IMF recommends catastrophe bonds for Bangladesh

Bangladesh could benefit from the use of insurance and reinsurance structures including catastrophe bonds as a way to secure much needed capacity enabling it to better respond to natural disasters and climate related risks, according to the International Monetary Fund (IMF).

Having completed a new economic assessment of the country, the IMF says that Bangladesh is making progress in reducing poverty, improving access to education and in delivering other development goals, but there is an overarching threat to the country posed by extreme weather and climate change.

Bangladesh is considered one of the countries most exposed to climate change related risks, with as much as one-third of the population at risk of displacement if sea levels rise.

Bangladesh also ranked in the top ten countries in the world most impacted by extreme weather events during 1998–2017, according to the Global Climate Risk Index. While the countries losses from extreme weather related catastrophe events were estimated to average as much as 1.8% of GDP every year between 1990 and 2008.

Capacity needs to be built up in countries like Bangladesh, in terms of resilience building, as well as risk financing and contingent finance to enable recovery after climate and weather related events strike.

Part of this is ensuring that the government’s own budget has the necessary contingency facilities in place, able to release capital and financing to impacted regions of the country immediately disaster strikes, or even before where possible.

But alongside budgeted contingency measures, the IMF also recommends the use of insurance and reinsurance related mechanisms, including catastrophe bonds, as a way to secure finance and provide more extensive coverage.

The IMF noted that the government of Bangladesh is already investing in and taking measures to reduce the countries exposure to climate and weather related events, including in adaptation related areas for crop protection, flood resilience and other mitigation activities.

However the lack of financing that would be immediately available after a disaster strikes remains a concern and this is where the capital markets, insurance and reinsurance related risk transfer technologies and structures such as the catastrophe bond could prove a valuable addition.

The insurance-linked securities (ILS) market and its investors would certainly be interested in supporting and allocating capital to the securitised risk that a Bangladesh catastrophe bond could bring to market, given the diversifying properties of perils in that region.

But to get a cat bond for Bangladesh to market would take the assistance of organisations such as the World Bank, as well as engagement from other multi-lateral agencies, as the country would require the technical support and assistance, as well perhaps as the financial support such organisations bring.

Every country that is as climate exposed as Bangladesh would benefit from a source of contingent financing that is secured and ready to pay-out when disaster strikes.

The catastrophe bond can provide that solution, while the capital market and institutional investors are an ideal source of the capacity and liquidity required to absorb and diversify away the world’s climate related disaster risks.