World Bank sets up catastrophe bond scheme for natural calamities

MANILA, Philippines - The World Bank has put up a catastrophe bond which developing countries can tap as insurance and developed countries can invest in.

Through its subsidiary – the International Bank for Reconstruction and Development – the World Bank launched the MultiCat program, a catastrophe bond platform that gives governments and other public entities access to international capital markets to insure themselves against the risk of natural disasters.

This is the first time a platform has been designed specifically to help governments in developing countries access affordable insurance coverage through the capital markets.

The MultiCat Program allows participants to buy insurance coverage for multiple perils, countries and regions. The types of events that may be insured are earthquakes, floods, hurricanes and other windstorms.

The program establishes a common documentation, legal and operational framework for future catastrophe bond issuances.

One of the benefits of the platform is to achieve cost efficiency for its clients by offering investors the opportunity to diversify their portfolios with assets that are uncorrelated with other assets, and by enlarging the traditional investor base for catastrophe bonds.

In developing MultiCat, the World Bank tapped the expertise of the Mexican government, one of the most experienced sovereign issuers in the catastrophe bond market. Mexico’s successful use of the MultiCat platform to issue a $290 million series of notes is the first offering using the new World Bank platform.

“The partnership between Mexico and the World Bank, under its MultiCat Program, has allowed us to efficiently transfer a pool of catastrophic risk — earthquake and hurricane — to the market for the first time, and we are very satisfied with the results achieved,” said Alejandro Werner, Mexican Vice Minister of Financ. “We are also very proud to have contributed to the creation of this platform that also makes a new set of catastrophe risk management instruments available to other members of the World Bank.”

The World Bank Treasury acted as arranger for the transaction, and appointed Swiss Re Capital Markets Corp. and Goldman Sachs as co-lead managers and joint bookrunners, and Munich Re as advisor in the transaction.

The program expands the World Bank’s catastrophe risk financing menu, which also includes the Catastrophe Deferred Drawdown Option (CAT DDO), a line of credit that provides immediate access to financing following a natural disaster, and intermediation services for weather hedges and the Caribbean Catastrophe Risk Insurance Facility.

The World Bank Treasury carries out financings and manages portfolio investments for the World Bank. It also provides banking, capital markets and asset management services to World Bank members and other public sector bodies.