Can insurance-linked securities mobilize investment in climate adaptation?

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The cost of adapting to climate change increases every year. Between now and 2030, adaptation in developing countries is projected to cost US$180 billion annually and skyrockets to US$280-500 billion as we get closer to 2050. The past five years are among the warmest ever recorded and the economic impacts from tropical storms, droughts and wildfires are reaching record levels around the world. Despite the need to improve our resilience, investments in early warning systems, climate resilient infrastructure, improved agriculture, natural capital such as mangroves and coral reefs, and water resource management, have remained stagnant. Adaptation finance still represents a fraction of overall climate finance and less than 20 percent of what is needed, even if absolute numbers are slowly rising US$22 to US$35 billion from 2016 to 2018).

But closing the gap between current adaptation financing levels and the need is a challenge. Public sector budgets are maxed out and attracting desperately needed private investment remains notoriously elusive. The challenge to mobilizing private investment into adaptation and resilience projects has always been–how do we get our money back? While we’ve been debating adaptation’s return on investment, the damages from intensifying hurricanes, wildfires, and droughts as a result of the climate crisis have cost hundreds of billions of dollars and displaced millions of people.

How to close Asia’s insurance protection gap

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Asia will drive the growth of the global insurance market in the years to come. Technological innovation along with solid financing and the right policies will be needed to make sure as many people as possible in the region get the insurance protection they need.

The demand for insurance in Asia in the coming decade will be shaped by rising household income levels of a rapidly expanding middle-class, policy measures to accelerate financial inclusion, and strengthening social protection and government insurance programs.

Governments are also increasingly making businesses, households, and individuals responsible for managing the adverse financial consequences of risks to assets, lives, incomes, and livelihoods.  One can, therefore, expect increased spending on buying protection and an expanding role for the insurance and capital markets to manage contingent liabilities better. The same holds for access to medical care, which will be spurring demand for health insurance.

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China’s Belt and Road Initiative could kick-start ILS in Asia

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The countries of China’s Belt and Road Initiative (BRI) are largely unsupported by insurance and would benefit from the introduction of insurance-linked securities (ILS) into the region, according to Kirill Savrassov, chief executive of Phoenix CRetro.

Speaking in an Intelligent Insurer Re/insurance Lounge webinar titled “New domiciles, new risks, new structures: another evolution for ILS”, which took place ahead of SIRC 2020 Re-Mind, Savrassov highlighted how a cat event in one of those countries could cause wider repercussions for the delivery of the BRI.

“Those countries are receiving billions and billions of investment into their transport and critical infrastructure but remain uninsured and uncovered for large natural disasters,” he said.

Governments and institutions bet big on CAT bonds

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There is something magical about the word bonds as it is closely linked with all facets of our life. But in the world of business, bonds are financial instruments that are used by governments and institutions to tide over funding difficulties in times of stress. And at no other time has it been more pronounced than at this juncture when businesses all over the world are reeling from the impact of the COVID-19 pandemic.

My interest in the topic was aroused when my old friend T.B.Nair, an independent analyst in the southern Indian city of Bengaluru, told me about how catastrophe bonds are gaining ground in the global marketplace. Nair told me that catastrophe bonds or CAT bonds are now becoming the instrument of choice for several countries to insure big transnational infrastructure projects from natural disasters. He even went on to suggest that CAT bonds would have been of great help for India to overcome the economic hardships arising from cyclones, floods etc.

Jamaica still aims for catastrophe bond with World Bank support

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The Government of Jamaica will continue to work alongside the World Bank and other multi-lateral groups to increase its disaster insurance protection this year, even though its priority is a swift economic recovery after the Covid-19 pandemic.

Jamaica had been planning a catastrophe bond issuance for this year, to enhance its disaster insurance arrangements.

The cat bond deal, which has been a work-in-progress for some years now, as we’ve documented regularly, was forcibly delayed by the Covid-19 pandemic, as financial market volatility due to the coronavirus outbreak put the Caribbean island nations’ first cat bond issuance on-hold, the country’s finance minister previously said.

Catastrophe bonds a win-win for governments & investors, says APEC

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The Asia-Pacific Economic Cooperation (APEC) continues to see the development of a regional catastrophe bond market as positive, highlighting at a recent workshop that cat bonds are a win-win relationship for governments and investors.

