MANILA, Philippines – The Philippines is reviving plans to issue catastrophe bonds to help fund massive and ongoing rebuilding efforts and better protect the country from natural disaster risks such as typhoons and earthquakes.
The government has resumed talks with the World Bank on the possibility of issuing catastrophe bonds, an initiative first broached in 2011. This high-yield debt instrument is usually insurance-linked that transfers a specified set of risks to investors.
Floated usually by a government agency or insurance company, a catastrophe bond may have treasury bonds as the underlying assets or reinsurance premiums as the underlying income stream.
Bondholders are paid with insurance premiums but may have to accept reduced principal repayment in the event the specified disaster occurs during the life of the bond.
The Philippines, which suffers $5 billion per year in storm damage, is in need of capital support to fund potential economic losses from natural catastrophes.
The country is exposed to severe earthquakes, typhoons and torrential flooding rains, all of which cause economic loss each year.
In 2013, Finance Secretary Cesar Purisima pushed for the issuance of catastrophe bonds given the intensity and frequency of climate extremes around the globe.
The Philippines is estimated to have suffered between $6.5 billion and $14.5 billion in economic damage following the onslaught of typhoon Yolanda in 2013. The amount was equivalent to as much as 5.5 percent of the country’s gross domestic product.
The Philippine insurance market remains underdeveloped despite the country’s growing economy. It continues to rely on several alternative funding strategies to support disaster recovery efforts.
About $170 million per year is allocated for the government’s calamity fund under the national budget.
The World Bank in 2009 launched a catastrophe program which allows participants to buy insurance coverage for multiple perils, countries and regions. The types of events that may be insured are earthquakes, floods, hurricanes and other windstorms.