Mr. Juan Antonio Ketterer is the Chief of the Connectivity, Markets and Finance Division of the Inter-American Development Bank (IADB). The Division he leads is responsible for the design and implementation of financing solutions that mobilize private investments and ensure inclusive, sustainable, and resilient development.
Given an increase of climate change related disasters countries need to adapt better to climate change and manage climate risks better to increase their resilience to climate and natural disasters. What are the main vulnerabilities and relevant perils and what are the major challenges to cope with after a disaster has struck in the LAC/ the IADB’s region of operation?
Latin America and Caribbean is one of the regions most exposed and vulnerable to the effects of climate and weather-related events. These events pose risks to the regions’ ability of achieving the Sustainable Development Goals.
- Extreme climate and weather-related events such as tropical cyclones, floods, droughts and wildfires have had significant impacts on the economic and social development of Latin America and the Caribbean (LAC). Between 2000-2020 the region was struck by 1,173 reported natural disasters caused by extreme events,1 which affected around 145 million people and resulted in more than 190 billion in reported damages.
- For Central America and the Caribbean, the 2020 Atlantic hurricane season has been particularly active, with the largest number of named storms on record and a record number making landfall. Major hurricanes Eta and/or Iota ravaged areas of Panama, Colombia, Costa Rica, Honduras, Nicaragua, El Salvador, Guatemala, and Belize. These hurricanes struck amid the pandemic and its economic slump and resulted in extensive economic losses estimated in over USD 8 billion. As LAC lags behind other regions in insurance protection, most of the losses were uninsured.2
- In South America, 2020 brought severe droughts, significantly affecting northern Argentina, Uruguay, Paraguay, and western border areas of Brazil. Estimated agricultural losses were approximately US$3 billion in Brazil with additional losses experienced in Argentina, Uruguay, and Paraguay.3
- With global temperatures continue to rise unabated, particularly beyond the 1.5 °C target, the scientific consensus is that the intensity, frequency, duration and impacts of extreme climate and weather events are likely to increase, putting critical infrastructure and much of the vulnerable population at risk. Climate change is thus a serious threat to the achievement of the Sustainable Development Goals, and could potentially reverse progress made in poverty reduction, reinforce or worsen existing inequalities, threaten food security, and limit access to basic services.
Given this need for resilience-building, what are governments doing to address these vulnerabilities? How is the IDB Group supporting this process?
Enhancing LAC’s resilience to natural disasters and climate change requires a comprehensive climate and disaster risk finance approach.
- It is critical that LAC countries continue building financial resilience to these shocks, along with other mitigation and adaption actions. This requires acknowledging that climate and disaster risks cannot fully be eliminated, and that an effective and comprehensive strategy should include not only actions to reduce risks but must also have an ex-ante risk financing component that strengthens resilience and eases the financial and socioeconomic impacts.
- The effective financial management of such risks is, however, a key public policy challenge for LAC governments. To overcome this challenge, the LAC region needs innovative climate and disaster risk financing solutions and insurance mechanisms. This reality has catalyzed the IDB to develop a Comprehensive Climate and Disaster Risk Finance Approach, predicated on the basis that an effective strategy should include a mix of risk retention and risk transfer instruments tailored to the country’s risk profile and needs.
- Within this comprehensive approach, the IDB has expanded its assistance and offering to its member countries to prepare, mitigate, respond, and recover from the adverse impacts of extreme climate and weather events. IDB’s offering includes technical support to improve risk assessment and readiness to mobilize resources from insurance and capital markets, along with efficient risk financing instruments that enable fast post-disaster recovery.
A critical pre-condition to the provision and use of Climate and Disaster Risk Finance and Insurance (CDRFI) is the adequate assessment of risk and use of high-quality data. How are risk analytics addressed in IDB support?
- To improve the understanding of climate and disaster risks, IDB has supported countries’ risk profiling and innovative risk modelling. An example is the Comprehensive Approach to Probabilistic Risk Assessment (CAPRA) that IDB has developed in partnership with Central American governments, the Central American Coordination Centre for Disaster Prevention, UNDRR and the World Bank. CAPRA provides a Geographic Information System (GIS)-based platform of information on natural hazard risk, for disaster risk analysis and communication. It supports decision-making for prevention, mitigation, and response to natural hazards.
What role does the private sector play in provision and uptake of CDRFI solutions in the region?
- To improve countries’ readiness to mobilize private sector financing, IDB fosters the development of efficient insurance and capital markets. It does so by supporting countries’ insurance regulators and supervisors to strengthen legal and institutional frameworks – this will increasingly mean supporting them in integrating climate-related risks into their supervisory frameworks and promoting climate-related risk disclosure.
