World Bank Plans Global Push for MultiCat Program

The World Bank has held discussions with at least ten developing countries about potentially using the bank’s newly announced “MultiCat” program and expect several new issuers in the near future, executives say.

Following the upsized sale of the $290 million MultiCat Mexico, the World Bank will leverage that success to help individual countries and regions issue catastrophe bonds.

“MultiCat Mexico will be one in a series of deals. Not only by individual governments. There is also an interest in the benefits of pooling of risks within regions,” says Ivan Zelenko, head of derivatives and structured finance in the World Bank Treasury.

Earlier this week, the World Bank announced the creation of the MultiCat program, which allows participants to buy insurance coverage for multiple perils through a catastrophe bond. The first bond to be issued by the program is MultiCat Mexico, a parametrically triggered vehicle that will cover losses for the Mexican government from earthquakes, floods and wind storms.

Zelenko at least one country worked alongside Mexico in becoming the first to issue a cat bond under the MultiCat program but the government pulled out prior to the announcement.

Specifically, the MultiCat program concept is based on the World Bank’s bond issuance system called the Global Debt Issuance Facility (GDIF).

The GDIF is a streamlined documentation program including a short “pricing supplement” — usually a total of two to three pages in length — for each bond issue that funds the World Bank’s general operations. It was developed by the bank to tap capital markets quickly and with minimum administrative hurdles.

“The idea of MultiCat is the same [as the GDIF]; a lot of bonds can be issued by using the same base documents,” says Zelenko.

He adds that the World Bank will act as arranger on MultiCat issues and use private banks as book runners and managers. “We are not using our balance sheet at all.”

The World Bank’s MultiCat program is part of the organization’s larger approach to risk management services for emerging markets, according to Issam Abousleiman, head of banking products for World Bank Treasury.

“There are many types of risks on the balance sheets of developing governments including currency, interest rate, refinancing, commodities and catastrophe risk,” says Abousleiman. “From an institutional level, we work with our member governments to help them develop a framework for disaster risk management all the way from preparedness to financial management.”

Abousleiman says the use of catastrophe bonds is a natural outgrowth of previous efforts to mitigate the financial impact of natural catastrophes in developing nations.

For example, the World Bank introduced weather derivatives in Malawi to manage the impact of drought on Maize production and it offers contingent loans for middle income countries following natural disasters. “The goal of those programs is to provide access immediately to liquidity,” Abousleiman says.

The focus on capital markets solutions for natural catastrophe risks was developed after the bank determined that traditional reinsurance was not accessible to governments in developing countries, says Zelenko.

“We analyzed the situation very carefully and the fundamental reasons why private reinsurance market was not providing governments with coverage.” Zelenko says. “There was essentially a problem of access, undercapitalisation relative to the size of the risk and a problem of market failure.”

Zelenko says that cat bonds are uniquely positioned to absorb natural catastrophe risks in developing countries because they utilize a larger pool of risk taking capacity.

“We are trying to unlock this capacity and promote access to banks as lead managers for the governments.” Zelenko says. “The World Bank is looking to facilitate a dialogue between the private market players, the cat bond markets and the governments.”

The scope of the catastrophic risk being transfered is well suited for a capital markets structure, says Jay Green, vice president in the Insurance Linked Securities Group at Swiss Re.

Swiss Re acted as a book runner on the MultiCat Mexico issue.

”While this type of parametric risk transfer can be utilized in traditional reinsurance, the capital markets provides additional benefits of a large source of risk trading capacity and a multi-year collateralized cover ,” he says. “The cat bond market is a natural fit for a public/private issuer.”

Green adds that whether the issuer is a government or a reinsurance company cat bonds are structures to minimize counterparty risk to the investor.

”Its a pure play on catastrophic risk exposure,” he says. ”Investors can focus on that an not counterparty risk.”

Another key for having the MultiCat program grow is the use of private catastrophe models in developing countries, Zelenko says. “This is one of the things that the World Bank brings to the table. If we go to a country that is not well covered, we would hire a risk modeling firm to help develop a model as part of the MultiCat program.” he says. “This will build up an infrastructure to set the groundwork for a local risk management strategy.”

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