CASE STUDY

The Philippines: Transferring the Cost ofSevere Natural Disasters to Capital Markets
OVERVIEWThe World Bank Treasury issued acatastrophe bond (cat bond) to insure thePhilippines against earthquakes andtropical cyclones for three years.
Background

The Philippines is one of the most disaster-prone
countries in the world, with high exposure to tropical
cyclones, earthquakes, and other natural hazards.
Typhoon Yolanda (also known as Typhoon Haiyan)
resulted in the loss of 6,300 lives and an estimated
US$12.9 billion in damages (equivalent to about
4.7% of the country’s GDP) in 2013.

The World Bank has been working with thePhilippines to strengthen its resilience to natural
disasters (see figure 3). In 2017 and 2018, thePhilippines obtained catastrophe risk insurance
through the World Bank that provided coverageagainst severe earthquakes to national government
agencies and tropical cyclones to 25 individual
provinces. Building on the lessons learned from theinsurance transaction, the Philippines requested
support from the World Bank for the issuance of acat bond.

Financial and Project Objectives•••

Protect against losses from earthquakes andtropical cyclones, including excess rainfall
without increasing sovereign debt
Gain access to fast-disbursing and cost-effective
insurance
Reduce uncertainty of cost over time

Evacuation center. Philippines. Photo: Jerome Ascano / World Bank

Financial Solution

In November 2019, the World Bank issued to capital
market investors two tranches of cat bonds thatprovide the Philippines with insurance coverage of a
maximum of US$225 million (US$75 million forearthquakes and US$150 million for tropical
cyclones) for three years.
The type of events that will trigger a payout are predefined based on the requirements of thePhilippines. If and when a qualifying event occurs,
the Philippines will issue a notice to an independentcalculation agent to determine the insurance
payouts.
The World Bank will transfer the payouts to thePhilippines as soon as a calculation report isavailable, within approximately one month forearthquake and five months for tropical cyclone
events, without the need to assess real losses
incurred by the country.
The Philippines pays an insurance premium for thecoverage, which the World Bank transfers to the catbond investors. The premium is fixed during the lifeof the bond, removing the uncertainty of the cost.

Transaction Structure and Summary

The World Bank issued the cat bonds under its Capital-at-Risk Program and collected the proceeds from theinvestors. The World Bank has a swap agreement with the Philippines, which allows the Bank to transfer theinsurance premium from the Philippines to the investor and in case of an eligible event, transfer the payoutproceeds to the Philippines.
Currency
Notional
ClassTenor (Term)
Insurance Premium
Expected Loss
Attachment
Probability(i.e., probability of at leasta minimum pay-out)

Geographic
Coverage
Trigger Type
Payout StructureMaximum Payout

Figure 1

Figure 2

US$Class A: US$ 75 million
Class B: US$ 150 million
Class A: Earthquake
Class B: Tropical Cyclone &Excess Rainfall
3 years
Earthquake: 5.50%
Tropical Cyclone: 5.65%
Earthquake: 3.00%
Tropical Cyclone: 3.00%
Earthquake: 5.30%
Tropical Cyclone: 5.30%
National
Modeled Loss
Stepped Payout Structure of0%, 35%, 70% and 100%
based on modeled loss
Earthquake: US$ 75 million
Tropical Cyclone: US$ 150
millionOutcomeOn December 16, 2021 Typhoon Rai (known locally as “Odette”) hit the Philippines, triggering a partial payoutof US$52.5 million to the Philippines from the cat bond transaction.
The cat bond is part of the World Bank’s programmatic, multi-year approach to support disaster risk managementin the Philippines and exemplifies the World Bank’s ability to help member countries access insurance throughthe capital markets.

Figure 3* The Development Policy Loan with a Catastrophe Deferred Drawdown Option (CAT DDO) is the World Bank’s contingent financing product for disasters.

For information:

Miguel Navarro-Martin, Manager of Banking Products,
mnavarromartin@worldbank.org, +1 (202) 458 4722