IBRD Financial Products

Disaster Risk Management

  • The World Bank Treasury offers financial solutions for contigent and crisis financing and disaster risk transfer intermediation. 

    Contingent & Crisis Financing

    • IBRD Development Policy Loan with Catastrophe Drawdown Option (DPL Cat DDO)

    Disaster Risk Transfer Intermediation

    • Catastrophe Bonds
    • Derivatives
    • Insurance & Reinsurance
  • IBRD offers a line of disaster risk financing for direct budget support that provides varying levels of protection depending on the type, frequency, and severity of the event.

    Contingent Financing

    Development Policy Loan with Catastrophe Deferred Drawdown Option (DPL Cat DDO)

    The Development Policy Loan with a Catastrophe Deferred Drawdown Option (Cat DDO) is a contingent credit line that provides immediate liquidity to IBRD member countries in the aftermath of a natural disaster. It is part of a broad spectrum of risk financing instruments available from the World Bank Group to help borrowers plan efficient responses to natural disasters. The Cat DDO gives a government immediate access to funds after a natural disaster, a time when liquidity constraints are usually highest. This type of financing is typically used to finance losses caused by recurrent natural disasters. It is most effective as part of a broader risk management strategy in countries highly exposed to natural disasters. A disaster risk management strategy would involve complementing the Cat DDO with disaster risk transfer instruments (such as catastrophe risk insurance or catastrophe bonds) for high risk layers. Governments determine the mix of disaster risk financing instruments based on an assessment of risks, desired coverage, available budget, and cost efficiency 

  • 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.

    Catastrophe Bonds

    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.

    Derivatives

    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.).   

    Insurance & Reinsurance

    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. 


 

 


Case Studies

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Managing Catastrophe in Costa Rica

Financial Solution: DPL Cat DDO
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Managing Catastrophe Risk in Guatemala

Financial Solution: DPL Cat DDO
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Managing the Impact of Drought on Energy Production in Uruguay

Financial Solution: Weather Hedge (Derivative)
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Mitigating the Impact of Drought on Food Security in Malawi

Financial Solution: Weather Hedge (Derivative)