A number of countries have benefited from disbursements under World Bank provided catastrophe contingent lines of credit after the Covid-19 coronavirus pandemic triggered their Catastrophe-Deferred Drawdown Options (CAT-DDO’s).
The Catastrophe-Deferred Drawdown Option (CAT-DDO) is a financing instrument that acts a little like a parametric catastrophe bond, in that they provide a source of capital contingent on a disaster being declared in the beneficiary country.
They are similar to an insurance or reinsurance policy, or a catastrophe bond, except that once triggered the contingent financing facility opens up a loan, or line of credit to the World Bank, that does have to be repaid, albeit at attractive terms.
The Catastrophe-Deferred Drawdown Option (CAT-DDO) has been widely used by emerging economies as part of the disaster risk financing toolkit.
Largely viewed as a contingent source of capital liquidity to be used following natural disasters, as this has been their main use-case in the past, it turns out that the fact CAT-DDO’s can also cover healthcare emergencies has proven beneficial in the current coronavirus crisis.
First to benefit from a CAT-DDO disbursement was the Dominican Republic, which has now received a US $150 million line that the World Bank says will “support the country’s efforts to implement emergency measures to contain the spread of COVID-19 (coronavirus) and manage the impact of the pandemic.”
The World Bank further explained that, “The funds are disbursed from a contingent credit line from the World Bank, better known as the Catastrophe Deferred Drawdown Option (Cat-DDO), effective since 2018. The Cat-DDO was the first of its kind in the Caribbean and supported a series of Government reforms to improve its institutional and regulatory framework for disaster resilience. Those included measures to strengthen the resilience of the health sector, in compliance with international regulations mandated by the Pan American Health Organization and World Health Organization.
“The Cat-DDO provides immediate liquidity to support a country’s efforts to recover from a natural disaster or a public health emergency.”
Next to benefit was Panama, which has received US $41 million through its CAT-DDO arrangement, with the World Bank explaining that, “Panamanian officials declared a national State of Emergency on March 13 to address the health crisis, which enabled the disbursement made on March 25 through the mechanism known as the Development Policy Loan with a Catastrophe Deferred Drawdown Option (CAT DDO), a contingent financing to address shocks related to disasters and/or health-related events.”
The Maldives has also benefited from its catastrophe contingent line of credit, as a CAT-DDO was triggered to provide a disbursement of US $10 million.
“A $10 million contingency financing, under Disaster Risk Management Development Policy Financing with a Catastrophe Deferred Drawdown Option (CAT DDO), signed in 2019, has also been made available to support Maldives,” the World Bank said.
In addition, the biggest recipient of funds under a catastrophe contingent line of credit was Romania, which received EUR 400 million (roughly US $441m).
“The Government of Romania activated Euro 400 million of pre-arranged financial support from the World Bank to help prevent and respond to the COVID–19 (Coronavirus) pandemic. The financing covers a range of interventions to strengthen health services, minimize the losses to both the public and private sectors, and to safeguard lives and livelihoods overall,” the World Bank explained.
Adding, “Romania was able to benefit from a pre-arranged loan which has a Catastrophe Deferred Drawdown Option (CAT-DDO) facility that the Government negotiated with the World Bank in June 2018. The objective of this program is to strengthen Romania’s institutional and legal framework to effectively manage the physical, social and fiscal impacts of health emergencies, natural disasters and climate change. As well as supporting the government with critical policy reforms to build resilience, this facility enables the government to access financing within 48 hours in response to a natural disaster or health emergency.”
Finally, Colombia has now also received US $250 million from its CAT-DDO arrangement with the World Bank.
The Bank said, “As part of its response to the COVID-19 emergency, on March 31, the Colombian government received a disbursement of US$250 million from a development policy loan, better known as CAT DDO, from the World Bank. Colombian authorities had declared a State of National Emergency on March 17 to address the health crisis.
“The CAT DDO is a contingent loan that countries subscribe to in advance to be financially prepared in the event of a disaster or health emergency, and it is immediately disbursed. The CAT DDO is part of the country’s disaster risk finance strategy.”
Other countries may also benefit, should they declare health emergencies due to the coronavirus pandemic and have a CAT-DDO covering health risks in place.
Interestingly, Morocco has restructured its CAT-DDO to include health risks in just the last few weeks, a direct response to the Covid-19 outbreak we imagine.
Nepal has also signed up for a CAT-DDO just in the last few weeks as well, with health hazards included in the coverage this provides.
The Catastrophe-Deferred Drawdown Option (CAT-DDO) has proven its worth and continues to prepare governments for greater use of disaster insurance, reinsurance and other risk financing options including catastrophe bonds.
The coronavirus pandemic has demonstrated the clear-value of having a contingent source of capital that is able to be triggered by major disaster-level events.
The need to secure effective pre-disaster risk financing in all its forms is clear now, more than perhaps ever before.