The World Bank Group said today that it intends to build on existing catastrophe insurance solutions, such as catastrophe bonds, to access disaster risk financing without adding to member country debt.
In announcing a new comprehensive toolkit focused on supporting countries in the aftermath of natural disasters, the World Bank highlighted catastrophe bonds as an area of development and expansion as it looks to give members access to efficient sources of insurance capital for disaster risk Transfer and Financing Purposes.
At today’s summit on the New Global Financial Agreement, World Bank Group President Ajay Banga highlighted priority areas for strengthening countries’ crisis preparedness, response and disaster recovery.
They include: (1) suspending debt repayments; (2) reorienting financing; (3) linking crisis preparedness and financing; (4); supporting development projects with private sector support; catastrophe insurance.
The World Bank Group will roll out climate adaptation debt provisions on the first tool in the suite.
These provisions could suspend debt repayments for the most vulnerable countries in the event of a crisis or disaster, with the World Bank’s most vulnerable clients benefiting first.
The second tool will give countries more flexibility in how they use the financing, allowing them to quickly direct some of the money to emergency response.
Third, the World Bank will help governments build better emergency response systems and processes, provide expertise and analytical support, and build rapid disbursement funds that are available in times of crisis.
The fourth initiative will focus on delivering new types of insurance products that can be used to support development projects so that work can quickly get back on track.
With the fourth element, the World Bank, through its Multilateral Investment Guarantee Agency, has partnered with the private insurance and reinsurance industry through the Insurance Development Forum to design an innovative parametric insurance product.
And IFC designs private-sector-led crisis response solutions to help financial institutions cope with the impact of natural disasters caused by climate change.
Finally, the fifth tool in the toolkit is where disaster bonds come into play.
The World Bank’s goal is to create enhanced catastrophe insurance products that provide resources without increasing countries’ debt burdens.
“Building on its catastrophe insurance solutions, such as catastrophe bonds, the World Bank Group will offer all countries the option to embed catastrophe insurance in loan products,” it explained.
Adding that, for affordability reasons, “we will work with donors to make these products affordable for low-income countries, including funds that can purchase premiums. This will develop enhanced catastrophe insurance products for disaster-affected countries provide resources without increasing its debt.”
These measures are expected to provide billions of dollars in funding for crisis response after the disaster.
Cat bond-based initiatives could be significant given the tool’s development project focus, and cat bond structures could also be relevant to a fourth initiative, particularly in the form of resilience bonds.
It is also worth noting that the World Bank hopes to make catastrophe insurance more accessible through the establishment of a premium fund.
The cost of cat bonds has sometimes hindered their use in the area of sovereign risk transfer, so any support for member countries to provide financing at a premium, with support from the World Bank, could help increase the availability of cat bonds for disaster risk financing. use.
The World Bank is an important facilitator of access to catastrophe insurance capital markets through the issuance of catastrophe bonds, and these steps could enhance its work in the ILS market while making catastrophe bonds and similar insurance more accessible to its member countries.
Michael Bennett, Head of Derivatives and Structured Finance, World Bank Treasury, speaks at the upcoming ILS Asia 2023 conference in Singapore on July 13. Register here to join us.