Catastrophe Deferred Drawdown Option (Cat DDO)
A credit line the World Bank opens for a government before a disaster, which the government draws as soon as it declares a state of emergency.
After an earthquake or a hurricane, a government budget needs cash within days, while a reconstruction loan takes months to negotiate: the deferred drawdown option bridges that gap. The government arranges it in advance, pays a front-end fee and commits to a disaster risk management program, which is a precondition for any drawdown. The trigger is neither a physical index nor a measured loss but the government's own declaration of emergency, which removes the basis risk that comes with parametric instruments. Nothing is actually transferred, though: the money drawn is a loan, repaid on the Bank's terms, so the instrument is risk financing rather than risk transfer. It therefore sits in the middle layer of a sovereign strategy, between budget reserves that absorb frequent events and insurance or cat bonds that respond to extreme ones.
The first Cat DDO was approved by the World Bank for Costa Rica in September 2008, for 65 million dollars; the country drew on it a few months later, after the Cinchona earthquake of January 8, 2009.
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