Sri Lanka signs up to World Bank Catastrophe Deferred Drawdown Option

Sri Lanka has become the first South Asian country to sign up for an innovative disaster risk financing facility with the World Bank, gaining access to a $102m Development Policy Loan with a Catastrophe Deferred Drawdown Option (DPL with a CAT DDO).

The CAT DDO acts like disaster insurance or a contingent facility, allowing Sri Lanka to draw down on a line of credit in the immediate aftermath of a catastrophe event such as a tsunami, cyclone or flood.

The $102m Development Policy Loan with a Catastrophe Deferred Drawdown Option acts as a line of approved credit which Sri Lanka will be able to draw on, either partially or in full, if it declares a state of emergency after a natural disaster occurs. The board of the World Bank approved the facility along with a $110 million Climate Resilience Improvement Project (CRIP), which will be used to finance both short and long-term interventions to reduce climate and disaster risk in Sri Lanka.

“Poor people are usually the first to suffer in natural disasters and they do not have the resources to cope with the losses in income or property,” commented Francoise Clottes, World Bank Country Director for Sri Lanka. “The package of financial support, including a first of its kind facility for South Asia, will help the government of Sri Lanka to respond more effectively to help people suffering from a natural disaster while ensuring that financial support remains intact for the country’s programs to overcome poverty and increase shared prosperity.”

The DPL with CAT DDO has been used before by the World Bank, typically as one of the first disaster risk financing initiatives in a country. It was first used by the World Bank in 2008 in middle-income countries in Latin America and the Caribbean. Since then the World Bank has approved the DPL with a CAT-DDO in the Philippines, Costa Rica, Colombia, El Salvador, Guatemala, Panama and Peru.

Countries which have accessed a CAT DDO facility have found the protection and financing it provides to be flexible and prompt in terms of payout, enabling governments to put the money drawn to immediate use in recovering from disaster rather than spending time and effort trying to raise capital after an event.

“This operation is part of a broader strategy to help the government of Sri Lanka shift to a more comprehensive approach to the management of disaster risks,” stated Marc Forni, Task Team Leader of the project. “It will also help improve institutional mechanisms for disaster risk management and financial protection, increase capacity to ensure climate resilient development, and improve understanding of disaster risk.”

Providing capital contingent on the declaration of a disaster is often one of the first steps in a country moving towards greater sovereign use of private market risk transfer tools. As development accelerates across the globe it is expected that an increasing number of countries will choose to access facilities such as this from the World Bank.

The contingent nature of the protection provided, featuring a trigger which needs to be activated (in this case declaration of disaster) before payout can be made, also helps to educate governments in the potential use of insurance and other risk transfer tools such as parametric insurance facilities or catastrophe bonds.

The DPL with a CAT DDO can be disbursed over a period of three years and may be renewed by the country accessing the facility up to four times for a total of 15 years.

In tandem with the rollout of this CAT DDO facility, a Fiscal Disaster Risk Assessment, supported by the Global Facility for Disaster Risk Reduction and Recovery (GFDRR), is being undertaken. This assessment will develop a disaster risk financing and insurance (DRFI) program which aims to help the government and private institutions better manage the financial risks of natural disasters.

The World Bank says that the ongoing project in Sri Lanka will work towards making recommendations that may eventually include the development of sovereign risk transfer instruments and supporting the development of a private catastrophe risk insurance market for the country or region.