The workshop last week was convened by The World Bank Treasury alongside the APEC Business Advisory Council (ABAC) and Asia-Pacific Financial Forum, to educate on the use of catastrophe bonds as disaster risk transfer instruments for the APEC Regional Disaster Risk Financing and Insurance Solutions Working Group.

The goal is to expand the understanding of the role catastrophe bonds can play, as well as the important role insurance and reinsurance risk transfer products play in protecting the fiscal budgets of countries against impactful natural disasters.

Asian ILS market to benefit regional re/insurers: Fitch

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The development and growth of an insurance-linked securities (ILS) market in Asia can only be a benefit to local insurance and reinsurance carriers, as well as those operating regionally, as the capital markets capacity can help them expand their ability to underwrite and diversify capacity sources, rating agency Fitch explained recently.

Fitch noted in a recent report that Asian insurers and reinsurers are taking up catastrophe reinsurance and retrocession cover in excess of the minimum regulatory requirements to improve their risk mitigation capabilities.

In the future insurance-linked securities (ILS), such as catastrophe bonds and other securitised reinsurance or retro arrangements backed by capital market investors, are likely to assist in this regard.

More than $1 billion pledged for post-earthquake recovery in Albania

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The international community has pledged $1.25 billion to help Albania recover from a devastating earthquake during a European Union-led donors’ conference in Brussels. 

“UN agencies have joined forces in developing and implementing the recovery measures based on the sectoral needs as identified by the Government,” said Mirjana Spoljaric Egger, Director of the UN Development Programme (UNDP) Regional Bureau for Europe and the CIS.

The pledges are expected to cover the country’s reconstruction needs following the November 2019 earthquake, which was the strongest to hit Albania in more than 30 years and killed 51 people.

The aftermath of the earthquake also increased the poverty rate by 2.3 per cent and hit more than one per cent of gross domestic product (GDP), with 220,000 people or 10 percent of the country’s population being affected.

A post-disaster needs assessment undertaken by the European Union, the United Nations, the World Bank and Albania appealed for € 1.08 billion from international donors to rebuild vital infrastructure such as houses, schools, and businesses.

That amount will also fund an upgrade in the country’s disaster preparedness.

Ms. Spoljaric called for transparency in the recovery effort and urged the Albanian Government to streamline its disaster preparedness, as the country being the most vulnerable to disasters in Europe.

She further added that a strong recovery programme would provide sound foundations for the achievement of the Sustainable Development Goals (SDGs) in Albania.

Jamaica readies for first cat bond, already budgeting for its renewal

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Despite the fact a catastrophe bond for Jamaica has not yet come to market, after receiving support to pay premiums for the in-development first issuance the Caribbean island nation is already preparing to budget for its future renewal.

Jamaica’s government has been working towards sponsoring its first catastrophe bond for at least two years, with assistance from the World Bank.

Our latest two updates on Jamaica’s progress towards becoming a cat bond sponsor discussed the support provided by the World Bank in risk modelling for the perils to be covered, and funding the country has received to help in paying cat bond premiums to investors.

Mexico returns for $425m+ quake & hurricane World Bank cat bond

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The government of Mexico has returned to the catastrophe bond market with the help of the World Bank and its International Bank for Reconstruction and Development (IBRD), seeking a $425 million or larger slice of parametric earthquake and hurricane disaster insurance from the capital markets through an issue we’ve named IBRD / FONDEN 2020 that is the first to incorporate sustainable development bond features.

The new transaction, which has just come to market according to sources, will be the sixth catastrophe bond that the government of Mexico’s natural disaster fund, FONDEN will be the ultimate beneficiary of.

Details on the others, the soon to mature 2018 issuance IBRD CAR 118-119, the 2017 issuance that was triggered by the Chiapas earthquake IBRD / FONDEN 2017, the 2012 cat bond that paid out after hurricane Patricia MultiCat Mexico Ltd. (Series 2012-1), the 2009 issued MultiCat Mexico 2009 Ltd., and the 2006 issuance CAT-Mex Ltd., can all be found in our extensive catastrophe bond Deal Directory.