The World Bank’s pipeline of catastrophe bonds to be issued for the governments of its member countries has been impacted by market conditions in 2022, according to an interview with Michael Bennett of the World Bank’s Treasury.
Speaking to Bloomberg, Michael Bennett, head of derivatives and structured finance at the World Bank’s Treasury, explained that 2022 has not been an easy year for the World Bank to bring catastrophe bonds to market for its members.
The last World Bank catastrophe bond issue was in July 2021, the $185 million IBRD CAR 130 cat bond issued for the Jamaican government.
A more typical issue year for the World Bank could see a number of catastrophe bonds come to market.
But, in 2022, capital market conditions are effectively increasing the cost of capital for investors this year due to global macro factors and investor jitters about geopolitics, causing spreads to widen at the same time as a reduction in capital inflows, a means that the ability of the cat cat bond market to absorb new transactions has been reduced.
Then, more recently, Hurricane Ian arrived and again affected the balance of the catastrophe bond market and has now resulted in a much higher price environment.
All of this can affect the World Bank’s ability to bring new catastrophe bonds to market and get the price for them.
“We have a number of trades in progress and some have actually been stalled by market conditions,” Bennett told Bloomberg in an interview.
“A good year for us might be three or four deals,” typically adding between $1 billion and $1.5 billion in issued venture capital.
The current rise in yield expectations among investors in the catastrophe bond market means that hedge prices are likely to be significantly higher in the future and may never return to the lows seen over the past decade.
This could present a challenge for government sponsorship of catastrophe bonds, but also makes the potential use of donor funds all the more important, to continue to provide access to risk transfer to those who need it.
Bennett told Bloomberg that while World Bank catastrophe bonds have historically focused on similar perils to the insurance and reinsurance industry, which will likely remain the primary focus, clients are also considering how to secure risk transfer for perils such as drought and floods. .
He also explained that Latin American countries are expected to remain a source of World Bank catastrophe bonds, but discussions are also underway in the Caribbean, while Asia is also seen as a source of future transactions. bonds cat.
On how governments can pay for risk transfer, Bennett explained that donor support to help pay the premiums is essential.
“One trend that I think we hope to see develop in 2023 would be increased donor support for bounties,” he told Bloomberg.
In addition, the structures recently announced at the COP27 climate conference, the Global Climate Risk Shield and the World Bank’s Global Shield Financing Facility, could potentially become a source of support for risk transfer premia. countries in the future.
