The African nation of Kenya is the next country in line to benefit from a Catastrophe Deferred Drawdown Option (Cat DDO) from the World Bank, with a project underway to deliver a $200 million disaster risk financing arrangement including a catastrophe contingent line of credit, alongside development financing.
The Catastrophe Deferred Drawdown Option (Cat DDO) from the World Bank is an interesting product, especially as it is effectively a source of disaster risk financing that is contingent on the occurrence of catastrophes and designed to be disbursed almost immediately after disaster events occur.
The Cat DDO acts as a kind of flexible loan, which in the case of Kenya is planned to have a final maturity of 30 years, including a grace period of 5 years.
The contingent credit line is designed to provide a similar source of post-loss liquidity as a sovereign insurance, reinsurance or catastrophe bond like arrangement would and is often seen as the first step in a country working with the World Bank for disaster risk financing, so could lead to use of insurance, reinsurance or ILS sovereign disaster risk transfer products in future.
The World Bank’s project involves delivering both Disaster Risk Management (DRM) Development Policy Financing alongside a Catastrophe Deferred Drawdown Option (DPF with Cat DDO), totalling roughly US$200 million equivalent.
The project is designed to, “Support the Government of Kenya’s (GoK) reform program to improve the country’s capacity to reduce disaster risks and improve management of the socioeconomic and fiscal impacts of disasters.”
These CAT DDO arrangements operate in a similar fashion to sovereign catastrophe bonds, being contingent in the nature of the protection provided.
They usually feature a trigger that needs to be activated, normally the declaration of disaster, before payouts can be delivered, meaning disbursements of capital can be rapid, as they can be in the case of parametric triggers for insurance, reinsurance or cat bonds.
These instruments also help to educate governments on the potential use of insurance and other risk transfer tools such as parametric insurance facilities or catastrophe bonds, to better protect their nations against disaster risks.
That means the IBRD cat bond arrangements could be a next step in a nations journey to better disaster security, following the successful adoption of a CAT DDO.
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