World Bank helps Vanuatu & Grenada to catastrophe contingent financing

The World Bank has helped two more countries join those benefiting from a source of catastrophe contingent disaster risk financing, as both Vanuatu and Grenada become the latest to receive a Catastrophe Deferred Drawdown Option (Cat DDO) arrangement.

The World Bank continues to deliver these catastrophe contingent risk financing solutions to countries exposed to peak perils as a way to introduce them to contingent disaster risk finance and insurance or reinsurance related arrangements.

The Catastrophe Deferred Drawdown Option (Cat DDO) is now one of the staple sources of capacity for countries interested in disaster risk financing, thanks to the help of the World Bank.

Designed to deliver financing contingent on the occurrence of catastrophes, with the trigger linked to the declaration of disaster by a government, the CAT DDO enables funding to be disbursed almost immediately after disaster events occur.

Designed and provided by the World Bank, the Cat DDO provides a similar type of protection to a catastrophe bond (so insurance or reinsurance like), in that it promises capital liquidity right when disasters of a significant impact or magnitude occur.

The World Bank recently approved a contingent $10 million to support Vanuatu in strengthening its resilience to disasters, in support of climate adaption, and to help the island nation manage its debt.

The $10 million of financing can be activated in the event of a major disaster striking Vanuatu and is structured as a Catastrophe-Deferred Drawdown Option, funded through the International Development Association (IDA).

“This strong support from the World Bank is critical to increasing the resilience of our country to natural disasters, like what we experienced during Cyclone Pam,” Vanuatu’s Minister of Finance and Economic Management, Gaetan Pikioune explained. “The financing and support for policy reforms provided by this operation will deliver short-, medium- and long-term benefits to all ni-Vanuatu.”

“We all know that natural disasters remain an ever-present threat to Vanuatu. Being prepared for major disasters – before they strike – is one of the most effective ways to minimize their impacts,” added Michel Kerf, Country Director for the World Bank in Papua New Guinea and the Pacific Islands. “We’re proud to be delivering support to Vanuatu focused on saving lives, protecting homes and communities, and benefiting Vanuatu’s economy.”

Grenada meanwhile has received a $20 million Disaster Risk Management Development Policy Credit with a Deferred Drawdown Option for Catastrophe Risks (Cat DDO) from the World Bank.

The arrangement is designed to provide the Caribbean island nation of Grenada with contingent financing in case of natural disasters, also supporting its reform program that aims to build multi-sectoral resilience to disaster and climate risks.

The Grenada arrangement is the the first Cat DDO approved for the Latin America and Caribbean Region that has been financed by the International Development Association (IDA).

“Catastrophic events pose a significant financial shock to a small island country,” Tahseen Sayed, the World Bank Director for the Caribbean commented. “The average estimated cost of damage from a disaster as a ratio to gross domestic product is six times higher for small states in the Caribbean than for larger countries worldwide. The World Bank is providing comprehensive support to Grenada’s efforts for better disaster preparedness, including through the innovative Cat DDO financing mechanism that can be immediately drawn down to meet critical financing needs after a disaster.”

Topically, this Grenada Cat DDO facility can be drawn is an official declaration of an emergency is made by the government and this can be related to either a natural disaster or a health related outbreak.

The CAT DDO is an efficient and cost-effective mechanism that guarantees funding is available at a time when other sources of capital can lock-up.

Hence they are often seen to be a precursor to governments moving more meaningfully into acquiring private catastrophe risk protection, through insurance and reinsurance markets, or the capital markets through catastrophe bonds, again usually facilitated by institutions such as the World Bank.

As a result, these instruments help to 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 countries protection and resilience to disaster risks.

The experience gained in securing Cat DDO coverage can serve as a step on the road to solutions such as the IBRD catastrophe bond arrangements, or parametric triggers for insurance and reinsurance, in a journey to enhanced disaster risk financing security.