Michael Bennett, head of derivatives and structured finance for the World Bank Treasury, answers SCI's questions

Q: How and when did the World Bank Treasury become involved in the risk transfer market?
A: We became involved in insurance risk transfer in 2007 when we began to intermediate drought and other natural catastrophe swaps for member countries and regional facilities. We extended that work to the capital markets beginning in 2009 with the creation of our MultiCat programme, a platform our member countries can use to issue catastrophe bonds to cover themselves against the risk of natural disasters. Since then, we’ve issued roughly US$2.7bn outstanding of cat bonds, including several landmark transactions for the market.

The other way the World Bank is involved in the risk transfer market is by issuing puttable bonds that can be used by other cat bond issuers as liquid, high-quality collateral, given the post-crisis requirement for sources of conservative collateral. The bonds are triple-A rated and floating rate, with periodic puts that enable a sponsor to call the bond and sell the collateral to pay noteholders, should a covered event occur. We’ve issued 60 of these bonds so far, totalling US$13bn.

Q: Which landmark transactions has the World Bank been involved with?
A: The MultiCat programme was first used by the Mexican government in 2009 to issue the US$290m three-year MultiCat Mexico 2009 deal, which provided parametric insurance coverage against earthquake risk in three regions around Mexico City and hurricanes on the Atlantic and Pacific coasts (see SCI’s primary issuance database). The Mexican government tapped the capital markets again in 2012, with the US$315m three-year MultiCat Mexico series 2012-I, which provided parametric insurance coverage against earthquake risk in five geographic regions and hurricane risk in three regions along the Atlantic and Pacific coasts. Goldman Sachs and Swiss Re acted as co-lead managers on both deals.

For the MultiCat Mexico deals, a separate SPV was set up for each issuance. However, we decided to simplify the process in 2014 by issuing cat bonds off our own balance sheet, thereby avoiding the need to establish SPVs and maintain collateral.

World Bank cat bonds are issued off a supplement to our regular triple-A rated Global Debt Issuance Facility (called the Capital At Risk (CAR) notes supplement) and are similar to other World Bank bonds, except that (due to the risk of loss of principal) they may not be assigned a credit rating or may be assigned a lower rating than the Facility. The aim was to make our issuance more flexible, in terms of including new perils and regions, and to potentially enhance yield for investors.

In 2014, we issued a US$30m three-year parametric cat bond covering earthquake and hurricane for the 16 countries participating in the Caribbean Catastrophe Risk Insurance Facility via the IBRD (SCI 3 July 2014). GC Securities served as sole placement agent and co-structuring agent with Munich Re on this deal.

Three years later, the World Bank launched the first pandemic cat bonds – the US$320m IBRD CAR 111 and 112 notes (SCI 30 June 2017). The issuance supported the Pandemic Emergency Financing Facility (PEF), which is our mechanism for channelling surge funding to developing countries facing the risk of a pandemic.

Swiss Re was sole book runner for the bond placement and joint structuring agent with Munich Re. Munich Re and GC Securities were co-managers.

The Mexican government also returned to the cat bond market in 2017, with three tranches of Capital At Risk notes – CAR 113, 114 and 115 – issued via the IBRD for a total of US$360m. The transactions provided parametric coverage for earthquakes and named storms, with GC Securities acting as sole bookrunner and joint structuring agent/co-manager alongside Munich Re.

Finally, last year we printed the second-largest cat bond ever and the largest sovereign risk transfer transaction (SCI 8 February 2018). Sized at US$1.36bn, the deal covers earthquake risk in the four Pacific Alliance countries of Mexico, Chile, Columbia and Peru – marking the first time the latter three jurisdictions have accessed the capital markets to obtain insurance for natural disasters. The issuance comprised five classes of bonds – CAR notes 116 to 120.

Q: The PEF Facility is notable for having a cash window and an insurance window. What was the World Bank trying to achieve with this structure?
A: The PEF was informed by the Ebola outbreak in West Africa that began in 2013. We were trying to solve the issue of relief cash not being made available fast enough to stamp out outbreaks of the virus.

The idea was to use risk transfer to expand risk takers to the private sector and to access the cash quickly once certain parametric triggers were hit. Since this was a very novel transaction, it took a long time to work out with our partners in the international community - most notably the World Health Organization, the donor governments and our private sector partners - which viruses to cover, the proper risk modelling and the parameters of the events we wanted to cover. Ultimately, the facility covered six of the viruses most likely to cause pandemics: flu, coronavirus, filovirus, lassa fever virus, rift valley fever virus and Crimean Congo hemorrhagic fever virus.

The structure involved the establishment of a trust fund that receives donations from Australia, Germany and Japan, which was split into two windows. The cash window is a pool of donations that can be deployed without specific parameters and at the will of the donors. The insurance window employs risk transfer to provide US$425m of pandemic coverage over three years.

Because it was a new risk to the market, we weren’t sure where we’d achieve the best capacity and price – with traditional insurers or via the capital markets. Consequently, we decided on a highly innovative approach: simultaneously placing the risk in the two markets through one joint book - ultimately placing US$105m with insurers and US$320m in cat bond form with investors across Asia, Europe, the US and Bermuda.

The PEF matures next year and so we’re currently exploring how we can possibly improve the coverage with the next iteration of the facility (SCI 11 April). The original parameter was to cover regional outbreaks; the next version could potentially comprise single-country coverage and/or cover more or different viruses. Another possibility we’re considering is whether it’s possible to tie the cash and insurance windows even closer together to reduce costs.

Q: What is your strategy going forward?
A: We have only scratched the surface of the member countries exposed to natural catastrophes. Thus far, only four of our 189 member countries and two facilities have tapped the cat bond market through our intermediation.

In theory, the World Bank can issue cat bonds covering any type of risk, but so far we’ve concentrated on natural catastrophes and pandemics.

Generally, we continue to look at the insurability of other risks. For instance, we are actively investigating whether the risk of famine could be insured in a manner possibly similar to the way we have insured pandemics. Another risk we are looking at are losses for governments related to cyber attacks.

Corinne Smith