Catastrophe Bonds:
win-win between Governments and Investors
Rom Aviv, Managing Partner, IBI ILS Partners
October 2018

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
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Recent Earthquakes in Indonesia
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4
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7
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9
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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
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Catastrophe Bond as a Solution
Governments
Investors
Bond
Interest
Capital
ReturnofCapitalatMaturity
Sovereign Debt Bond
Governments
Investors
Bond
Interest
InCaseofCatastrophe:Capital
Sovereign Catastrophe Bond
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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
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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)
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Investors’ Allocation to Alternative Investments is
Increasing
Example: Australian Pension Fund
ource: Price water house Coopers
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Investors’ Alternative Bucket: Why ILS?
• Diversification (low correlation)
• Short Maturity
• Floater: Linked to Interest Rates
• Limited counterparty Risk
• Deep and Mature Industry
• Accurate Pricing
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Why ILS Exposure in ECIS Makes
Sense?
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• Diversification: peril and region
• Parametric vs. indemnity: less modeling uncertainty
• Secondary trading – pricing more accurate
• ESG
Why ILS Exposure in ECIS Makes Sense?
(continued)
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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
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Pricing Motivation
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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%
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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
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