MultiCat Program of World Bank
- MultiCat Program has been launched by the World Bank which will allow governments and public entities in developing countries to buy insurance on affordable terms in the form of ‘catastrophe bonds.
Why there was a need of Catastrophe Bond ?
- Most developing countries are unable to access international insurance and reinsurance markets to cover themselves against such contingent liabilities.
- Only three per cent of potential losses in developing countries are insured (compared to 45 per cent in developed countries).
- As a result, such events exact a devastating toll on public finances when governments have to cover the costs of relief and reconstruction efforts.
Why most companies are not in position to access international insurance markets?
- High and volatile insurance premiums, the complexity of contracts, and the insurance industry’s limited capacity to absorb extreme risks, bar many countries from accessing the international insurance markets
- Countries highly vulnerable to natural disasters needed an innovative approach to optimise their risk coverage and premium terms, and mitigate the impact on government budgets.
What is the plus point of catastrophe bonds?
- With over $150 trillion in assets, the international capital markets have the depth and liquidity to absorb huge risks and generate timely payouts.
- Various financial instruments exist for this purpose, including catastrophe bonds.
- These bonds allow investors to diversify their assets and pay much higher interest rates, to compensate for the risk of the issuer not repaying the principal in the event of a major catastrophe.
- But many disaster-prone countries cannot access these sophisticated financial instruments.
- This will allow governments and public entities in these countries to buy insurance on affordable terms in the form of a catastrophe bond.
- These bonds will provide a government with immediate access to liquidity to fund emergency relief operations after a natural disaster, thus reducing volatility in fiscal budgets, while avoiding the need to set up idle reserves.
- The MultiCat platform is flexible and can support a variety of structures, including the pooling of multiple perils (earthquake, hurricane, rainfall) in different regions.
- The pooling of different risks helps attract new investors, enlarging the investor base and lowering the insurance premium over time.
- Bonds issued under the platform will carry the MultiCat brand name and use a common legal structure and documentation, with the World Bank acting as arranger.
- Thus, issuing countries will benefit from the bank’s expertise in identifying and pooling risks, as also pulling together highly complex transactions and attracting a broad range of investors.
- These products and services are most effective as part of a broader catastrophe risk management strategy that involves layering resources based on the severity and frequency of natural disasters.
With Inputs from Business Standard