140: Cat bonds in public sector & sovereign risk transfer panel - Artemis ILS Asia 2023
Oct 13, 2023
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Scott McHardy, Head of Risk Finance at Toka Tū Ake EQC, joins Esther Kim from Swiss Re and Michael Bennett of the World Bank Treasury to discuss the growing importance of catastrophe bonds in public sector risk transfer. They highlight innovative initiatives like C-Drift and Pac-Drift, and the need for effective solutions to close the protection gap for vulnerable nations. The panel also explores the complexities of insurance in light of natural disasters and the potential for significant growth in the Asia-Pacific ILS market.
The World Bank's introduction of parametric insurance simplifies access to disaster-related coverage for vulnerable nations, enhancing their financial resilience.
The evolution of public sector risk transfer shows challenges in adoption due to education gaps and political dynamics influencing insurance uptake in different regions.
Deep dives
Overview of Public Sector Risk Transfer Growth
The public sector risk transfer landscape has evolved significantly over the past few decades, particularly through the initiatives of organizations like the World Bank. The World Bank provides parametric insurance policies to its member countries, which are often susceptible to natural disasters, allowing governments straightforward access to insurance solutions. This approach aims to streamline the process for countries that face challenges such as lengthy procurement procedures or difficulty understanding the complexities of insurance markets. By simplifying access and effectively hedging risks through mechanisms like catastrophe bonds, the World Bank enhances the financial resilience of vulnerable nations, enabling them to manage disaster-related risks more effectively.
Historical Context and Insurance Development in New Zealand
The establishment of a natural hazard insurance scheme in New Zealand was prompted by significant earthquakes in the early 20th century, leading to the formation of the EQC in 1944. Initially focusing on earthquake coverage, the scheme transformed by integrating natural hazard insurance within fire insurance policies to broaden its reach. Over the years, additional perils, including landslides, have been adopted based on historic claims, reflecting the evolving nature of insurance needs in response to emerging risks. The decision to eliminate commercial coverage further refined the EQC's focus on residential insurance, showcasing a strategic shift to better serve the communities it protects.
Challenges in Public Sector Risk Transfer Adoption
The public sector faces numerous challenges in adopting risk transfer solutions, particularly regarding education and understanding the value of insurance. Governments may prioritize immediate emergency funds over insurance expenditures, as the benefits of insurance are often only realized post-event, leading to hesitance in spending public money on such policies. Furthermore, the varying motivations of different public sector entities contribute to the complexity of insurance uptake, as state-owned enterprises and development banks have unique needs and decision-making processes. These hurdles, alongside the limitations in risk modeling capabilities in less developed markets, create a significant gap in public sector engagement with risk transfer solutions.
Political Dynamics Affecting Risk Transfer in APAC
The disparity in risk transfer adoption between Latin America and APAC countries reflects underlying political dynamics, where local government perceptions greatly influence insurance decisions. In some instances, politicians may resist implementing insurance solutions to remain in control of disaster response narratives, preferring to distribute aid directly to affected areas rather than allowing insurance payouts to manage recovery. This situation highlights a critical challenge in shifting towards more systematic risk transfer approaches, as the perception of risk and personal accountability in decision-making plays a significant role in shaping public insurance policy. Consequently, fostering regional collaboration and showcasing successful insurance models in nearby countries can drive increased adoption of risk transfer mechanisms in the APAC region.
This panel discussion took place at the Artemis ILS Asia 2023 conference in Singapore on July 13th.
This session discussed the role of catastrophe bonds and trends in public sector and sovereign risk transfer, under the watch of moderator Alex Pui, Executive Manager, Commonwealth Bank of Australia.
The panellists taking part were: Scott McHardy, Head of Risk Finance, Toka Tū Ake EQC; Esther Kim, Senior Product Manager, Public Sector Solutions, Swiss Re; Michael Bennett, Head of Derivatives & Structured Finance, World Bank Treasury.
The panel session discussed the use of catastrophe bonds in public sector and sovereign risk transfer and the potential for that to increase, with specific relevance to the Asia Pacific region.
The group discussed specific use-cases for cat bonds in public and sovereign risk transfer.
They also explored the broader potential for use of insurance-linked securities (ILS) capacity within these risk transfer arrangements
With a catastrophe bond sponsor on the panel, as well as the World Bank, there was a robust discussion on the benefits of cat bond protection and of bringing the capital markets into catastrophe insurance and reinsurance programmes.
Listen to the full podcast episode to learn more about the use of catastrophe bonds within public sector and sovereign risk transfer programmes.
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