World Bank to scale-up access to catastrophe bonds and reinsurance capital

The World Bank announced a significant expansion of the use of catastrophe bonds, reinsurance and instruments such as parametric risk transfer for countries exposed to large-scale disasters, with an ambition to embed catastrophe insurance and risk transfer instruments more deeply into its financing operations.The World Bank’s position on the use of disaster insurance and risk transfer backed by private capital markets and reinsurance capacity has been building over the last few years.

Artemis readers and conference attendees know that the Bank’s senior staff members remain committed to the use of insurance-linked securities (ILS) as an effective way to mobilise private capital to support the disaster insurance needs of member countries.

Watch this keynote speech and Q&A with Jorge Familiar, Vice President and Treasurer, of the World Bank Group from our Artemis London 2023 conference.

The World Bank has used efficient and responsive risk transfer to protect countries and government’s budgets for many years, with parametric catastrophe bonds and insurance playing a role in its operations for over two decades.

As we reported last year, the World Bank has been planning to significantly increase the use of instruments such as catastrophe bonds, to benefit member countries, with ambitious plans to expand its use of catastrophe bonds for member countries by roughly 400% over the next five years.

Now, the Bank has come forward with some more insight into how it intends to increase access to catastrophe insurance to member nations, particularly developing countries.

Late yesterday, the World Bank announced the approval of “a suite of groundbreaking tools to help developing countries better respond to crises and strengthen preparedness for future shocks.”

It is an expansion of the Bank’s Crisis Toolkit offering, but now designed to fill gaps based on lessons learned from previous crisis response arrangements, marking a substantial expansion to the range of tools available to countries to protect them in times of crisis and enable faster and more effective recovery from disasters.

One interesting new commitment from the World Bank is a promise to allow fast access to cash for emergency response, including the Rapid Response Option, which will allow a country to repurpose a portion of their unused World Bank financing to address emergency needs when a crisis occurs.

An example would be that, in the event of a hurricane, a government could efficiently repurpose undisbursed funds from long-term infrastructure projects, such as for development of roads and bridges, to deliver capital to support the immediate availability of food and shelter for its citizens.

That’s a pretty big step in how the Bank will allow countries to use their financing, as well as in providing swift access to it when events occur that could have a major impact on the countries budget, financing and ability to continue on its development pathway.

In addition, the Bank is going to substantially scale-up access to pre-arranged financing for emergency response, such as through contingent resources and by expediting access to new financing for budget support when disasters hit.

Where it gets most interesting for Artemis readers though, is the World Bank’s promise to scale-up and expand catastrophe insurance availability and also embed its use into Bank financing arrangements.

The goal is to offer “increased protection against large-scale disasters,” which of course means more capacity will be needed to support this, while innovative risk transfer mechanisms and structures will be required to deliver insurance risk transfer in the most effective and efficient ways.

“Building on existing tools such as catastrophe bonds, the Bank Group will offer all countries the option to embed catastrophe bonds, insurance, and other risk management products into their Bank financing operations,” the organisation explained.

Adding, “Governments then could be eligible for a payout from an insurance mechanism in the event of a crisis, without having to take on more debt at that time.”

The use of insurance and risk transfer as a way to shelter countries from the need to secure as much debt, after disaster strikes, can be a significant shock-absorber for their local economy.

Of course, insurance instruments, such as catastrophe bonds, also allow for the rapid disbursement of emergence funds post-disaster as well, often reaching governments before any meaningful aid flows from international sources.

The World Bank continued to explain, “This approach will mobilize private capital and pass the risks of high-intensity but low-frequency disasters to international reinsurance and capital markets.”

Leveraging private market appetite for catastrophe risk-linked returns, as well as the expertise of the reinsurance and insurance-linked securities (ILS) communities, can mobilise significant capacity to provide this post-disaster risk financing, while also driving innovation in risk transfer that will benefit World Bank member nations.

The World Bank is not just seeking to scale-up the use of catastrophe bonds and other disaster insurance products, the Bank also wants to make them more available to the poorest nations that face major disaster risks.

“Working with donors, the Bank Group is also aiming to ensure these insurance products are accessible to lower-income countries,” the organisation said.

The Bank also intends to integrate the components of the Crisis Toolkit, so they work more closely together.

For example, “The Multilateral Investment Guarantee Agency is working with lenders and the private insurance industry to better integrate the impacts of climate change on loans to the public sector with instruments such as parametric risk insurance,” the World Bank explained.

“The World Bank Group has been a steadfast partner to developing countries through crises – from early risk assessments and crisis financing strategies to a diverse array of financial instruments for disaster response. This includes continued support for crisis prevention, preparedness, and resilience through our knowledge agenda, such as our Country Climate and Development Reports (CCDRs) and reflected in the full alignment of financing with the Paris Agreement. The expanded Toolkit marks a major milestone in the World Bank Group’s Evolution, furthering its commitment to better assist countries in the challenging era of crises,” the announcement stated.

By expanding catastrophe risk transfer solutions, both in scale and their use cases, the World Bank hopes to embed these concepts of disaster risk financing more deeply into its own work with countries and ultimately into countries own financial preparedness arrangements.

Embedding catastrophe bonds, insurance and other risk management tools into World Bank financing operations could be a game-changer, significantly expanding their use and requiring significant private capital to provide the necessary reinsurance capacity to underpin these arrangements.

We’ve often talked about mobilising private capital to enable better response to disaster, this new vision from the World Bank would see that achieved and cat bonds and other insurance-linked securities, as well as parametric triggers and global reinsurance capital, could be firmly embedded into global disaster funding, financing and resilience preparedness arrangements, while also supporting countries ability to recover and get back on their development pathways more swiftly.

The integration being proposed is significant, we understand also including the potential for countries to leverage project funding from the World Bank as one source of liquidity that could help to pay for catastrophe bond issuance.

That may be a more effective way of securing donor funds and putting them to work, than directly requesting premiums be paid. As countries can divert some of their own pre-agreed project funding, or perhaps increase it, to provide catastrophe bond support for those projects and also the countries ability to repay loans as well.

All of this could be game-changing for the World Bank’s ability to roll-out catastrophe bond and catastrophe insurance protection more broadly to member nations.

Anna Bjerde, World Bank Managing Director of Operations and Ed Mountfield, Vice President, Operations Policy and Country Services (OPCS), explained, “Catastrophe insurance can play an important role in crisis mitigation. We are offering all countries the option to embed catastrophe bonds, insurance, and other risk management products into our financing operations. Governments could then be eligible for a payout in the event of a crisis, without taking on more debt. Building on existing tools such as catastrophe bonds, this approach will mobilize private capital and pass the risks of high-intensity but low-frequency disasters to international reinsurance and capital markets. Working with donors, we aim to ensure these insurance products are accessible to lower-income countries.

“This new set of tools will, for the first time, allow the World Bank to offer all client countries contingent financing to help respond to crisis. For example, a hurricane-affected country can now embed the Rapid Response Option in its existing World Bank lending portfolio, allowing it to quickly redirect some of its undisbursed funds for emergency response if such phenomena do occur. Or the country may opt for contingent budget support to put in place a strong disaster preparedness program and ensure that financing is immediately available for a disaster situation. Enhanced insurance mechanisms will add another layer of protection. Through a catastrophe bond, facilitated by a Bank financing operation, private bondholders will be able to provide a payout to the government in the event of a hurricane of a specific magnitude, without the country incurring additional debt.”

Watch this keynote speech and Q&A with Jorge Familiar, Vice President and Treasurer, of the World Bank Group from our Artemis London 2023 conference.