Asian Development Bank discussing Risk-Layered disaster risk transfer with Mongolia

The Asian Development Bank is working with Mongolia on the potential to replicate the Risk-Layered Disaster Relief Finance Program it recently implemented for the Kyrgyz Republic and Tajikistan, which puts sovereign parametric risk transfer instruments including catastrophe bonds as part of the conversation.

Recall that the Asian Development Bank (ADB) implemented its first Risk-Layered Disaster Relief Finance Program in those two countries earlier this year, with the project combining Contingent Disaster Financing (CDF) and the first Disaster Relief Bonds (DRB) (or catastrophe bonds) directly issued by the Bank.

The two sovereign catastrophe bonds secured $160 million of capital market-backed parametric earthquake and extreme precipitation disaster risk financing, evenly split between the Asian Development Bank – Kyrgyz Republic 2026 and Asian Development Bank – Tajikistan 2026 cat bond issuances.

As the Asian Development Bank (ABD) now looks to continue this disaster risk financing work with more of the natural hazard exposed countries it counts as members, Mongolia is the next deemed well-suited to the Risk-Layered Disaster Relief Finance Program approach.

Mongolia faces a range of natural disaster and climate risk related threats, from earthquakes to floods caused by extreme precipitation and snow melt, dust storms, droughts and wildfires.

The country has seen an increasing frequency of losses caused by these hazards and in some cases this has stretched the government’s resources to respond. At the same time, Mongolia is undergoing a rapid urban development in some areas, which further elevates its exposure to extreme natural hazard events.

The Asian Development Bank (ADB) has now begun a new project that involves discussions with the Government of Mongolia on the replication of the Risk-Layered Disaster Relief Finance Program that it implemented for the Kyrgyz Republic and Tajikistan.

This will include an analysis and exploration of options for strengthening Mongolia’s own risk layered disaster risk financing architecture, while the ADB will take its learnings from the successful implementation in Kyrgyz Republic and Tajikistan to asses what type of financial instruments might be feasible.

The ADB will work with Mongolia to help it understand the institutional requirements for adopting structured disaster risk financing instruments, including design considerations, legal and regulatory needs and guide the country on how sovereign level disaster risk financing can be integrated into its climate and resilience strategy.

There’s no certainty catastrophe bonds would prove suited to become part of Mongolia’s disaster risk financing arrangements, but they will surely be part of the conversation after the ADB’s recent successful first issuances.

Exactly what risk transfer structures are considered or implemented will come down to Mongolia’s risk profile, structuring considerations and feasibility, and which markets might be most appropriate for transferring disaster risks to.

Sovereign parametric insurance arrangements in their broader formats are likely to be in the discussion as well. Mongolia has some history with parametric microinsurance programs that have been targeted for specific sectors of the economy, so the government has some experience there.

It’s encouraging to learn that the Asian Development Bank is taking the experience of its first implementation of the Risk-Layered Disaster Relief Finance Program forward to other member countries and it suggests the cat bonds could be replicated in time, for the countries with the right peril profile and levels of disaster risk management maturity.

In addition, the ADB is also working with Kazakhstan, another country with high natural peril exposure, to develop disaster risk management and financing frameworks, that is expected to include a contingent disaster financing instrument. Again, it’s good to see the ADB expanding its disaster risk finance work with its members to help them secure capital instruments that can respond when major events impact their economies.