World Bank leverages private capital, contingent credit & parametric risk transfer for REPAIR

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The World Bank has approved the Regional Emergency Preparedness and Inclusive Recovery Program (REPAIR), which is designed to boost financial resilience against climate shocks for Eastern and Southern African countries and leverages private market parametric disaster insurance risk transfer alongside its contingent credit DDO solution.

It’s evidence of the continued innovation at the World Bank in helping countries to become better financially protected against catastrophe, severe weather and climate related risks, while also tapping into private capital to assist with the funding.

This program will see a new risk pool created, a Regional Climate Risk Fund (RCRF), that will be designed to provide affordable, pre-arranged financing to Eastern and Southern Africa countries ahead of climate and other disaster shocks.

They estimate that more than six million people in Comoros, Madagascar, and Mozambique will benefit from the new World Bank regional program.

The program will initially seek to attract $205 million in private capital to support these efforts in its first phase.

“We know from experience that mobilizing financing immediately after a disaster can be challenging. With REPAIR, governments will have anticipated and pre-positioned financing ready to disburse when the next disaster hits,” explained Boutheina Guermazi, World Bank Director of Regional Integration for Africa, the Middle East, and North Africa. “The speed of response is crucial for saving lives, protecting livelihoods, and enabling an inclusive recovery.”

The World Bank said that “speed, flexibility, and sustainability” are key to this programs success, so the REPAIR program will see customised financial tools deployed that can “promptly deliver funds to countries within seven days of a climate-related disaster.”

Part of this is through the establishment of the Regional Climate Risk Fund (RCRF) with pre-arranged financial instruments to respond to shocks of different frequency and severity, the Bank said.

In addition, there will be a preparation and resilience angle to the REPAIR program, which aims to “enhance the efficiency and readiness of local delivery systems in each country to ensure that financial assistance can quickly reach affected communities in the aftermath of a climate-related crisis.”

The program will leverage pooled efficiencies and resources, will making use of private capital from the markets to enhance coverage for participating countries.

African Risk Capacity Limited (ARC Limited), the sovereign parametric disaster insurance specialist for African, is set to implement this and will be tasked with building “a sustainable platform that raises large-scale financing for climate adaptation,” the World Bank said.

“We never know who and how a natural disaster will strike, but we know that Southern African countries are highly vulnerable to such shocks. REPAIR will allow them to respond quickly and flexibly to both small incidents and major crises, ensuring that financial assistance can swiftly reach those who need it most,” added Idah Z. Pswarayi-Riddihough, World Bank Country Director for Mozambique, Madagascar, Mauritius, Comoros, and Seychelles.

These Eastern and Southern African countries are severely impacted by climate change, which the World Bank notes can make natural disasters like droughts, floods, and tropical cyclones more frequent and severe.

As an example of the levels of capital needed to boost resilience and the immediate response to disasters, the World Bank highlights that 2023’s tropical cyclone Freddy alone caused $507 million in damages across the region.

There are ambitious targets, with the World Bank projecting that by 2031 REPAIR could total $926 million and has plans to expand to include nine additional countries that have shown interest.

“Overall, it aims to attract $795 million in private capital to help strengthen the resilience of 24 million people across the region,” the World Bank said.

Interestingly, a tiered approach to providing disaster risk financing and transfer will be adopted for REPAIR and the Regional Climate Risk Fund (RCRF), that will see the World Bank making use of established solutions that have demonstrated their value.

This will see a layered approach, starting with reserves that will be used to fund moderate and frequent climate disaster shocks, funded by the IDA.

Above that, the deferred drawdown option will be used for severe and less frequent climate shocks, which is a contingent credit arrangement that can be triggered by specified declarations of disaster emergency, so are effectively a type of parametric solution and so can respond rapidly.

Then, parametric insurance and risk transfer arrangements for catastrophic climate events will provide the next layer.

The parametric insurance and risk transfer arrangements are expected to be placed in the private market and are likely to see premiums funded by the IDA or donors, we believe, at least to begin with.

It’s an ambitious new program from the World Bank, a number of years in the making and it brings together a number of their disaster risk financing disciplines and solutions, with a risk pooling and layered financial instrument structure designed to be able to respond fast and to climate events of differing severity.

With the Regional Climate Risk Fund (RCRF) looking set to be a further expansion of the work of the African Risk Capacity as well, the resulting risk opportunity will come with a pedigree that should prove attractive to reinsurance capital, as and when it is needed to support the program.

As a new risk pool component this could also add further scale and diversification to ARC’s footprint, meaning it requires more reinsurance at renewals time as well.

With the ambitious plan out to 2031, it will be interesting to see whether parametric catastrophe bonds could get a look in as well, as ceding out the top-layers of the risk pool to efficient private capital bearing institutions could be another way to generate efficiencies as things scale.

It’s encouraging to see this new program and this appears a well-thought through approach, that will bring benefits to the countries covered and in time could be a model for other integrated disaster risk financing, risk pooling and resilience enhancing programs around the world.

The World Bank has facilitated more than US $4.8 billion in cat bonds across 17 transactions according to Artemis’ data and is now said to be exploring the issuance of its first bond to provide protection against the impacts of drought.

World Bank leverages private capital, contingent credit & parametric risk transfer for REPAIR was published by: www.Artemis.bm
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