- IDB helps improve countries’ readiness also by building the technical, regulatory, and financial underpinnings of capital markets. Capital markets are key to enable the transferring and financing of climate and disaster risk exposures and resilience through instruments such as Catastrophe Bonds and Climate Resilience Bonds. Capital markets are key to finance the achievement of the Sustainable Development Goals. To this end, IDB has supported USD 1 billion in Green, Social, Sustainable Bonds issuances from national and sub-national governments, financial institutions, and utilities to mobilize private capital for the financing of climate–resilient and low-emission infrastructures.
One of the main potentials to reap resilience benefits of CDRFI is to provide for ex-ante pre-arranged financing solutions for when climate and natural disasters strike. How does IDB provide and prioritize ex-ante solutions? What role do parametric solutions play, that can typically pay out faster than indemnity products in emergency scenarios?
- To increase financial resilience and ensure timely finance post disaster needs, IDB provides a range of instruments including regular investment loans, the Contingent Credit Facility for Natural Disaster and Public Health Emergencies (CCF), and risk transfer options.
- The CCF is an innovative ex ante risk financing instrument that provides liquid resources to member countries to finance the urgent needs following a severe or catastrophic natural disaster: humanitarian relief efforts and rehabilitation of basic services to the population. These contingent loans provide cost-effective parametric and non-parametric coverages for a wide range of perils: earthquakes, hurricanes, floods, wildfires, droughts, epidemics, and pandemics.
- For the most important perils (earthquakes, hurricanes, floods), IDB contingent loans provide innovative parametric coverages, tailored to countries’ risk profile and financing needs, that allow quick access to resources following a natural disaster. IDB continuously innovates in the development of new parametric coverages in response to its member countries’ needs. For example, last year, in response to the growing threat of wildfires in the Amazon Rainforest, the IDB developed an innovative parametric coverage under the CCF for wildfires in Paraguay. Through this ex-ante coverage, the Government of Paraguay would be able to access to cost-efficient resources of up US$150 million to control and suppress fires, and to provide humanitarian assistance to the affected population in case of large-scale wildfires, thus strengthening the country’s readiness and resilience.
- Through this Facility, the IDB is currently providing financial coverage for 14 LAC countries for a total of US$2.4 billion and has made several successful disbursements in response to natural disasters (e.g., the 2016 earthquake in Ecuador, and hurricane Dorian in The Bahamas in 2019), enabling governments to organize a comprehensive emergency response. One point to highlight is that of the total financial coverage, 75% (US$1.8 billion) are for small and vulnerable countries. IDB continues to deploy the use of CCF in other member countries, especially give the impact of the 2020 Atlantic hurricane season on Central America. For example, in 2021, the IDB expects to provide US$1.2 billion of additional financial coverage to three countries in Central America for hurricanes and other main perils.
How has COVID-19 changed/ altered IDB’s approach to supporting CDRFI? What role do compound risks play in the region, and how are they addressed looking forward?
- In response to the COVID-19 pandemic and the resulting liquidity constraints facing most LAC countries for public health emergency response, the IDB expanded the CCF’s scope to add public health risks, including COVID-19 and future epidemics and pandemics. With this quick response, IDB could potentially provide up to US$2 billion to its member countries for public health response financing. Already, the IDB approved US$202 million to help Ecuador, Dominican Republic and Suriname finance the acquisition and distribution of COVID-19 vaccines, the purchase of medical equipment, laboratory equipment and inputs, ambulances, and personal protective equipment for health workers, surveillance officers, border personnel.
- IDB also engineers and promotes market-based solutions for climate and disaster risk transfer at the country and sector levels. It has recently developed a Catastrophe Risk Transfer Program that would help member countries to transfer risks to the insurance and capital markets more efficiently, as it will use an innovative mechanism that eliminates the need and cost associated with stablishing a special purpose vehicle. At the sector level, IDB also works to offer insurance solutions to SMEs, particularly for the agricultural sector. For example, in Peru IDB is providing technical assistance to Agrobanco, a state-owned development bank that provides credits to small farmers, to improve the effectiveness and sustainability of its commercial crop insurance program.
How does the IDB Group work together / achieve synergies with other partners under the InsuResilience Global Partnership? What added-value do you see for your CDRFI operations?
The InsuResilience Global Partnership Vision 2025 emphasized the urgency of scaling up and accelerating climate and disaster risk financing and insurance solutions and approaches by developing countries.
- IDB is a key ally of the Partnership to achieving its Vision 2025 to scaling up and accelerating climate and disaster risk financing and insurance solutions. This is because climate and disaster risk financing and the mobilization of national and international private capital are at the core of IDB’s development mandate and evolving toolbox. IDB and the InsuResilience Global Partnership can strengthen each other’s efforts and advances by working together to:
- Promote an active dialogue with public and private actors of financial, capital and insurance markets to build and pilot innovative solutions, foster the integration of climate-related risks into capital allocation decision-making and promote risk disclosures.
- Share best practices and learning on what works and what does not.