Photo: Russ Allison Loar via Flickr
Policy Solution

Catastrophe (CAT) bond

Funding and Financing

Overview:

Summary: Funds are paid to an insurer when a pre-determined index is triggered like an extreme weather event. Proceeds from the CAT bond are put in a collateral account and only released if the trigger event occurs. If a payment is triggered, typically interest and principal repayment obligation are deferred or forgiven.

Implementation: Use CAT bonds to provide long-term financial protection against climate-related risk. One example is a Resilience Bond, which links catastrophe insurance to infrastructure investments using insurance savings as revenue to fund resilient infrastructure projects.

Considerations for Use: CAT bonds can include interest or repayment discounts to governments that invest in risk-mitigation infrastructure.

  • Policy Levers: The mechanism municipalities can use to actualize the intervention. These policy levers will likely be used in combination with each other.

    Funding and FinancingThe allocation of public or philanthropic funding or private financing to implement projects, including risk transfer mechanisms.
  • Trigger Points: Opportunities for municipalities to implement risk reduction and preparedness interventions based on the policy lever, building on the United Nations Environment Programme triggers used in the Beating the Heat handbook (2021).

    Preparatory measures (actions to establish authority to act)Actions to establish/ ensure the authority to act when appropriate trigger-points occur.
  • Intervention Type:
    Planning/Policy
  • Sectors:
    Disaster Risk Management  ,

    Impact:

  • Target Beneficiaries:
    Residents; Property owners; Renters; Business owners
  • Phase of Impact:
    Risk reduction and mitigation
  • Metrics:
    Proceed amount and allocation

Implementation:

  • Intervention Scale:
    Region; State/Province
  • Authority and Governance:
    State/provincial government; National government
  • Implementation Timeline:
    Short-term (1-2 Years)
  • Implementation Stakeholders:
    Array
  • Funding Sources:
    Public investment; private investment
  • Capacity to Act:
    High

    Benefits:

  • Cost-Benefit:
    Medium
  • Public Good:
    Low
  • GHG Reduction:
    N/A
  • Co-benefits (Climate/Environmental):
    N/A
  • Co-benefits (Social):
    Increase property values; Reduce poverty