A project is now underway that may see the country of Romania as the next in line to benefit from a Catastrophe Deferred Drawdown Option (Cat DDO) instrument from the World Bank, as the government of the country seeks to enhance its disaster risk financing support.
The Catastrophe Deferred Drawdown Option (Cat DDO) is an interesting disaster risk financing product, especially as it is contingent on the occurrence of catastrophes and designed to be disbursed almost immediately after disaster events occur.
Designed and provided by the World Bank, the Cat DDO is similar in terms of the kind of protection it offers to a catastrophe bond, in that it promises capital liquidity right when disasters happen.
It’s an efficient and cost-effective way to guarantee the availability of funding, hence can often be a precursor to governments moving more meaningfully into acquiring catastrophe risk protection through insurance and reinsurance markets, or capital markets through catastrophe bonds.
The Cat DDO provides the beneficiary country with a flexible loan source, which in this case with Romania is planned to have a final maturity of 20 years.
As we wrote last month, there is also a project underway at the World Bank to provide the African nation of Kenya with a Catastrophe Deferred Drawdown Option (Cat DDO) alongside development financing.
The new project for Romania seeks to strengthen its institutional and legal framework to better manage the physical, social and fiscal impacts from natural disasters and climate change, the World Bank said.
The Romanian project constitutes provision of a 400 million Euro (roughly $493m) Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option, so the liquidity is tied to the occurrence of a major disaster for which the government needs financing to be made available quickly.
These CAT DDO financing initiatives provide disaster risk financing in a similar manner to sovereign catastrophe bonds, being contingent in the nature of the protection provided.
They typically feature a trigger with conditions that need to be met in order to activate the financing facility, often an official declaration of disaster, then payout loans can be delivered, meaning the disbursement of capital can be made rapidly, akin to the use of parametric triggers for insurance, reinsurance or cat bonds.
These instruments also act as a mechanism that can help educate governments and sovereign stakeholders on the potential use of insurance, reinsurance and other risk transfer tools such as parametric risk transfer or catastrophe bonds, to enhance their nations protection and resilience to disaster risks.
As a result, the experience of attaining Cat DDO coverage could be a step prior to countries looking at solutions such as the IBRD cat bond arrangements as the next step in a nations journey to better disaster security.