Bahamas gets contingent disaster loan with parametric triggers from IDB

The islands of the Bahamas are to benefit from a $100 million contingent loan arrangement from the Inter-American Development Bank (IDB), which will provide a source of liquidity after natural disasters and feature parametric triggers to activate loan disbursements.

The use of contingent financing for recovery, rebuilding and financing response to natural disasters is not new, the World Bank has been a regular provider of its contingent Catastrophe Deferred Drawdown Option (Cat DDO) loans and the updated Disaster Risk Management Development Policy Loan with a Catastrophe-Deferred Drawdown Option (CAT-DDO 2) arrangements in recent years.

But these CAT DDO contingent financing arrangements are typically triggered based on the sovereign government declaring that a disaster situation has occurred.

In the case of the Bahamas $100 million contingent disaster loan from the Inter-American Development Bank (IDB), which is being prepared right now, the structure will utilise parametric triggers based on inputs relating to disaster event location, type and magnitude to define wither any disbursement of the loan is due.

In this way the contingent disaster loan can provide just in time financing for right after a disaster strikes, with the event parameters the deciding factor on whether the loan liquidity is made available to the government of the Bahamas for response and recovery purposes.

Initially, the $100 million contingent disaster loan will only cover hurricane impacts, but the terms of the arrangement mean that other perils or types of disaster could be added under the loan’s coverage in future.

The contingent and natural disaster event-linked loan is seen as another way that the Bahamas can better manage its natural disaster risk and strengthen its public finances to combat climate change related risks.

The loan facility also has resilience aspects baked in, with a condition of retaining the facility being that the Bahamas continues to have a comprehensive natural disaster risk management plan in place.

While contingent disaster loans from development organisations are not new, the parametric nature of the triggers in this one are and it could help to prepare the way for greater use of parametric risk transfer, including insurance, reinsurance and catastrophe bonds in the Bahamas and the broader region.

Ensuring liquidity of risk finance assets right when after the disaster strikes is key for recovery and resilience, hence embedding a parametric trigger into such arrangements can help to ensure capital flows just in time and when it is most needed.

The government of the Bahamas signed up to parametric insurance coverage from the CCRIF SPC (formerly the Caribbean Catastrophe Risk Insurance Facility) earlier this year, but with the parametric triggers restructured on a regional basis.