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2018 DRR Financing 2.4 Rom Aviv

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Catastrophe Bonds: Win-win between Governments and Investors

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2018 DRR Financing 2.4 Rom Aviv

  1. 1. Catastrophe Bonds: win-win between Governments and Investors Rom Aviv, Managing Partner, IBI ILS Partners October 2018
  2. 2. Recent Natural Disaster: Indonesia September 28, 2018: Earthquake and Tsunami A search and rescue team takes a victim from the ruins of the Roa-Roa Hotel in Palu, Indonesia. Source: ANTARA FOTO / Reuters 2
  3. 3. Recent Earthquakes in Indonesia 3 4 5 6 7 8 9 10 10/28/1995 7/24/1998 4/19/2001 1/14/2004 10/10/2006 7/6/2009 4/1/2012 12/27/2014 9/22/2017 6/18/2020 Earthquakes in Indonesia: Magnitude between 1996-2018 3
  4. 4. Catastrophe Bond as a Solution Governments Investors Bond Interest Capital ReturnofCapitalatMaturity Sovereign Debt Bond Governments Investors Bond Interest InCaseofCatastrophe:Capital Sovereign Catastrophe Bond 4
  5. 5. Hypothetical Cat Bond Structure in Indonesia • Mw< 7 – No payout • 7< Mw < 7.2: 25% payout • 7.2< Mw < 7.5: 50% payout • 7.5< Mw < 7.8: 75% payout • 7.8< Mw : 100% payout Source: USGS 5
  6. 6. Cat Bond Key Advantages to Governments • Rapid access to capital • Mitigate shocks in budget • Reconstruction and Development • Emergency Plan financing • Financial Aid to population • Reinsurance in some context (e.g. FEMA) 6
  7. 7. Investors’ Allocation to Alternative Investments is Increasing Example: Australian Pension Fund ource: Price water house Coopers 7
  8. 8. Investors’ Alternative Bucket: Why ILS? • Diversification (low correlation) • Short Maturity • Floater: Linked to Interest Rates • Limited counterparty Risk • Deep and Mature Industry • Accurate Pricing 8
  9. 9. Why ILS Exposure in ECIS Makes Sense? 9
  10. 10. • Diversification: peril and region • Parametric vs. indemnity: less modeling uncertainty • Secondary trading – pricing more accurate • ESG Why ILS Exposure in ECIS Makes Sense? (continued) 10
  11. 11. Why Issuing Cat Bonds Now? 1) Track Record and Legal Robustness of the Product 2) Price & Strong Demand – risk similar, costs are cheaper 3) Proof of Concept – e.g. MultiCat 4) Climate Change 11
  12. 12. Pricing Motivation 12
  13. 13. Pricing Example USD1.4bn of Notes issued by IBRD (February 2018) State Issuance Size (USD mm) Initial Upper End Coupon Settled Coupon Chile 500 3.50% 2.50% Colombia 400 4.25% 3% Mexico A 160 3.75% 2.50% Mexico B 100 9.75% 8.25% Peru 200 7.75% 6% 13
  14. 14. Summary & Conclusion • Historically fruitful collaboration • Proof of Concept: ticked • Effective methodology to mitigate Nat Cat risk for governments • Diversifying segment for ILS Investors • A genuine Win-win 14

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