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The Philippines, the Asian Development Bank and private market entities are working to develop a parametric disaster insurance pooling facility for Philippine cities to buy protection from, backed by reinsurance and capital markets funding.

The Philippine City Disaster Insurance Pool (PCDIP) is being designed by a collaboration between the Philippine Department of Finance and the Asian Development Bank, with support from private market catastrophe risk experts Risk Management Solutions (RMS), experts from the Earthquake and Megacities Initiative, economists from Vivid Economics and insurance or reinsurance brokers from Willis Towers Watson.

The proposed risk pooling facility would enable Philippine cities to purchase disaster insurance protection for typhoon and earthquake risks, with flood also expected to be targeted in future.

The Philippine City Disaster Insurance Pool (PCDIP) would pool the risks from member cities and approach the reinsurance and capital markets for the capacity to underpin the risks it holds, enabling the cities to benefit from economies of scale, diversification within the risk pool and as a result more favourable reinsurance pricing, it is assumed.

The PCDIP facility would look to leverage both traditional reinsurance and the capital markets, with instruments including catastrophe bonds mooted, in order to capitalise on appetite for risk and to deliver the most efficient insurance capacity to the participating Philippine cities.

The insurance contracts will be parametric based, with payouts linked to the physical features of typhoons and earthquakes (wind speeds and ground shaking), to begin, rather than the actual losses suffered.

By using parametric triggers, this latest Philippine risk transfer initiative will aim to make payouts to participating cities within fifteen days after a disaster strikes, so could become an important source of liquidity for city and local governments to help recovery from severe weather and natural disaster events.

Each city that participates would have its own parametric indices for the perils it chose coverage for, with these calculated in order to assess impact of a disaster and whether a payout is due.

The risk pool of the PCDIP will act as an insurer, ceding its risks to the reinsurance or capital markets in order to support the payouts required, while aggregating premiums from the cities and approaching its own risk transfer as a single entity will provide the needed economies of scale to make it a viable proposition.

Cities will be able to tailor their coverage, depending on the severity of event they want to receive a payout for and the amount of payout they could receive, with premiums rising accordingly.

Payouts will be funded by the capital in the pool, including profit retention from years where payouts are limited, and reinsurance provided by the traditional or capital markets.

As a result, parametric catastrophe bonds would be a viable tool for this new Philippine city disaster risk pool to protect itself, although to begin it is likely to find the appetite of the traditional reinsurance market very strong for any risk it brings.

To begin the pool is expected to be capitalised by the Philippine government using the proceeds of a loan from the Asian Development Bank.

If this new city disaster insurance pool gets up and running in the Philippines, it could become another source of risk opportunity for ILS investors, similar to the regional parametric insurance cover that renewed recently at $390 million in size.

Further down the line, these parametric facilities may merge, we’d imagine, as covering the same risks it would seem the economies of scale could be maximised and the approach to the reinsurance and ILS markets made even more effective with a greatly enlarged risk pool.

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