IADB looking at contingent disaster financing for Latin America and Caribbean

The Inter-American Development Bank has been discussing new disaster risk financing instruments to assist countries in Latin America and the Caribbean to recover after major natural disaster or weather events. A disaster fund has been discussed and is one of the options on the table. Other instruments which have been discussed are contingent capital type solutions which would require a disaster to have a certain level of impact before a payout or loan would be made.

Representatives of the IADB believe that flexible financial instruments to help countries hedge against natural disasters and the resulting possible economic downturns are what is required. The structure of any facility is to be defined but it is likely to include contingent loans for post-event disaster financing. Whether these loans could be linked to actual parametric conditions to trigger different levels of payment has been discussed. This would make the loans triggers very similar to a catastrophe bond and the IADB have been looking at alternative risk instruments for insight into the best way to help the region.

“The region’s countries today need a stronger IDB, more active and creative in developing new tools,” said Uruguayan Finance Minister Fernando Lorenzo, who was elected chairman of the Board of Governors of the IADB. “In the past insufficient funding was the main cause of dysfunction in national policies and (…) in instances when it was necessary to carry out painful, excruciating adjustments, with extremely negative social consequences for region,” he said. “Therefore, the IDB and other regional institutions do well in offering us more and better tools to address such contingencies.”

It will be interesting to see what type of facility emerges for this region, whether it will involve any parametric or other triggers and also whether any assistance from the private reinsurance and risk transfer markets will be sought.