Guy Carpenter’s recently released report on the public sector response to climate change, Protecting our Planet and the Public Purse, looks beyond the United States’ approach to natural catastrophe risk mitigation and investigates the measures taken by countries in Latin America and Asia.
The Fund for Natural Disasters (FONDEN) in Mexico
Mexico has been a pioneer in exploring innovative ways to transfer a portion of its natural catastrophe risk to private investors. More than 20 years ago, the Mexican government created The Fund for Natural Disasters, called FONDEN, which was designed to take a proactive approach to support disaster relief and, importantly, reconstruction and to act as a buffer against multiple losses that occurred in the 1990s.
In 2006, Mexico placed the first catastrophe bond by a sovereign government. In 2009, Mexico once again broke boundaries by becoming the first country to issue a multi-peril catastrophe bond, covering earthquake and hurricane risk, through the World Bank’s MultiCat program. More recently, FONDEN placed its fourth catastrophe bond in 2017 via the Global Debt Issuance Facility of the World Bank Group’s International Bank for Reconstruction and Development.
FONDEN’s reconstruction program has leveraged traditional reinsurance to provide up to USD 250 million of coverage for public assets and eligible low income housing after disasters. Renewed on an annual basis, the program provides additional funding for rebuilding when local or recipient resources are exhausted after a declared disaster. Notably, the program has a detailed structure to create cost sharing with localities or recipients, encourage take-up of insurance protection for publicly owned assets and enforce higher standards for reconstruction following disasters.
Over the life of the FONDEN program, Mexico’s government has received roughly USD 280 million from its traditional reinsurance program and an additional USD 200 million from its catastrophe bonds, for a total recovery of almost half a billion dollars.
Southeast Asia Disaster Risk Insurance Facility (SEADRIF)
SEADRIF is the first regional facility in the Association of Southeast Asian Nations (ASEAN) to address disaster risk financing in a comprehensive manner from risk identification, reduction and preparedness to insurance and resilient recovery.
ASEAN countries are heavily exposed to a variety of natural catastrophe risks while regional catastrophe risk insurance markets are still underdeveloped in terms of nonlife catastrophe insurance penetration.
Natural disasters result in different financing needs. For instance, while over 50 percent of losses from the Thai floods in 2011 emanated from the manufacturing sector, the 2015 Myanmar floods predominantly caused losses related to infrastructure. SEADRIF is a key initiative that strengthens regional financial resilience and is designed to be a platform to offer climate and disaster risk financing solutions, responding to the different needs of ASEAN countries.
Developed as an initiative by the ministers of finance and central bank governors from ASEAN+3 countries, SEADRIF was established in July 2019 as a multi-functional regional platform for ASEAN countries to access financial, analytical and advisory and knowledge services and products to strengthen financial resilience against disasters and climate shocks. SEADRIF’s work is co-financed by various governments. Its founding members are Cambodia, Indonesia, Lao PDR, Myanmar, Singapore, the Philippines and Japan. The World Bank acts as SEADRIF’s lead technical partner, and the ASEAN Secretariat serves as the SEADRIF Secretariat.
The first financial product to be offered by SEADRIF Insurance Company, a licensed direct general insurer in Singapore, is a catastrophe risk pool for Lao PDR and Myanmar. The pool leverages joint reserves and offers market-based finite and parametric catastrophe risk insurance solutions to provide liquidity in the aftermath of disasters such as severe floods.
At the request of the member countries, SEADRIF is also exploring the development of other disaster risk financing solutions such as a joint risk pool for public assets and infrastructure of ASEAN countries. SEADRIF provides a formal, long-term, disciplined approach via a regulated, licensed insurance company with the ability to expand its geographic and product scope in partnership with the reinsurance industry.
The Philippines Catastrophe Bond for Earthquake and Typhoon
Issued by the World Bank, the first ever sovereign catastrophe bond in Southeast Asia provides the government of the Philippines with protection against earthquake and tropical cyclone risk.
The Philippines is frequently impacted by tropical cyclones and earthquakes, which are expected to incur losses of more than USD 3 billion per year to public and private assets. In order to maintain fiscal health and to reduce the impact of natural disaster shocks on the most vulnerable, the Philippine government has developed a comprehensive disaster risk financing and insurance strategy.
Based on an analytical catastrophe risk assessment, the Philippine’s Disaster Risk Financing and Insurance (DRFI) strategy follows a multi-tiered and multi-layered approach by addressing disaster risk financing needs on national, local and individual levels and combining different financial instruments including dedicated disaster funds, contingent credit lines and risk-transfer to the international reinsurance and capital markets.
The Philippines’ catastrophe bond, which was listed at the Singapore Exchange in November 2019, has been another milestone for the Philippine government in executing on its disaster risk financing and insurance strategy. In addition, it constitutes a landmark transaction marking a number of firsts such as being the first catastrophe bond ever directly sponsored by an Asian sovereign, the first catastrophe bond listed on an Asian exchange and the first World Bank bond ever listed in Singapore.
The catastrophe bond provides the Philippine government with USD 225 million in protection against earthquake and tropical cyclone risk over three years. It was designed to provide flexible financial resources immediately after a catastrophe event and will pay out on a modeled loss basis with different staged triggers based on the severity of an earthquake or tropical cyclone.