How Capital Markets Can Help Developing Countries Manage Climate Risk

Abstract

Climate change is exacerbating the frequency and severity of catastrophic weather events around the world. The economic impact of these events on developing countries can be severe, and roll back years of development gains. To help face this growing challenge, the governments of developing countries need improved access to insurance and alternative risk transfer mechanisms to manage their exposure to climate risk. Multilateral development banks, such as the World Bank, can help. For example, they can catalyze the creation of sovereign risk pools and facilitate access for developing country governments to the substantial reinsurance capacity of the capital markets. The World Bank’s role in creating the Caribbean Catastrophe Risk Insurance Facility, and the World Bank catastrophe bond issue in 2014 for that Facility, serve as models for this kind of assistance. In order to maximize the developmental impact of these kinds of interventions, donor governments, acting through multilateral development banks, should encourage beneficiary countries to invest in ex ante climate risk preparedness and resilience as a condition of receiving this kind of development assistance.