Earthquake bonds reinforce WB's leadership in providing financial protection

Disasters hurt the poor and vulnerable the most.

By incorporating disaster risk management into development planning, countries can save lives and build foundations that support long-term recovery and sustainable development. Obtaining insurance helps governments to manage the financial impact of disaster and climate shocks.

Through the World Bank's earthquake bonds, Chile receives US$500 million, followed by Colombia (US$400 million), Mexico (US$260 million), and Peru (US$200 million) in insurance coverage. The bonds —which are issued by this bank— do not contribute to the countries' debt. If an event occurs that triggers a payout from the bond, the country receives the payout. The investors lose part or all the capital.

The insurance offers protection to government budgets. It is an important complement to emergency funds, budget reserves, contingent credit lines, and other financial instruments governments use in the aftermath of natural disasters.

The bonds follow a two-year partnership between the World Bank and the four countries, all members of the Pacific Alliance. In April 2016, the countries jointly approached the WB to explore whether they could obtain insurance through a catastrophe bond to protect themselves from the financial impact of natural disasters.

In response to this request, the World Bank worked with the four countries to assess how catastrophe bonds could be designed to most effectively transfer risk to the capital markets. In the preparatory phase, the WB worked with Chile, Colombia, and Peru on specialized modeling and analysis to enable the governments to evaluate their earthquake risk.

Mexico also shared its extensive experience in using catastrophe bonds to complement its broader disaster risk management efforts. This work benefited from the strong support and financial backing of the Swiss State Secretariat for Economic Affairs (SECO).

The bonds are the successful outcome of this collaboration and form part of a broader strategy to support all World Bank member countries in addressing natural disaster risk.

In addition to offering instruments for financial protection, the WB provides technical and financial support for risk assessments, risk reduction, preparedness, as well as resilient recovery and reconstruction through the Global Facility for Disaster Reduction and Recovery and the Disaster Risk Financing and Insurance Program.

"Strengthening the resilience of our partner countries is a key objective of Switzerland's economic cooperation and we are proud to partner with the World Bank in assisting Middle-Income Countries in building their resilience against natural disasters," said Raymund Furrer, head of SECO's Economic Cooperation and Development Division.

"Helping our client manage risk and build resilience to external shocks is a strategic priority for the World Bank," said Arunma Oteh, WB Vice President and Treasurer. "This historic transaction cements the World Bank's role as a pioneer in leveraging capital market instrument to build resilience, and showcases our unique ability to bring together sovereigns for a market transaction that transfers risk and will help support countries when the unforeseen does occur." 

"When there are people just one disaster away from poverty, managing risk is a development priority," said Jorge Familiar, WB Vice President for Latin America and the Caribbean. "These Pacific Alliance catastrophe bonds are an example of the innovative contributions that stem from the Bank’s partnership with Latin America and the Caribbean."

(END) NDP/MVB