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Development Centre

Catastrophe bonds can strengthen disaster risk financing in Asia and the Pacific

 

Paris, 14 February 2024 - Tropical storms, earthquakes, floods and droughts are growing in both frequency and intensity in the countries of Asia and the Pacific, yet they are insufficiently insured against natural catastrophes. To reduce the costs of such disasters, they must broaden their financing options. By transferring risks to investors through capital markets, catastrophe (CAT) bonds can help, according to the OECD Development Centre’s report Fostering Catastrophe Bond Markets in Asia and the Pacific, released today.

Insurance protection gaps - the difference between economic losses and insured losses from disasters - are a major issue for countries in the region. Addressing them necessitates additional risk capital and new financial tools, in addition to current approaches such as government budget allocation and insurance.

CAT bonds emerged as insurance-linked securities in the early 1990s. While the global CAT bond market has grown steadily, particularly in OECD countries, growth in Asia and the Pacific has been slower. Yet such bonds, which can be issued in a quick, market-based and transparent way, can play an important role in strengthening disaster risk financing in the region.

According to the report, the key to success is to incorporate CAT bonds into a country’s risk transfer programme. The effective development of CAT bond markets requires reliable data provision and solid measurement infrastructure, suitable catastrophe risk models, robust legal and regulatory frameworks, and a transparent process for distributing proceeds in case of a triggering event. Moreover, building capacity related to CAT bond development, such as through training to broaden the investor base, is essential. The report also notes the importance of formulating a grand design for disaster risk financing in each country.

Among the countries of Asia and the Pacific, the Philippines is already present in CAT bond markets: its example is discussed in the report, alongside the experiences of other countries such as Australia, Jamaica, Japan, Mexico, New Zealand and the United States.

 

Journalists are invited to contact Kensuke Molnar-Tanaka, Head of Asia Desk, OECD Development Centre ([email protected], +33 6 27 19 05 19), Bochra Kriout at the OECD Development Centre’s Press Office ([email protected], +33 1 45 24 82 96) or Yumiko Yokokawa at the OECD Tokyo Centre ([email protected], +81 3 55 32 00 21).

 

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