The World Bank Treasury offers financial solutions for contigent and crisis financing and disaster risk transfer intermediation.
Contingent & Crisis Financing
Disaster Risk Transfer Intermediation
The World Bank Treasury offers several contingent and crisis financing options.
Development Policy Loan with Catastrophe Deferred Drawdown Option (DPL Cat DDO)
The DPL Cat DDO is a contingent financing line that provides immediate liquidity to countries to address shocks related to natural disasters and/or health-related events.
It serves as early financing while funds from other sources such as bilateral aid or reconstruction loans are being mobilized. Cat DDOs enhance countries’ capacity to plan for and manage crises by securing access to financing before disaster strikes. It is approved prior to the disaster and disburses quickly once the event occurs and the drawdown trigger is met.
The Cat DDO is most effective as part of a broader risk management strategy in countries highly exposed to natural disasters, including health related events. A disaster risk management strategy would typically include a Cat DDO to provide liquidity in the immediate aftermath, or at the onset, of an event. This may also be complemented by other risk transfer instruments that provide immediate liquidity, cover losses or support reconstruction. Governments determine the mix of disaster risk financing instruments based on an assessment of risks, desired coverage, available budget, and cost efficiency.
Crisis Reponse Window
The primary objective of the Crisis Response Window (CRW) is to provide IDA countries with additional resources that will help countries to respond to severe economic crises and major natural disasters and return to their long-term development paths. In November 2015, the Executive Directors of IDA expanded the eligibility criteria for accessing the CRW to include public health emergencies and epidemics. Read more at ida.worldbank.org/financing/crisis-response-window.
Immediate Response Mechanism
The Immediate Response Mechanism (IRM) complements longer-term emergency response tools available to IDA countries, such as the Crisis Response Window, offering them financial support within weeks rather than months of an emergency. The inclusion of contingent emergency response components in selected existing and/or future investment projects will facilitate the rapid disbursement of funds. Read more at ida.worldbank.org/financing/immediate-response-mechanism.
Pandemic Emergency Financing Facility
The Pandemic Emergency Financing Facility (PEF) quick-disbursing financing mechanism that provides a surge of funds to enable a rapid and effective response to a large-scale disease outbreak. Eligible countries can receive timely, predictable, and coordinated surge financing if affected by an outbreak that meets PEF’s activation criteria. The PEF provides the first-ever insurance for pandemic risk, offering coverage to all low-income countries eligible for financing under IDA. Read more at worldbank.org.
Disaster Risk Transfer Intermediation helps protect countries against risks stemming from meteorological and geological events, and including pandemics, epidemics and other events affecting health issues like morbidity, mortality and longevity. When intermediating on behalf of clients, the Bank stands between the client and the private sector, engaging in back-to-back transactions with both parties to pass on the terms of the risk protection from the market counterparty to the client, while providing protection to the client against the credit risk of the private sector counterparty. The transaction types include catastrophe bonds, derivatives, and insurance and reinsurance contracts. With this flexibility, the Bank is able to respond to client needs in terms of structuring, documentation, and legal requirements and, at the same time, tap the market that can hedge the risk most effectively.
Cat bonds transfer risk to investors by allowing the issuer to not repay the bond principal if a major natural disaster occurs. The World Bank Group has developed a flexible platform for structuring and issuing cat bonds to transfer risk to capital market and insurance investors.
A derivative contract can be used for documenting the transfer of catastrophe risk linking coverage payouts to pre-specified conditions (e.g. parameters such as magnitude of earthquake, windspeed of a tropical cyclone, etc). Another particular use of this instrument can be for hedging weather risk with a financial contract based on an underlying weather index that transfer the risk to the financial markets. Payments are triggered by adverse weather events according to pre-specified conditions (e.g. levels of rainfall, seasonal temperatures, etc.).
The insurance and reinsurance contracts works in a similar manner as a derivative, by providing coverage against disaster risk. The disaster risks taken by the World Bank to provide coverage to the client will be fully offset by entering into one or more transactions with the market. Insurance and reinsurance transactions, however, have different legal and regulatory implications from derivatives, which will be reviewed on a case by case basis.
When is it used?
These are risk management products that IDA and IBRD eligible borrowers can use to mitigate exposure to natural disasters, weather risks, or health hazards. Each product can be structured for a single client or a group such as regional multi-country risk pool. Risk transfer instruments are important complement to the use of emergency funds, budget reserves and contingent credit lines (Cat DDOs). They are designed to leverage budget resources to offer greater protection when an adverse event occurs.
How does it work?
The financial terms are highly customized to the needs of the client. The main cost is the premium for the risk transfer coverage and is proportional to the amount of the coverage and its risk parameters. Buying coverage for more frequently occurring disasters is more expensive than coverage for rarer “catastrophes.” Upfront fees for structuring these transactions also vary depending on the complexity related to the risk modeling, drafting of legal documentation, marketing and placement. In offering these products, the World Bank acts as an arranger or as an intermediary using the IBRD or IDA balance sheets. When intermediating on behalf of clients, the Bank stands between the client and the private sector, engaging in back-to-back transactions with both parties to pass on the terms of the risk protection from the market counterparty to the client, while providing protection to the client against the credit risk of the private sector counterparty. The Bank never retains any market risks — risk is acquired from clients and simultaneously passed in full to market counterparts.
What are the requirements?
The legal documentation requirements vary according to the selected product and can be customized to meet the client’s need. For example, a country should have the statutory authority and capacity to purchase insurance from the World Bank. Typically, intermediation of these products is executed on a stand-alone basis. However, clients may request to embedded a risk transfer transaction within a loan agreement, or explore other customized solutions. With this flexibility, the Bank is able to respond to client needs in terms of structuring, documentation, and legal requirements and, at the same time, tap the market that can hedge the risk most effectively.
