World Bank targets sovereign disaster risk transfer expansion by 2020

The World Bank Group aims to expand the use of sovereign disaster risk transfer instruments by the year 2020, hoping to add five more countries to those covered by instruments such as insurance, risk pools and contingent finance.

In 2014 the World Bank helped more than 12 countries to improve their post-disaster financial response capacity and of course is behind some of the established catastrophe risk pools such as the Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC) and the Pacific PCRAFI arranged Pacific Catastrophe Risk Insurance Pilot.

Additionally, the World Bank was of course behind the MultiCat catastrophe bonds for Mexico, MultiCat Mexico 2009 Ltd., the now triggered MultiCat Mexico Ltd. (Series 2012-1), and the issuance of a cat bond for the Caribbean CCRIF, World Bank – CCRIF 2014-1.

Other disaster risk financing efforts include the support of countries such as most recently the Philippines and previously Sri Lanka with the Catastrophe-Deferred Drawdown Option (CAT-DDO) instrument, which enables countries to call on efficiency financing after disasters in the form of loans.

In a new Climate Change Action Plan published yesterday the World Bank explained its ambitions to expand the use of these solutions, to bring disaster risk financing to new countries, as well as to expand its use in those already embracing it.

As well as expanding the sovereign level schemes in existence and adding new ones for the five new countries, the World Bank is also working at a regional level with local governments to provide financial cover for natural disasters, severe weather and catastrophe events.

If these local government efforts prove successful, with one of the initiatives underway in the Philippines, the World Bank said it will look to expand them elsewhere. These local or regional efforts could use the sovereign risk pools for reinsurance perhaps, while the sovereign facilities then call on private risk transfer from the reinsurance and capital markets.

Additionally the World Bank wants to continue to support and encourage the roll-out of weather index insurance to enable climate-smart agriculture, another area of focus that will ultimately see the risk pools grow.

The goal is to encourage financial protection from natural disaster and contingent financing for when the worst does happen. The World Bank links this intrinsically to its climate change action plan, with so many of the exposures its risk financing instruments cover being climate linked.

John Roome, Senior Director for Climate Change at the World Bank Group, commented; “The Action Plan will allow us to help developing countries more quickly, and in the areas where support is most needed, such as disaster preparedness, social protection, and coastal protection.”

The key for the private risk transfer markets is to be ready to support the risk transfer, reinsurance or retrocession needs of the growing pools of disaster, weather and climate risk that are created from the World Bank’s initiatives.

As these risk pools increase in size, the requirement for risk transfer grows and the catastrophe bond market could find itself the ultimate destination for more of these exposures in years to come, as the World Bank follows this mission to expand coverage to uninsured regions of the world.

The importance of having financing in place that is secured and ready to enable disaster recovery cannot be underestimated. The expansion of the use of these instruments is guaranteed and the capital markets will play its role in ultimately financing them, alongside re/insurers.