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Disaster Risk: Using Capital Markets to Protect Against the Cost of Catastrophes

Michael Bennett's picture
Hurricane Sandy / NOAA
Hurricane Sandy / NOAA


In addition to their often devastating human toll, natural disasters can have an extremely adverse economic impact on countries. Disasters can be particularly calamitous for developing countries because of the low level of insurance penetration in those countries. Only about 1% of natural disaster-related losses between 1980 and 2004 in developing countries were insured, compared to approximately 30% in developed countries. This means the financial burden of natural disasters in developing countries falls primarily on governments, which are often forced to reallocate budget resources to finance disaster response and recovery. At the same time, their revenues are typically falling because of decreased economic activity following a disaster. The result is less money for government priorities like education or health, thereby magnifying the negative developmental impact of a disaster.

To address this problem, the World Bank Treasury has been helping our clients protect their public finances in the event of a natural disaster. The most recent innovation is our new Capital-at-Risk Notes program, which allows our clients to access the capital markets through the World Bank to hedge their natural disaster risk. Under the program, the World Bank issues a bond supported by the strength of our own balance sheet, and hedges it through a swap or similar contract with our client. The program allows us to transfer risks from our clients to the capital markets, where interest in catastrophe bonds is growing.

Good Lord! Are we stuck in time?

Kerry Natelege Crawford's picture
Photo by Chico Ferreira, available under a Creative Commons license (CC BY 2.0).
(Photo by Chico Ferreira, available under a Creative Commons license - CC-BY-2.0)

Growing the middle class

Francisco Ferreira's picture

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Shoppers in Chile

Since the Great Recession of 2008, there has been a widespread sense of malaise among the American middle class. Their incomes are close to stagnant, employment has not recovered, and the gap between them and the famously rich top 1% continues to grow. Look south of the Rio Grande, though, and it is quite a different picture. In the last decade, moderate poverty (under U$ 4 a day) in Latin America and the Caribbean fell from over 40% to 28%.