Philippines catastrophe bond (2019)
The Philippines' first catastrophe bond, issued in November 2019 by the World Bank against earthquakes and tropical cyclones.
An archipelago hit every year by several typhoons and exposed to earthquakes cannot fund its reconstruction from the budget alone. The catastrophe bond transfers part of the extreme risk, with a parametric trigger based on a loss model computed from the event's physical parameters. Two tranches separated the risks, one covering earthquakes and cyclones, the other cyclones only, so investors could choose their exposure. The payout can also be partial: the model converts wind and rain into an estimated loss, and the note repays a fraction of its principal according to the level reached. This brings parametric cover closer to the actual loss, at the cost of a longer calculation that is harder to explain to the public than a simple threshold crossed or not.
In November 2019, the World Bank issued 225 million dollars of three-year catastrophe bonds for the Philippines, in two tranches, 150 million of which covered cyclones only. Typhoon Rai (Odette) of December 2021 crossed that tranche's wind parameter, and it paid 35% of its principal, or 52.5 million dollars; the rainfall calculation, completed in May 2022, added no further payout.
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