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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.

Cost-Effective Conservation

Rachel Kyte's picture

También disponible en español

The success of the Amazon Region Protected Areas Program (ARPA) drew a crowd here in Hyderabad at the UN Convention on Biological Diversity meeting. This effort by the government of Brazil – supported by the World Bank, the Global Environment Facility, WWF, and the German Development Bank (KfW) – is protecting almost 60 million hectares of rainforest, an area roughly the size of France and Belgium combined.

Speakers from the governments of Brazil and Germany, as well as from the GEF and foundations, all agreed that ARPA’s results are impressive: Between 2004 and 2006, ARPA accounted for 37 percent of Brazil’s substantial decrease in deforestation, and the program’s first 13 new protected areas will save more than 430 million tons of CO2 emissions through 2050.