As contingent credit, the Catastrophe Deferred Drawdown Option (Cat DDO) could be an affordable source of financing and complements existing market-based disaster risk financing instruments such as insurance, catastrophe bonds, and reserve funds. These instruments can be combined to retain the risk from smaller, more frequent events, or to transfer the risk from less frequent, higher-impact events, based on an assessment of risks, desired coverage, available budget, and cost-efficiency. On the other hand, Cat DDO works similarly to a catastrophe bond, in that it promises capital liquidity right when disasters happen. The Cat DDO structure has already been used by a number of nations to access financing post-disaster already, including the Dominican Republic, as well as the Philippines and Sri Lanka.
The WB's project for Romania - Disaster Risk Management Development Policy Loan with a Catastrophe Deferred Drawdown Option pro0vides for a EUR 400 million loan, with a 20 years maturity and 19.5 years grace. The objective of the project is to strengthen Romania's institutional and legal framework to effectively manage the physical, social and fiscal impacts of natural disaster and climate change.
The risk from earthquakes to society, buildings and infrastructure in Romania is extremely high. Romania also has over 1 million ha of land exposed to flooding with nearly 1 million Romanians living in high flood risk areas. Drought, landslides, extreme weather and heat/cold events are also increasing. The WB's analysis has highlighted the risk to existing building stock in Romania, with a magnitude 7.5 earthquake (such as the 1977 Vrancea earthquake) immediately reducing the functionality and access to housing in Bucharest to 30 percent, with functionality only rising to 65 percent after a year and 90 percent after two years. Thus, having a rapid funding resource in place might be crucial for maintaining the country's economic sustainability in the aftermath of a nat cat event of large dimensions.
The ongoing project run together with the WB is a continuation of the prior actions taken by Romania to improve its nat cat risks management system. Currently (end of June, 2018 data) 1.7 million Romanian households have nat cat insurance coverage at least at the level provided by the mandatory cat insurance policy PAD issued by the Romanian Catastrophe Insurance Pool - PAID. Of the total number of policies, 19% were issued for real estate properties in the capital city Bucharest.