Adapting to Climate Change: Assessing the World Bank Group ...

CHAPTER 3CLIMATE VARIABILITYfrom setting this aside to set up a contingent credit line. Additional donor funds wouldbe required in order to offer a Cat DDO to IDA borrowers, either through a special IDAallocation, through particular donors offering guarantees, or potentially throughclimate change adaptation funding. These funds could be used to offer a contingentcredit line at IBRD lending rates for disaster-prone IDA countries that was madeavailable following a disaster of specified magnitude 37 .3.73 While there has been some success with these instruments, they are not designedto cover the vast majority of disaster damage. Developing countries remain largelyexposed to disaster losses, and most coverage occurs through ad hoc support fromdonors. The Bank has attempted to fill this gap by supporting use of a catastrophebond. A catastrophe bond is a debt instrument that pays a set coupon amount unless adisaster of at least a specified magnitude occurs, in which case it pays nothing. Thus,the bond acts to spread catastrophic risk from the issuer to the purchaser. The WorldBank Treasury has acted as the arranger for a $290 million multi-catastrophe (hurricaneand earthquake) bond issued in 2009 by Mexico’s national disaster fund, the first suchmulti-catastrophe bond in the world by a national government. An IFC attempt tocreate a reinsurance company that would provide disaster coverage was unsuccessfuldue to the lack of interest from technical partners.3.74 There is little scope for widespread use of catastrophe bonds by Bank Groupclients. The catastrophe bond requires a very high level of client capacity and financialsector experience, and the global market for such bonds remains small even indeveloped countries. (The total value of outstanding bonds is $13 billion (Munich Re2011). Bank support for catastrophe bonds in the near future will likely remain limitedto providing technical support to a small potential pool of clients. Reinsurers andfinancial markets demand very high markups over an actuarially fair premium, 38 inpart because of the extreme uncertainties over the probabilities of catastrophic disasters,which will be exacerbated by climate change. At these prices, the welfare gain fromtransferring this risk elsewhere may not be worth the cost, and governments may bebetter off retaining the risk. The Bank Group may be more effective in increasing theability of clients to manage catastrophic events by improving client disaster riskmanagement capacity, and by investing in data collection systems that will reduce theuncertainty faced by disaster modelers.CONCLUSIONS ON DISASTER RISK MANAGEMENT3.75 There has been a significant shift in the Bank’s approach to disasters, toward aproactive risk management and risk reduction approach, and there has beenwidespread success in mainstreaming disaster risk management into sectoraloperations. But most operations still use traditional risk reduction approaches; more55