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The World Bank is committed to significantly expanding the use of instruments such as catastrophe bonds, reinsurance, and parametric risk transfer to countries exposed to catastrophes, and to embed catastrophe insurance and risk transfer instruments more deeply into financial operations. He announced that he is aiming for
Artemis readers and conference attendees will learn that senior Bank staff continue to work on the use of insurance-linked securities (ILS) as an effective way to mobilize private capital to support member countries’ disaster insurance needs. I know that.
Watch the keynote address and Q&A from World Bank Group Vice President and Treasurer Jorge Familia at the Artemis London 2023 Conference.
The World Bank has long used efficient and responsive risk transfer to protect countries and government budgets, and parametric catastrophe bonds and insurance have played a role in its operations for more than 20 years.
As we reported last year, the World Bank plans to significantly increase the use of things like catastrophe bonds to benefit member countries, increasing the use of catastrophe bonds for member countries by about 400% over the next five years. It has ambitious plans to expand. Year.
Now, the World Bank has provided further insight into how it intends to increase access to disaster insurance for its members, especially developing countries.
Late yesterday, the World Bank announced the approval of “a suite of innovative tools to help developing countries better respond to crises and strengthen their preparedness for future shocks.”
It is an expanded version of the World Bank’s crisis toolkit, but is designed to fill in the gaps and build on lessons learned from previous crisis response arrangements to protect countries in times of crisis and enable faster and more responsive responses. The range of tools available to countries to do so has expanded significantly. More effective recovery from disasters.
One interesting new commitment from the World Bank is its promise to provide rapid access to cash for emergency response, including emergency response options. This will allow countries to repurpose some of their unspent World Bank loans to address emergency needs in times of crisis. .
As an example, in the event of a hurricane, governments can efficiently repurpose unspent funds from long-term infrastructure projects, such as road and bridge development, to provide funds that support immediate access to food and shelter for the population. There is a possibility that it can be done. Nation.
This is important in the way the Bank makes loans available to countries, and in providing quick access in the event of events that could significantly impact a country’s budget, financing, and ability to continue on its development path. This is a huge step forward in providing this.
Additionally, the Bank plans to significantly expand access to pre-arranged financing for emergency response, accelerate access to new financing for budgetary support during disasters, and , and through emergency response resources.
Most interesting to Artemis readers, however, is the World Bank’s promise to expand the availability of disaster insurance and incorporate its use into bank lending arrangements.
The goal is to provide “enhanced protection against large-scale disasters”, which of course means more capacity will be needed to support this, but the most effective and efficient Achieving insurance risk transfer in this way requires innovative risk transfer mechanisms and structures. .
“Building on existing tools such as catastrophe bonds, the World Bank Group will offer all countries the option to incorporate catastrophe bonds, insurance, and other risk management products into the Bank’s lending operations,” the organization said.
It added: “Governments could be eligible to receive payments from insurance schemes in the event of a crisis without incurring further debt.”
Using insurance and risk transfer as a way to protect countries from the need to secure as much debt as possible after a disaster can be a significant shock absorber for regional economies.
Of course, insurance products such as catastrophe bonds allow emergency funds to be disbursed quickly after a disaster, often giving governments access to funds before meaningful aid flows from international sources. will arrive.
The World Bank went on to explain that “this approach would mobilize private capital and shift the risk of high-intensity, low-frequency disasters to international reinsurance and capital markets.”
By leveraging the private market’s appetite for catastrophe risk-linked returns and the expertise of the reinsurance and insurance-linked securities (ILS) communities, significant capacity can be mobilized to provide this post-disaster risk financing. At the same time, it can drive innovation in risk transfer. It will benefit World Bank member countries.
The World Bank not only aims to expand the use of catastrophe bonds and other catastrophe insurance products, but also wants to make catastrophe insurance products more available to the poorest countries facing significant disaster risks. Masu.
“The World Bank Group also aims to work with donors to ensure these insurance products are available to low-income countries,” the group said.
The Bank also plans to integrate components of its crisis toolkit to enable them to work more closely together.
For example, “Multilateral investment guarantee agencies are working with lenders and the private insurance industry to better integrate the effects of climate change on public sector lending through measures such as parametric risk insurance,” according to the World Bank. explained.
“The World Bank Group remains a steadfast partner for developing countries through crises, from early risk assessments and crisis financing strategies to a wide range of financial products for disaster response. This includes continued support for crisis prevention, preparedness and resilience through knowledge agendas such as the Global Development Report (CCDR) and is reflected in full funding alignment with the Paris Agreement. “The expansion marks a major milestone in the evolution of the World Bank Group and further strengthens the group’s commitment to better support countries in difficult times of crisis,” the announcement said.
By expanding the catastrophe risk transfer solution both in scale and in its use cases, the World Bank is embedding these concepts of disaster risk finance more deeply into its work with countries and ultimately building on their own financial preparedness. I hope it will be included in the deal.
Incorporating catastrophe bonds, insurance, and other risk management tools into the World Bank’s lending operations could be a game-changer, greatly expanding their use and reinsurance needed to support these arrangements. Significant private capital will be required to provide the capacity.
We have often talked about mobilizing private capital to enable better responses to disasters, but this new vision for the World Bank will see the achievement of cat bonds and other insurance-related securities, as well as is expected to see strong use of parametric triggers and global reinsurance capital. It is part of global disaster finance, financing and resilience preparedness arrangements, while also supporting the ability of countries to recover faster and get back on track for development.
We note that the proposed consolidation is significant and includes the possibility of countries leveraging project funding from the World Bank as one possible source of liquidity to help pay for catastrophe bond issues. I understand.
This may be a more effective way to secure and leverage donor funds than directly requesting premium payments. Countries may divert or, in some cases, increase a portion of pre-agreed project funding to provide disaster bond support to these projects and provide countries with the ability to repay their loans. can.
All of this could be a game-changer for the World Bank’s ability to extend disaster bond and insurance protection more broadly to its members.
Anna Vijerde, Managing Director of Operations, and Ed Mountfield, Vice President of Operations Policy and Country Services (OPCS) at the World Bank, explained: We offer all countries the option to incorporate disaster bonds, insurance and other risk management products into our lending operations. That way, governments could be eligible for payments in the event of a crisis without incurring further debt. Building on existing tools such as catastrophe bonds, this approach mobilizes private capital and transfers the risk of high-intensity, but low-frequency catastrophes to international reinsurance and capital markets. We aim to work with donors to ensure these insurance products are available to low-income countries.
“This new toolset will enable the World Bank to provide emergency financing to all client countries to support crisis response. For example, hurricane-affected countries can use existing World Bank loan portfolios to can now incorporate rapid response options, allowing a portion of unspent funds to be quickly redirected to emergency response in the event of such an event. Alternatively, the country can build in strong disaster preparedness They may choose to support contingency budgets to implement programs and ensure that funds are immediately available in the event of a disaster. Strengthening insurance mechanisms provides an additional layer of protection. Bank lending operations provide an additional layer of protection. Through facilitated disaster bonds, private bondholders will be able to make payments to the government in the event of a hurricane of a certain size, without the country incurring additional debt.”
Watch the keynote address and Q&A from World Bank Group Vice President and Treasurer Jorge Familia at the Artemis London 2023 Conference.
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