ADB provides catastrophe triggered financing for Pacific islands

The Asian Development Bank (ADB) has approved $24 million of catastrophe triggered contingent disaster financing for Pacific islands the Federated States of Micronesia (FSM), the Marshall Islands, Solomon Islands, and Tonga.

As a second phase of the Pacific Disaster Resilience Program, financing is designed to help strengthen and boost disaster resilience efforts for these islands and disbursements can be triggered by their governments when a state of disaster or emergency is declared.

The ADB launched a new contingent natural disaster risk financing solution, named contingent disaster financing (CDF), earlier this year, as it sought to deliver financing rapidly after severe catastrophes and weather events struck its members.

This latest phase of the Pacific Disaster Resilience Program will see a $3 million policy-based loan and a $3 million grant approved for the Solomon Islands, and grants worth $6 million each for FSM, the Marshall Islands, and Tonga.

In 2018 Tonga drew down on available financing within days of cyclone Gita striking the islands, providing proof of concept for an earlier phase of the program and an in development catastrophe contingent financing solution.

“Based on the success of the first phase of the program, the second phase will support policy actions in disaster risk management and provide a source of rapidly disbursing finance for timely disaster response and early recovery,” explained ADB Climate Change Specialist for the Pacific Ms. Hanna Uusimaa.

The financing also hinges on resilience efforts made, as in order to withdraw loan and grant proceeds pre-defined disaster resilience-related policy actions must be achieved.

But to disburse the loans, a state of disaster or emergency must have been declared making these instruments almost akin to a parametric trigger in terms of how quickly they can payout and the fact they are transparent and easy to assess whether payment is due.

While these islands do have some insurance protection that is parametric in nature, under the Pacific islands scheme that is backed by global reinsurance capital, this isn’t seen as sufficient on its own, hence this contingent financing is designed to boost that coverage.

The ADB said that the contingent disaster financing, that can be triggered by major catastrophes, helps to address risks related to disaster events that could exhaust annual contingency budgets and emergency funds but that may not be cost-effectively covered by insurance.

These instruments are vital while countries ramp up their adoption of insurance and reinsurance related risk transfer schemes, including instruments such as catastrophe bonds, which need to achieve some scale in terms of risks covered in order to become more cost-effective.