Disaster bonds, disaster risk insurance facilities and natural disaster funds: protecting our planet and public money

Gay Carpenter’s recently released report on public sector response to climate change, protecting our planet and public money, looks beyond the United States’ approach to mitigating the risks of natural disasters and examines measures taken by countries in Latin America and Asia.

Natural Disaster Fund (FONDEN) in Mexico

Mexico has been a leader in exploring innovative ways to transfer part of the risk of natural disasters to private investors. More than 20 years ago, the Mexican government created the Natural Disaster Fund, called FONDEN, which was designed to take a proactive approach to support disaster relief, and most importantly, reconstruction and act as a buffer to prevent the multiple losses that occurred in the 1990s.

In 2006, Mexico established its first disastrous association by a sovereign government. In 2009, Mexico again crossed the boundaries by becoming the first country to issue multi-hazard catastrophe bonds, covering earthquake and hurricane risks, through the World Bank’s MultiCat program. Recently, Fonden placed its fourth catastrophic bond in 2017 by facilitating the global debt issuance of the World Bank Group for Reconstruction and Development.

The FONDEN Reconstruction Program has benefited from traditional reinsurance to provide coverage of US $ 250 million for public assets and eligible low-income housing after disasters. Renewed on an annual basis, the program provides additional funding for reconstruction when local or recipient resources are exhausted after a declared disaster. It is worth noting that the program has a detailed structure for establishing cost sharing with local areas or beneficiaries, encouraging the introduction of insurance protection for publicly owned assets and enforcing higher standards for post-disaster reconstruction.

Over the course of the FONDEN program, the government of Mexico has received approximately $ 280 million of its traditional reinsurance program and an additional $ 200 million in catastrophic bonds, to recover a total of nearly half a billion dollars.

Southeast Asia Disaster Risk Facility (SEADRIF)

SEADRIF is the first regional facility in the Association of Southeast Asian Nations (ASEAN) to address disaster risk financing in a comprehensive way from risk identification, mitigation, and preparedness to insurance and flexible recovery.

ASEAN countries are highly exposed to a variety of natural disaster risks, while regional disaster risk insurance markets are lagging behind in terms of penetration of disaster insurance.

Natural disasters lead to different financing needs. For example, while more than 50 percent of the losses from the Thai floods in 2011 emanated from the manufacturing sector, the Myanmar floods in 2015 mostly caused infrastructure losses. SEADRIF is a major initiative that promotes regional financial resilience and is designed to be a platform for providing climate and disaster risk financing solutions, and responding to the different needs of ASEAN countries.

SEADRIF was developed as an initiative by finance ministers and central bankers from ASEAN + 3 countries, and SEADRIF was established in July 2019 as a multi-functional regional platform for ASEAN countries to access financial, analytical, advisory and knowledge products and services to enhance financial products resilience to climate disasters and shocks. SEADRIF’s work is funded jointly by different governments. Its founding members are Cambodia, Indonesia, Lao PDR, Myanmar, Singapore, the Philippines, and Japan. The World Bank acts as the lead technical partner for SEADRIF, and the ASEAN Secretariat acts as the SEADRIF Secretariat.

The first financial product offered by SEADRIF Insurance, a licensed public insurance company licensed in Singapore, is a catastrophic risk pool for Lao PDR and Myanmar. The complex takes advantage of shared reserves and provides limited and limited market-based disaster risk insurance solutions to provide liquidity in the aftermath of disasters such as severe floods.

At the request of member states, SEADRIF is also looking to develop other disaster risk financing solutions such as the Common Risk Group for Public Assets and Infrastructure in ASEAN countries. SEADRIF provides a formal, long-term and disciplined approach through a licensed and regulated insurance company with the ability to expand its geographical reach and products in partnership with the reinsurance industry.

Catastrophic Bonds in the Philippines for Earthquakes and Hurricanes

Issued by the World Bank, the first ever sovereign catastrophic bond in Southeast Asia that provides the Philippine government protection from earthquake and typhoons risks.

The Philippines is often affected by typhoons and tropical earthquakes, which are expected to suffer losses of more than US $ 3 billion a year for public and private assets. In order to maintain financial health and reduce the impact of natural disaster shocks on the most vulnerable, the Philippine government has developed a comprehensive disaster risk and insurance financing strategy.

Based on an analytical assessment of disaster risk, DRFI adopts a multi-layered, multi-layered approach by addressing disaster risk financing needs at the national, local and individual levels and combining different financial instruments including earmarked fund disasters and emergency credit lines and risk transfer To the international reinsurance and capital markets.

The Philippine Philippine Bond, which was listed on the Singapore Stock Exchange in November 2019, was another milestone for the Philippine government in its implementation of disaster risk financing and its insurance strategy. In addition, it constitutes a historic deal that points to a number of early adopters such as being the first disaster bonds directly sponsored by an Asian country, the first disaster bonds listed on the Asian Stock Exchange and the first World Bank bonds listed in Singapore.

The disaster bonds provide the Philippine government with protection of US $ 225 million from earthquake and typhoons over three years. Designed to provide flexible financial resources right after a disaster strikes, it will pay on a typical loss basis with various interim catalysts based on the intensity of an earthquake or tropical cyclone.

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