are likely, rather than those they would like to see.

“It’s worth noting the dashboard is a snapshot of where we stand, not a forecast of where we will end. We are in the early stages of changes that will play out over several decades. Estimates could change quickly with small changes in direction over coming years.

“As a result, the dashboard conclusions must be seen as measures of the paths we are currently on, rather than conclusions on where we will end up.”

Andy Howard explains the dashboard in more detail in the video above.

The climate change challenge: a 30-second guide

Greenhouse gases (GHG), such as carbon dioxide, methane and nitrous oxide trap heat in the Earth’s atmosphere.

Emissions of these GHGs have grown in tandem with the world’s economic expansion, prompting a rise in temperatures. The late 1800s is usually taken as the pre-industrial baseline. Since then, atmospheric concentrations of GHGs have risen 50% from 270ppm to more than 400ppm. Average temperatures are up almost 1°C.

Scientific and political consensus has settled on 2°C as the acceptable limit for temperature rises, requiring concentrations to stay below 450ppm. On current trends, that limit will be breached within two decades.

Andy Howard said: “In short, there is no single silver bullet. Meeting global leaders’ commitment to limit temperature rises to two degrees over pre-industrial levels means cutting greenhouse gas emissions per person by 80% by 2050, a period in which global incomes are set to triple.

“This is not going to be easy. Every part of the global economy, every industry and every company will be affected to some extent. We need new ideas to make sure investors are prepared for those changes.”

Source: Schroders Sustainable Investment Team

Banks worth $7 trillion pledge to calculate costs of climate risks

TORONTO, July 11 (Thomson Reuters Foundation) – Eleven of the world’s biggest banks pledged on Tuesday to find out how much exposure they have to risks related to climate-change, a move backed by environmentalists who say better information on the costs of global warming will push lenders to transition towards green investments.

With more than $7 trillion under management, some of the biggest names in global finance have signed onto the United Nations-backed disclosure effort for information on new risks presented by climate change.

Information on banks’ climate risks could eventually be reviewed by regulators as part of their financial disclosures, said Simone Dettling, a researcher with the U.N. Environment Programme working on the transparency plan.

“The goal is to shift lending away from carbon intensive sectors that are becoming risky towards green technologies that are becoming more attractive,” Dettling told the Thomson Reuters Foundation in a phone interview.

Before banks can change their lending patterns they need to understand how their portfolios will be impacted by climate change. Most currently do not have this information, Dettling said.

“They have committed to finding these numbers,” she said of the voluntary scheme.

Once banks have information on their exposure to climate risks they can begin disclosing how these risks will impact investors while looking for new sustainable alternatives, she said.

That disclosure could happen within the next year, she said, although banks and U.N. officials are still hammering out the details.

Information on investments in fossil fuel firms, renewable energy businesses and transportation companies is likely to be among the data disclosed as part of banks’ climate-risk assessments, Dettling said.

Banks backing the plan for new research into climate risks include ANZ, Barclays, Bradesco, Citi, Itaú, National Australia Bank, Royal Bank of Canada, Santander, Standard Chartered, TD Bank Group and UBS, said the U.N. Environment Programme.

“The scale and sophistication of climate risk and opportunity continue to grow,” Citi Bank spokesman Ed Skyler said in a statement on Tuesday.

“Working together to refine our approaches to enhanced disclosure will help accelerate the transition to a low-carbon economy.”

Reporting by Chris Arsenault @chrisarsenaul, Editing by Ros Russell.; Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, women’s rights, trafficking, property rights, climate change and resilience. Visit http://news.trust.org)