Partnering with World Bank to close Protection Gap
The economic progress many developing countries are making is put at risk when a catastrophe hits. If the nation is lacking appropriate protection, the impacts from a natural disaster typically mean that the government’s limited financial resources will have to be directed toward disaster response and away from further investments in education, healthcare and infrastructure
The incessant drumbeat of the headlines notwithstanding, most parts of the world are indeed becoming safer, more resilient and more prosperous. Since 1990, for instance, the percentage of the world’s population living in extreme poverty has declined from around 34 percent to less than ten percent. And since 1970, the annual death rate in low-income countries from natural disasters is down from 0.7 per 100 thousand people to 0.2.
While it’s somewhat comforting to be reminded that, in many ways, conditions are better today than they’ve ever been, countries still must contend with a broad assortment of possible shocks, which are especially impactful for those with more vulnerable economies. Climate change, in particular, presents a series of potentially challenging scenarios, which require even greater resilience and more effective responses.
The economic progress many developing countries are making is put at risk when a catastrophe hits. If the nation is lacking appropriate protection, the impacts from a natural disaster typically mean that the government’s limited financial resources will have to be directed toward disaster response and away from further investments in education, healthcare and infrastructure.
Enter the World Bank
With its deep financial resources, technical expertise and global credibility, the World Bank has been uniquely influential in leading and supporting a variety of initiatives aimed at reducing extreme poverty and promoting shared prosperity.
What is perhaps less widely known, however, is the work the World Bank and its affiliates are doing – both directly and in conjunction with the UN, governments, private investors and re/insurers – to address pre- and post-event disaster mitigation by reducing the protection gap – the difference between losses covered by insurance and total economic losses. In fact, the World Bank is the leading actor in developing or backing increasingly innovative financial instruments to mitigate disaster risks.
As a result of its efforts, a growing supply of market capital is being made available to create and implement more robust and forceful actions related to disaster risk.
Understanding the World Bank
The World Bank’s overall mission is twofold:
•To end extreme poverty: By reducing the share of the global population that lives in extreme poverty to three percent by 2030.
•To promote shared prosperity: By increasing the incomes of the poorest 40 percent of people in every country.
The World Bank provides financing, policy advice and technical assistance to governments of developing countries via two institutions:
•The International Bank for Reconstruction and Development (IBRD) – which assists middle-income and creditworthy poorer countries; and
•The International Development Association (IDA) – which focuses on the world’s poorest countries.
While the IBRD and IDA partner with governments, the following three affiliates work to strengthen the private sector in developing countries with financing, technical assistance, political risk insurance and dispute resolution:
•The International Finance Corporation (IFC);
•The Multilateral Investment Guarantee Agency (MIGA); and
•The International Centre for Settlement of Investment Disputes (ICSID).
The IBRD and IDA are supported by the World Bank’s Treasury unit, which manages and invests the Bank’s financial reserves. The Treasury unit also designs innovative lending products to meet World Bank clients' requests for customized financing – loans, derivatives, market hedges and other instruments – for their development programs.
Catastrophe risk protection through access to capital markets
The World Bank is well connected in the re/insurance space: it understands the risk financing solutions that can be created and the value that enhanced insurance and reinsurance penetration can unlock by moving the costs associated with mitigating the impacts of natural catastrophes, including pandemics, out of the public purse and into the private market.
The World Bank Treasury is uniquely positioned to connect capital and insurance markets with the risks faced by IBRD and IDA clients and has acted as both intermediary and arranger in catastrophe risk transactions. And by leveraging the connections the Treasury unit has in the catastrophe (cat) bond space, put-able floating rate notes backed by the IBRD have become one of the preferred collateral solutions for third-party cat bonds; close to USD 12 billion of these have been issued to date.
Specifically, the World Bank’s Treasury unit has delivered a suite of products over the past ten years to help IBRD and IDA member countries achieve greater resilience against the impact of a range of catastrophe risks.
These products leverage the Treasury unit’s experience, expertise, market standing and access to capital markets to deliver market-based, risk transfer solutions for disaster risk management. In offering these products, the Treasury acts as an arranger or fully hedged intermediary, using either the IBRD’s or IDA’s balance sheet.
Since 2007, the Treasury unit has delivered almost USD 3.9 billion in catastrophe risk transactions for IBRD and IDA clients, including USD 2.4 billion between June 2017 and February 2018. This makes the World Bank the largest provider of sovereign risk insurance.
•The Treasury has also introduced several “firsts” to the market, including:
•The first cat bond issued by a supranational;
•The first cat bond covering Caribbean earthquake and hurricane risks;
•The first hybrid risk transaction in Latin America;
•The first pandemic bond; and
•The first simultaneous issuance for multiple countries.
Re/insurance to promote resilience
In the course of working with member countries to understand their needs and develop market solutions, the World Bank’s Treasury unit has also deepened its relationships with the private sector, including:
•Reinsurers, which serve as both risk takers and arrangers; and
•Pension funds, asset managers, and alternative/catastrophe risk funds – which are part of a growing group of market participants that are keen on writing insurance as a way to earn higher returns and diversify their risk profiles.
These deeper connections with the private sector have been extremely beneficial for the middle income and poorer countries the IBRD and IDA serve. Perhaps most importantly, member countries can take advantage of the Treasury unit’s growing market experience and expertise, and also enjoy greater access to reinsurers like XL Catlin, as well as other sources of private sector capital.
Also, by leveraging the World Bank’s issuance and derivatives infrastructure and platform, member countries can save significant time and costs, while at the same time benefitting from the Bank’s securities and tax exemptions.
XL Catlin is currently engaged with the World Bank on several efforts aimed at mitigating disaster risk and is in active dialogue with it on opportunities for leveraging XL Catlin’s access to alternative capital/catastrophe risk funds that can be used to match demand to supply.
XL Catlin also is a founding member of the Insurance Development Forum (IDF) along with the World Bank, UN, leading re/insurers and the major global brokers. The IDF is a ground-breaking public-private partnership, with dedicated working groups focusing on multiple aspects of the protection gap.
As a World Bank-approved swap counterparty, XL Catlin intends to continue supporting the IBRD and IDA, as well as the International Finance Corporation, in providing reinsurance cover to developing countries. In doing this, we seek to provide greater resilience ante- and post-disaster. In a world of fast-changing and ever-accumulating financial risk, we’re looking to help enable the ultimate benefit of insurance: a unique and impactful societal safety net.