World Bank Issues First Catastrophe Bond
8 July 2014: The World Bank Group's International Bank for Reconstruction and Development (IBRD) has issued its first catastrophe ("cat") bond, which will benefit the 16 member States of the Caribbean Catastrophe Risk Insurance Facility (CCRIF). The bond, which is a three-year, US$30 million transaction under IBRD's Capital-at-Risk Notes Program, is linked to tropical cyclone and earthquake risk in CCRIF countries.
In a hedge against the risks associated with the cat bond, the Bank has also entered into a catastrophe swap with CCRIF, such that, in the event the bond is triggered, its principal will be lowered (as determined by its terms), and an equal amount will be paid to CCRIF under the swap.
Martyn Parker, Chairman of Global Partnerships at Swiss Re, which acted as an advisor to the World Bank on the cat bond's issuance, noted that "[g]overnments' fiscal positions are increasingly exposed to natural catastrophes and climate change." Recognizing these risks, CCRIF Chairman Milo Pearson commented that the partnership with the World Bank is "another example of CCRIF's continuing efforts to explore ways to help the countries in the Caribbean Region in building resilience to natural hazards.”
Although the World Bank has been active in the cat bond market since 2009 by providing a documentation platform ('MultiCat Program') for countries wanting to access the market, the partnership with CCRIF represents the first time the World Bank itself has issued a cat bond.
CCRIF is a not-for-profit risk-pooling facility that uses parametric insurance to provide financial liquidity to its member States in the immediate aftermath of such natural disasters as earthquakes and hurricanes. Since its creation in 2007, it has made pay-outs totaling US$32,179,470 to seven member governments. [World Bank Press Release] [CCRIF Press Release]