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Ivan ZelenkoHead of Derivatives and

Structured Finance

WORLD BANKWORLD BANK

Cat Bonds: towards efficient disaster risk sharing

OECD

International Network of the Financial Management of Large-Scale CatastrophesBangkok 24-25 Sep 2009

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The call for an enhanced risk taking The call for an enhanced risk taking capacity in catastrophe insurancecapacity in catastrophe insurance

Natural catastrophes have increased in frequency Natural catastrophes have increased in frequency and costand cost

Governments of emerging countries are highly Governments of emerging countries are highly aware of economic consequences and are looking aware of economic consequences and are looking for insurance solutionsfor insurance solutions

Global reinsurance shows signs of under-capacity: Global reinsurance shows signs of under-capacity: concentration on peak risks, massive capital loss concentration on peak risks, massive capital loss following mega events like Katrinafollowing mega events like Katrina

The resulting high level of premiums (in multiples The resulting high level of premiums (in multiples of the expected loss) and their volatility induce of the expected loss) and their volatility induce barriers to entry and rationingbarriers to entry and rationing

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Cat bonds can bring in the risk taking Cat bonds can bring in the risk taking capacity of global capital marketscapacity of global capital markets

Risk modeling and parametric insurance have allowed Risk modeling and parametric insurance have allowed to convert disaster insurance into a new asset classto convert disaster insurance into a new asset class

From the mid 90s, cat bonds have grown into a $13bn From the mid 90s, cat bonds have grown into a $13bn market, a small segment of the $50T total cap of market, a small segment of the $50T total cap of global capital markets global capital markets

They could grow to an estimated $150-350Bn within They could grow to an estimated $150-350Bn within 10 years10 years

The enlarged mutualisation should reduce the cost of The enlarged mutualisation should reduce the cost of insurance insurance

The maturity of cat bonds (3 to 5 years) helps manage The maturity of cat bonds (3 to 5 years) helps manage the volatility of premiumsthe volatility of premiums

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Total Non-Life Bonds Outstanding, By Year (as of Total Non-Life Bonds Outstanding, By Year (as of June 2009)June 2009)

714 742 825 1,125 967 9901,988

1,1432,138

4,920

7,721

2,730

1,385153 180759 1,412 1,812

2,2063,102

3,541

3,657

7,663

10,676

10,920

0

3,000

6,000

9,000

12,000

15,000

18,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Issued OutstandingSource: Goldman Sachs and Swiss Re

Cat bond markets have shown Cat bond markets have shown resilience throughout the financial crisisresilience throughout the financial crisis

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Cat Bonds have shown a sustained Cat Bonds have shown a sustained performance across most asset classes performance across most asset classes

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Cumulative Performance from January 01, 2007 – June 01, 2009

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

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5-S

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7

5-J

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8

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8

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8

5-J

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8

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8

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9

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Swiss Re Cat Bond Index Total Return S&P 500 Barclays Capital High Yield Corporate

20%

1%

-35%

Diversification power shown to investors in the Diversification power shown to investors in the midst of the crisismidst of the crisis

Source: Goldman Sachs and Swiss Re

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Catastrophe Bonds as a Public Finances Catastrophe Bonds as a Public Finances Insurance Tool Insurance Tool

The World Bank Treasury, in partnership with Mexico The World Bank Treasury, in partnership with Mexico has been working with an initial group of countries on has been working with an initial group of countries on facilitating the access to cat bond markets to facilitating the access to cat bond markets to governmentsgovernments

The World Bank Treasury is developing an issuance The World Bank Treasury is developing an issuance program or “shelf”, which will be easily accessible to its program or “shelf”, which will be easily accessible to its member countries member countries

The MultiCat Program will enable the sourcing of The MultiCat Program will enable the sourcing of insurance coverage against low frequency – high severity insurance coverage against low frequency – high severity perils such as earthquakes, floods and hurricanesperils such as earthquakes, floods and hurricanes

The first issue of a series of cat bonds to be issued under The first issue of a series of cat bonds to be issued under the MultiCat Program is currently in preparationthe MultiCat Program is currently in preparation

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