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World Bank facilitates Philippines’ groundbreaking parametric insurance scheme

18th August 2017 - Author: Staff Writer

The World Bank and the U.K. Department for International Development supported the Philippines in setting up the country’s first ever national parametric catastrophe risk insurance scheme to transfer the risk of typhoons and earthquakes to the global reinsurance market.

Philippines flag mapThe scheme makes U.S. $206 million in cover available to local government units (LGUs) from 25 participating provinces, paying out when predefined parametric triggers from earthquake and major typhoons are met.

Joaquim Levy, Managing Director and Chief Financial Officer of the World Bank Group, said; “Financial shocks caused by natural disasters undermine economic growth and poverty reduction.

“This new insurance program illustrates how the World Bank Group can leverage capital from the market to help governments receive fast cash injections for emergency response and to sustain essential services in times of crisis, empowering local governments to more effectively assist their citizens.”

The Philippines is among the world’s most vulnerable countries to natural disasters. The country is expected to incur, on average, US$3.5 billion in asset losses each year due to typhoons and earthquakes, according to the World Bank.

RMS

The Government Service Insurance System (GSIS), a government-owned insurance agency, acts as a representative policy holder for the government’s 25 participating provinces – making GSIS the first government agency to ever enter into a reinsurance agreement with a governmental agency.

The innovative scheme also sets a record as the first time the World Bank has executed a catastrophe risk transaction in the local currency.

The International Bank for Reconstruction and Development (IBRD) is the intermediary chosen to transfer GSIS’s risk to the selected panel of reinsurers; Nephila, Swiss Re, Munich Re via the subsidiary NewRe, Axa, and Hannover Re.

Air Worldwide has provided the transactions’ underlying risk modelling.

The programme has been finalised after six years of intensive work and coordination efforts by the World Bank and the Philippines’ Department of Finance, which adopted and implemented a Disaster Risk Finance Strategy.

“This initiative is a major advancement in the Philippines’ efforts to bolster its resilience,” said Mara Warwick, World Bank Country Director for the Philippines, “It demonstrates the global leadership of the country in developing innovative financial solutions to mitigate the financial impacts of extreme climate and weather related events, as well as major earthquakes.”

This parametric disaster insurance facility will provide rapid payouts when disaster strikes – complementing other funding sources such as the national and local disaster risk reduction management funds and contingent credit that protect against less severe natural disasters.

Over the last 8 years, the World Bank has issued, hedged, or facilitated over U.S. $2.5 billion transfers for earthquake, wind, drought-related and pandemic risks from its borrowing member countries to the capital markets.

If successful, the Philippines’ groundbreaking scheme could be the first of many transactions facilitated between government agencies and the capital markets, bringing coverage down the to local level with the help of effective safeguards and intermediaries that ensure the smooth functioning of insurance payouts.

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