When it comes to risk transfer tailored solutions that complement comprehensive risk management are best. Experience of others provides valuable lessons learned, practices and approaches which may be adjusted to fit your specific circumstances.
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Marshall Islands, Tonga, Solomon Islands, Samoa, and Vanuatu are among the top 30 countries most vulnerable to natural disasters. Access to liquidity in the aftermath of a disaster is essential for these governments to respond to emergencies. A new pilot catastrophe risk insurance program provides the governments with immediate funding if a major natural disaster occurs.
Livestock in Mongolia are exposed to extreme climatic conditions. To reduce the impact of livestock mortality on herders’ livelihoods, herders purchase policies from private insurance companies that pay out when local livestock mortality rates exceed specified ‘trigger ’percentages. The product is currently reinsured on the international reinsurance markets. The Government of Mongolia also acts as a reinsurer and covers extreme losses.
Ethiopia’s Horn of Africa Risk Transfer for Adaptation (HARITA) program – recently renamed the R4 Rural Resilience Initiative – is an innovative model of how demand-based disaster micro-insurance for the poor can be integrated into a social safety net (SSN) program, enhancing both its climate-related and social protection benefits. HARITA/R4 offers weather based insurance to a chronically poor, highly climate-vulnerable population in the Tigray region of Ethiopia.
Malawi is heavily exposed to the risk of drought and food shortage. The World Bank’s intermediation on index-based weather derivatives allowed Malawi to transfer weather-related risk to market counterparts. The 2008-2009 transaction marked the first time that the Bank offered a financial risk management tool to a low-income country.
Uruguay is highly dependent on hydropower for electricity and is exposed to the risk of drought and high oil prices. The World Bank executed a $450 million weather and oil price insurance transaction for the state-owned electric utility, which provides cost certainty to the energy company, budget stability to the government, and price stability to consumers. This milestone transaction, the largest executed so far, creates an important fiscal buffer, which is part of the wider risk management strategy.
Mexico, one of the most experienced emerging market countries in disaster risk management, has proactively sought to benefit from global diversification by sharing risks with international capital markets. It was the first country to issue a multi-peril multi-region cat bond using the World Bank’s MultiCat Program.
The Catastrophe Deferred Drawdown Option (Cat DDO) provides assurance of rapid access to funds at cost-effective levels after a natural disaster has occurred. Guatemala, one of the top five high-risk countries in the world in terms of vulnerability to three or more hazards, requested and received a Development Policy Loan (DPL) with a Cat DDO that complements other financial instruments and disaster risk management measures in place in the country.