2018 - 2019 Edition of Citi Perspectives for the Public Sector

Citi Perspectives for the Public Sector |  2018-2019 43 Investors buy cat bonds because the returns risk is uncorrelated to that of other investment instruments. Meanwhile, governments sponsor cat bonds, because they transfer the financial unpredictability of disasters to the market. Budgeting for natural disaster response is made simpler. However, the probability of a disaster event directly correlates with the cost of a cat bond: all else being equal, high frequency events are more expensive to cover than low frequency events. The cat bond market developed first to cover North American and Japanese storms and earthquakes. Today, cat bonds cover more diverse perils in a wider range of countries and at larger issuance sizes. They can now be issued against perils including Chinese earthquakes, European earthquakes, Australian typhoons and pandemics. An example of the evolution of the market is the landmark cat bond issued on February 2018 by the IBRD on behalf of the member countries of the Pacific Alliance: Chile, Colombia, Mexico and Peru. The IBRD issued $1.36 billion of floating rate earthquake-linked capital at risk notes across five tranches. This was the first catastrophe bond transaction for Chile, Colombia and Peru, the first multi- sovereign issuance and the largest-to-date cat bond. The transaction demonstrated the resilience of the cat bond market immediately following one of the largest disaster loss years in history in 2017. Why transparency is crucial Whether using a DRMF or cat bonds, the management and disbursement of natural disaster relief funds needs to be transparent and efficient. Otherwise, relief funds can be diverted away from the ultimate intended beneficiaries or reach victims too late. Numerous “fintech” advances in electronic banking and financial management are now enabling governments to replace cash and paper with fast, transparent, efficient, effective and controlled ways to move money in a crisis. 4 Tech for Integrity (T4I) was a global public private partnership launched by Citi, Mastercard, Microsoft, IBM, Facebook, Clifford Chance, Let’s Talk Payments and PWC at Davos in 2017. Over 70 governments, NGOs and multilateral organizations such as the UNDP, IADB and the World Bank supported the initiative. T4I used an open innovation methodology to crowdsource technology solutions from around the world that help public sector and private sector entities fight corruption, increase transparency and promote integrity. 5 Citi does not endorse any of these companies in particular, but the Public Sector Group is watching the evolution of disaster response technologies with keen interest. Implementation of transparency-boosting technologies in humanitarian crises can reduce opportunistic fraud and corruption, increase the efficiency of disaster response financing, and improve the speed at which disaster victims receive the funds they need. Virtual cards and mobile wallets have already demonstrated their ability to improve transparency in natural disaster situations. However, these solutions face last mile connectivity challenges: they all require telecommunications infrastructure, which might be damaged in a disaster. During Citi’s Tech for Integrity Challenge, several fintech solutions demonstrated the potential to overcome damaged telecoms infrastructure and similar obstacles. 4 The startup Paycode combines a smart card, biometric identity and “bank in a box” model that does not require internet connectivity to deliver and access funds. Nultan’s contactless radio-frequency identification (RFID) payment solution allows fast, non-cash payments without an internet connection. PALPAY also uses RFID technology to distribute and track non-cash supply deliveries to disaster victims. 5 Multi-tier layering of funding solutions and efficient and transparent management of disaster relief funds should be part of every government’s comprehensive natural disaster risk management strategy. Importantly, this strategy and its different components should be in place before a natural disaster occurs. Preparedness is key to minimizing the human and financial impact of natural disasters. Setting up a DRMF, issuing a cat bond, or leveraging the latest disaster relief technologies are complex and lengthy processes that require planning, political support and widespread communication. If governments can proactively design and implement these and other measures, great progress will have been made against the devastating financial impact of natural disasters. An example of the evolution of the market is the landmark cat bond issued on February 2018 by the IBRD on behalf of the member countries of the Pacific Alliance: Chile, Colombia, Mexico and Peru.