Ivan Zelenko Head of Derivatives and Structured Finance WORLD BANK Cat Bonds: towards efficient disaster risk sharing OECD International Network of the Financial Management of Large-Scale Catastrophes Bangkok 24-25 Sep 2009 Ivan Zelenko Head of Derivatives and Structured Finance

The call for an enhanced risk taking capacity in catastrophe insurance Natural catastrophes have increased in frequency and cost Governments of emerging countries are highly aware of economic consequences and are looking for insurance solutions Global reinsurance shows signs of under-capacity: concentration on peak risks, massive capital loss following mega events like Katrina The resulting high level of premiums (in multiples of the expected loss) and their volatility induce barriers to entry and rationing

Cat bonds can bring in the risk taking capacity of global capital markets Risk modeling and parametric insurance have allowed to convert disaster insurance into a new asset class From the mid 90s, cat bonds have grown into a $13bn market, a small segment of the $50T total cap of global capital markets They could grow to an estimated $150-350Bn within 10 years The enlarged mutualisation should reduce the cost of insurance The maturity of cat bonds (3 to 5 years) helps manage the volatility of premiums

Total Non-Life Bonds Outstanding, By Year (as of June 2009) Cat bond markets have shown resilience throughout the financial crisis Total Non-Life Bonds Outstanding, By Year (as of June 2009) 714 742 825 1,125 967 990 1,988 1,143 2,138 4,920 7,721 2,730 1,385 153 180 759 1,412 1,812 2,206 3,102 3,541 3,657 7,663 10,676 10,920 3,000 6,000 9,000 12,000 15,000 18,000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Issued Outstanding Source: Goldman Sachs and Swiss Re

Cat Bonds have shown a sustained performance across most asset classes Diversification power shown to investors in the midst of the crisis Cumulative Performance from January 01, 2007 – June 01, 2009 20% 1% -35% Source: Goldman Sachs and Swiss Re

Catastrophe Bonds as a Public Finances Insurance Tool The World Bank Treasury, in partnership with Mexico has been working with an initial group of countries on facilitating the access to cat bond markets to governments The World Bank Treasury is developing an issuance program or “shelf”, which will be easily accessible to its member countries The MultiCat Program will enable the sourcing of insurance coverage against low frequency – high severity perils such as earthquakes, floods and hurricanes The first issue of a series of cat bonds to be issued under the MultiCat Program is currently in preparation