The Asian Development Bank (ADB) has launched a new contingent natural disaster risk financing solution which it has named contingent disaster financing (CDF), as it seeks to deliver rapid paying risk capacity for its members after they experience significant natural catastrophe events.
Contingent disaster financing (CDF) is a mechanism by which funding can be released quickly to ADB members in support of their budgets after disaster strikes.
It’s designed to ensure they can recover better, without having to take financing from their broader budgets
“CDF will provide a quick and flexible source of funds for developing member countries affected by disasters until funds from other sources become available,” explained the ADB’s Director General of Strategy, Policy, and Partnerships Tomoyuki Kimura. “It will also help promote greater preparedness and risk management in developing member countries prone to disasters.”
Contingent disaster financing (CDF) is really a guaranteed line of credit that can be opened up to participating countries after a major natural disaster occurs.
It also includes resilience related elements, as the member countries have to sign agree to better its preparedness for disasters as part of the agreement.
The CDF will provide financing protection for disasters triggered by natural hazards such as typhoons, floods, earthquakes, droughts, and tsunamis, the ADB explained.
On the resilience and preparedness side of the equation, the CDF is also supports essential policy reforms to strengthen disaster preparedness that should be completed before a catastrophe strikes the country.
Once approved, a CDF remains open to a country until it is triggered and a disaster strikes. Once triggered the member country can draw down on the credit facility, allowing funding to flow rapidly after the natural disaster has occurred.
“The country can then quickly access the approved financing to help relieve fiscal constraints for urgent relief and recovery efforts and avoid disruptive reallocations from priority budget programs,” the ADB explained.
Kimura added, “Where necessary, CDF disbursements can be accompanied by follow-up assistance through ADB’s other emergency or regular lending instruments to support recovery and reconstruction.”
Similar to the World Bank’s catastrophe deferred drawdown option CAT-DDO, which also opens a line of credit that is contingent on disaster striking a country before any payment occurs, the CDF is effectively a parametric source of disaster risk financing without any premium to pay in advance (the country would pay for the credit once it is activated, we understand).
As such these are useful mechanisms for countries to get used to placing disaster risk financing within their budgetary planning, perhaps leaving a hole that insurance and reinsurance solutions can fill in years to come.
The contingent nature of the coverage and rapid disbursement of capital after disaster strikes is akin to a parametric catastrophe bond solution, which can provide beneficial education for the member countries that could lead on to them embracing insurance and reinsurance based risk financing in years to come.
The ADB is adding to the range of disaster risk financing and insurance or reinsurance like tools that it has to offer member governments with the launch of the CDF, which can only help to support members in their responses and recovery to natural disasters, with catastrophe bonds another such instrument.