Partnering with the World Bank to close the protection gap
By Brendan Plessis, Executive Vice-President, Emerging Markets, AXA XL
The incessant drumbeat of the headlines notwithstanding, most parts of the world are indeed becoming safer, more resilient and more prosperous. Since 1990, for instance, the percentage of the world’s population living in extreme poverty has declined from around 34 percent to less than ten percent. And since 1970, the annual death rate in low-income countries from natural disasters is down from 0.7 per 100 thousand people to 0.2.
Nonetheless, the economic progress many developing countries are making is put at risk when a catastrophe hits. If the nation is lacking appropriate protection, the impacts from a natural disaster typically mean that the government’s limited financial resources will have to be directed toward disaster response and away from further investments in education, healthcare and infrastructure.
Enter the World Bank
The World Bank’s overall mission is twofold:
- To end extreme poverty: By reducing the share of the global population that lives in extreme poverty to three percent by 2030.
- To promote shared prosperity: By increasing the incomes of the poorest 40 percent of people in every country.
The World Bank provides financing, policy advice and technical assistance to governments of developing countries via two institutions:
- The International Bank for Reconstruction and Development (IBRD) – which assists middle-income and creditworthy poorer countries; and
- The International Development Association (IDA) – which focuses on the world’s poorest countries.
The IBRD and IDA are supported by the World Bank’s Treasury unit, which manages and invests the Bank’s financial reserves. It also designs innovative lending products to meet World Bank clients‘ requests for customized financing for their development programs including loans, derivatives, market hedges and other instruments.
The World Bank’s Treasury unit also is a leading actor – in conjunction with the UN, governments, private investors and re/insurers – in developing or backing increasingly versatile financial instruments for mitigating disaster risks.
Catastrophe risk protection through access to capital markets
The World Bank is well connected in the re/insurance space: it understands the risk financing solutions that can be created and the value that enhanced re/insurance penetration can unlock by moving some of the costs associated with natural catastrophes and pandemics out of the public purse and into the private market.
Given its deep financial resources, technical expertise and global credibility, the World Bank Treasury is uniquely positioned to connect capital and insurance markets with the risks faced by IBRD and IDA clients, and it has acted as both intermediary and arranger in catastrophe risk transactions.
Specifically, the World Bank’s Treasury unit has delivered a suite of products over the past ten years to help IBRD and IDA member countries achieve greater resilience against a range of catastrophes.
These products leverage the Treasury unit’s experience, market standing and access to capital markets to deliver market-based, risk transfer solutions for managing disaster risk. In offering these products, the Treasury acts as an arranger or fully hedged intermediary, using either the IBRD’s or IDA’s balance sheet.
Since 2007, the Treasury unit has delivered almost USD 3.9 billion in catastrophe risk transactions for IBRD and IDA clients, including USD 2.4 billion between June 2017 and February 2018. This makes the World Bank the largest provider of sovereign risk insurance.
Re/insurance to promote resilience
In the course of working with member countries to understand their needs and develop market solutions, the World Bank’s Treasury unit has also deepened its relationships with the private sector, including:
- Reinsurers, which serve as both risk takers and arrangers; and
- Pension funds, asset managers, and alternative/catastrophe risk funds; these are part of a growing group of market participants that are keen on writing insurance as a way to earn higher returns and diversify their risk profiles.
These deeper connections with the private sector have been extremely beneficial for the middle income and poorer countries the IBRD and IDA serve. Perhaps most importantly, member countries can take advantage of the Treasury unit’s growing market presence and expertise, and also enjoy greater access to reinsurers like AXA XL, as well as other sources of private sector capital.
And by leveraging the World Bank’s issuance and derivatives infrastructure and platform, member countries can save significant time and costs, while at the same time benefitting from the Bank’s securities and tax exemptions.
AXA XL is currently engaged with the World Bank on several efforts aimed at mitigating disaster risk and is in active dialogue with it on opportunities for leveraging AXA XL’s access to alternative capital/catastrophe risk funds that can be used to match demand to supply.