New insurance mechanism will help country reduce fiscal vulnerability against natural disasters

The Dominican Republic secured a $24 million loan from the Inter-American Development Bank (IDB) to support the costs associated with setting up their first multiyear catastrophic natural disaster emergencies coverage through their own Natural Disaster Insurance Facility.

The loan is part of an integrated disaster risk management and finance approach the Dominican Republic is implementing with support from the IDB that seeks to prevent and mitigate the impact of such disasters on the economy, society and public finances.

Given its geographic location and various social, economic, and demographic factors, the Dominican Republic faces high exposure to natural disasters related to weather (tropical cyclones) and geophysical phenomena (earthquakes). Natural disasters have taken a costly human and material toll on the country in the past decade. Notable recent events include Tropical Storms Noel and Olga in late 2007, which caused an extraordinary expense for the public treasury of around 0.6 percent of the gross domestic product.

The new insurance coverage developed by the government with technical assistance from the IDB will help reduce the country’s fiscal vulnerability related to natural disasters. Studies indicate that current tax revenue would be able to cover only about 25 percent of public emergency expenses related to a natural catastrophe emergency.

The coverage will be structured as a parametric insurance policy and most of the risk will be transferred to international financial markets. The policy will provide coverage of the extraordinary public expenditures for up to US$ 50 million per event that could be incurred during emergencies caused by seismic activity and/or tropical cyclones of catastrophic intensity over an initial period of five years.

The IDB loan will finance the total premium to be charged by the Facility for the first five years of coverage, the first of its kind to be implemented in Latin America and the Caribbean.

The insurance coverage will complement other measures taken by the Dominican Republic to cover such potential extraordinary expenses, as part of its five-year Integrated Natural Disaster Risk Management Plan. Last year, as part of this same plan, the country obtained a $100 million IDB contingent loan to cover emergencies caused by natural disasters.

The $24 million IDB loan is for a total term of 25 years , including a five-year grace period. The disbursement period is up to five years and the interest rate is LIBOR-based.