Catastrophe Financing for Governments

Abstract

---With rapidly increasing population and growing catastrophe exposure in their countries, many more government leaders (including Presidents, Prime Ministers and heads of Kingdoms) are now faced with this strategic question: how best develop a national strategy to hedge against the massive economic burden of extreme events that could hit their country tomorrow?We propose a framework to help those leaders in governments around the world and their advisors think more clearly about these issues, focusing specifically on the role that risk transfer mechanisms alternative to traditional insurance can play. The report provides a case study of the $290 million multi-peril, multi-tranche catastrophe bond recently sponsored by the Government of Mexico and arranged by the World Bank under the MultiCat Program. We discuss the step-bystep creation of this catastrophe bond, from starting discussions that took place in 2008 to the investor road show and the successful issuance of the bond in October 2009. This joint initiative could provide an example for other countries that wish to establish their own financial coverage solution against disasters, as part of a broader national risk management strategy. We illustrate this with the case of the government of Chile and earthquake risks. It also shows that considering countries, or even cities, for the issuance of such insurancelinked securities (ILS) could considerably expand this market for alternative catastrophe risk transfer instruments.

Financial Support Mechanisms and Financing Instruments for Climate Change Adaptation

“…Michel-Kerijan et al (2011) [2], as described in Figure 1, suggest four-level approach chosen by a government based on its priorities and level of economic development. Level 1 is for the very limited funding from central government (i.e., low-income economies).…”

“…They often have to wait for funding for several months. Moreover, the level of donations may be significantly [2] think that the level of technical expertise in risk management in these countries is usually higher but still limited. In Level 3, as the level of economic development improvement, ex-post funding is mainly from the central government but there is some coverage by insurance systems.…”

“…Michel-Kerijan et al (2011) [2] suggest four-level approach based on its priorities and level of economic development for governments. They introduce that both the insurance penetration and the level of technical expertise in risk management increase as the economic development of countries from Level 1 to Level 4 countries since people afford to pay insurance in Level 4 countries compared with in Level 1 countries.…”

“…The risks are also generally covered by both public and private sector. This paper aims to investigate the ex-ante and post-disaster financial instruments for climate change adaptation according to the four-level approach provided by Michel-Kerijan et al (2011) [2]. Ghesquiere and Mahul (2010) [3] suggest that different types of financing instruments have to be used in different phase after disaster.…”

“…Thus, we introduce main financial instruments of climate change adaptation financial support mechanism and cases what financial instruments are used. We also apply both four-level approach in Michel-Kerijan et al (2011) [2] and financial instruments suggested by Ghesquiere and Mahul (2010) [3] to discuss cases of financial instruments in this paper.…”