Development and implementation of financial mechanisms and instruments
Besides budgetary resources, countries need access to other mechanisms to cover the extraordinary expenditures caused by natural disaster emergencies. The IDB has been developing the following instruments to address countries needs:
Contingent Credit facility for Natural Disaster Emergencies
In 2009, the IDB has created a $600 million contingent credit facility. This facility finances loans of up to $100 million, with disbursements contingent to the occurrence of a natural disaster event in a certain locality and intensity previously agreed with the Bank.
The facilities provide an institutional platformfor the efficient management of financial risks caused by catastrophic natural disasters, which eventually could be used for the transfer of other public financial risks associated with climate change, agriculture and food security.
This initiative offers several benefits including:
- comprehensiveand efficient access to international capital and risk transfer markets.
- promotes the expansion of private sector participation in international insurance coverage of home hazards, deepening and expanding the local insurance market
- provides the opportunity for growth and development for domestic insurers.
- complements similar multilateral initiatives in the region
Other risk transfer instruments
The IDB also helps countries design and structure the sale of catastrophe bonds, also known as cat bonds. These types of securities can help minimize the financial impact of a natural disaster by promoting a sponsor to pay the principal on the debt on behalf of a government once certain conditions are met.