_Note:_ The cost multiplier represents the estimated cost of resources as a multiple of the average expected loss it finances. Donor Grants do not have a financial cost but are often reallocated from other ongoing projects and may have an opportunity cost. Reserves are generally held in short‐term assets; their cost is the difference between the returns on long term investments and on short‐term investments. Budget reallocations are funds reallocated from other programs and may have an opportunity cost; unless they affect the credit rating of a government, the cost of emergency loans is reflected in the interest rate applied; see discussion below on the cost of risk transfer instruments.

Source: Authors.

Finally, governments have recently taken a closer look at instruments available in the financial markets such as traditional insurance, parametric insurance and ART mechanisms (CAT‐Bonds in particular). Traditional insurance is already in use in many countries to insure public and private assets. When properly designed, traditional insurance can provide tailored coverage for specific assets and perils. More importantly, governments in many parts of the world have been able to reduce the impact of disasters on their budget and to increase the resilience of their economy by promoting insurance penetration in the private sector. Parametric insurance has also been used in innovative programs such as the Caribbean Catastrophe Risk Insurance Facility (see Box 7). Finally, some countries, like Mexico, have recently ventured into the use of CAT Bonds to cover specific needs.

Nevertheless, the use of insurance and ART remains a relatively expensive proposition for governments (see Box 2), and their use has remained limited to specific cases discussed later in this paper.

**Box 1. Reducing the moral Hazard of post‐disaster assistance**

The Development Policy Loan (DPL) with Catastrophe Risk Deferred Drawdown Option, DPL with CAT DDO, is a <mark>financial instrument that offers IBRD‐eligible countries immediate liquidity of up to USD$500 million or 0.25 percent of GDP (whichever is less) in case of a natural disaster (Per World Bank Operational Policy/Bank Policy 8.60). The instrument was designed by the World Bank to provide affected countries with bridge financing while</mark> other sources of funding are being mobilized.

<mark>The CAT DDO was created first and foremost to encourage investment in risk reduction. Indeed, to have access to this contingent credit, countries must show that they have engaged in a comprehensive disaster management program. As such, the DPL with CAT DDO is the first financial instrument offered by the donor community that</mark> aims at addressing the problem of moral hazard in donor funding for disaster recovery.

<mark>The first DPL with CAT DDO was approved by the World Bank’s Board of Executive Directors in September 2008. The US$65 million contingent loan to the Government of Costa Rica aims to enhance the government’s capacity to “implement a Disaster Risk Management Program for natural disasters.” This program was described in the</mark> loan document and agreed upon before signing.

<mark>Following the 6.2 magnitude earthquake that hit Costa Rica on January 8, 2009, the Government of Costa Rica drew down approximately US$15 million of this loan. DPLs with CAT DDO have since been signed with Colombia</mark> and Guatemala and are currently under preparation in various other countries.

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