Public Disclosure Authorized The World Bank DOCUMENT OF THE WORLD BANK REPORT NO.: RES24760 Public Disclosure Authorized Public Disclosure Authorized RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF HONDURAS AND NICARAGUA CATASTROPHE RISK INSURANCE PROJECT APPROVED ON JUNE 18, 2014 TO REPUBLIC OF HONDURAS,REPUBLIC OF NICARAGUA SOCIAL, URBAN, RURAL AND RESILIENCE GLOBAL PRACTICE LATIN AMERICA AND CARIBBEAN Public Disclosure Authorized Regional Vice President: Country Director: Senior Global Practice Director: Practice Manager/Manager: Task Team Leader: Jorge Familiar Calderon J. Humberto Lopez Ede Jorge Ijjasz Vasquez Ming Zhang Ana Campos Garcia
ABBREVIATIONS AND ACRONYMS CCRIF COSEFIN DRFI IDA PDO SORT SPC Caribbean Catastrophe Risk Insurance Facility The Council of Ministers of Finance of Central America and the Dominican Republic Disaster Risk Financing and Insurance International Development Association Project Development Objective Systematic Operations Risk rating Tool Segregated Portfolio Company
BASIC DATA Product Information Project ID P149895 Original EA Category Not Required (C) Approval Date 18 Jun 2014 Lending Instrument Investment Project Financing Current EA Category Not Required (C) Current Closing Date 31 Jul 2021 Organizations Borrower Republic of Honduras,Republic of Nicaragua Responsible Agency Ministry of Finance and Public Credit of Nicaragua,Ministry of Finance of Honduras Processing (this section will be automatically removed by the system before the paper is disclosed) Form Type Based on the proposed changes this Restructuring type is Full Restructuring Paper Level 1 Decision Authority Board/AOB Decision Project Development Objective (PDO) Original PDO The Project Development Objective is to enable the access of Honduras and Nicaragua to efficient sovereign risk insuranceassociatedwith tropical cyclones, earthquakes, and/or excess rainfall. Summary Status of Financing Ln/Cr/Tf Approval Signing Effectiveness Closing Net Commitment Disbursed Undisbursed IDA 55300 18 Jun 2014 18 Jan 2017 12.00 0 10.54
IDA 55310 18 Jun 2014 11 Jul 2014 01 Jun 2015 30 Jun 2019 12.00 3.50 7.41 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING This Restructuring Paper seeks the approval of the Executive Directors to adjust the Project Development Objective (PDO) of the Honduras and Nicaragua Catastrophe Risk Insurance Project. The withdrawal of the credit offer to the Republic of Honduras (Credit No. 55300 HN) as of January 18, 2017 requires an adjustment of the PDO, effectively removing Honduras from the PDO. The restructuring will also take into consideration the availability of new sovereign risk insurance products for both geophysical and climate related events and adjust the PDO accordingly. The Restructuring will also result in a number of other changes in the Project. These include: (i) change of the Project name; (ii) update of the financing plan to reflect the withdrawal of Credit No. 55300 HN; (iii) extension of the closing date of Credit No. 55310 NI from June 30, 2019, to June 30, 2021; (iv) revision of the Project s description, including changes in components and costs to reflect that the Project would only provide financing for Nicaragua; (v) reallocation of funds and change in the percentage of expenditures to enable the Project to finance 50 percent of the payment for insurance premiums in years five and six of Project implementation; (vi) update of disbursement estimates; (vii) removal of the Ministry of Finance of Honduras as an implementing agency; (viii) revision of the Results Framework to remove any references to Honduras and change the end target date of PDO and intermediate indicators; (xi) reassessment of the Project s risk considering only the context of Nicaragua; and (x) revision of the Integrated Safeguards Data Sheet to remove references to Honduras and include the revised PDO and Project description. Project Background. The Honduras and Nicaragua Catastrophe Risk Insurance Project in the amount of SDR 7.8 million (US$12 million equivalent) to the Republic of Honduras (Credit No. 55300 HN), and SDR 7.8 million (US$12 million equivalent) to the Republic of Nicaragua (Credit No. 55310 NI) was approved on June 18, 2014. The objective of the Project was to enable access to Honduras and Nicaragua to an efficient sovereign risk insurance associated with natural disasters, such as tropical cyclones, earthquakes, and excess rainfall. To achieve this objective, the Project aimed at facilitating access of participating countries to regional risk insurance through membership in the Caribbean Catastrophe Risk Insurance Facility Segregated Portfolio Company 1 (CCRIF SPC). The Project finances two Components: (i) Component 1: Payment of the entrance fee to the CCRIF for Honduras and Nicaragua (US$4.5 million); and (ii) Component 2: Payment of annual insurance premiums to the CCRIF for Honduras and Nicaragua (US$19.5 million). Due to the delays in the signing of the Financing Agreement with Honduras, Project Implementation Progress is currently rated Moderately Unsatisfactory 1 CCRIF SPC (formerly known as the Caribbean Catastrophe Risk Insurance Facility (CCRIF) is the first multi country catastrophe risk pooling and financing facility that transfers partial sovereign disaster risk to the international reinsurance market and provides countries with much needed liquidity following disaster events. In 2014, the facility was restructured into a segregated portfolio company (SPC) to facilitate expansion into new products and geographic areas and is now named CCRIF SPC.
and the overall risk is rated Substantial. Following the Restructuring, both ratings will be upgraded. The Project does not trigger any safeguard policies. There are no outstanding audit reports (for this Project, the recipient is not required to conduct annual audits for the Project since Project funds are not channeled through government accounts). The Project is implemented in a complementary manner to the Central America and Caribbean Catastrophe Risk Insurance Project (P149670), financed by a Multi Donor Trust Fund. Thus, the credit processed under the Project is used to leverage donor contributions by financing entrance fees and premium payments to CCRIF SPC, while proceeds from the Central America and Caribbean Catastrophe Risk Insurance Project are used to finance CCRIF SPC risk transfer and retention expenditures. As a result of the two Projects, CCRIF SPC can offer more affordable catastrophe coverage options and build its capital for the sustainable continuation of its operations. Status of Project implementation in Honduras. The deadline for signing the Financing Agreement with Honduras passed on December 18, 2015 (18 months after Board approval). The World Bank communicated the deadline to the Honduran Government on several occasions both verbally and in an official communication dated November 24, 2015. As the Government of Honduras did not formally request an extension of this deadline, the World Bank notified the Honduran Government on January 18, 2017 of the official Withdrawal of Offer of the Credit. The World Bank will continue providing technical support to Honduras to inform the decision making process regarding CCRIF SPC participation as well as technical assistance on disaster risk financing and insurance. Status of Project implementation in Nicaragua. The Financing Agreement for Credit No. 55310 NI was signed on July 11, 2014, and declared effective on June 1, 2015. As of March 31, 2017, US$3.5 million (or 32 percent) of credit proceeds have been disbursed. Nicaragua became the first Council of Ministers of Finance of Central America and the Dominican Republic (COSEFIN) member country to formally join CCRIF SPC by signing a Participation Agreement on April 18, 2015. Since then, Nicaragua has used credit proceeds to make the following payments to CCRIF SPC: (i) the entrance fee (US$1 million) in August 2015; and (ii) the annual insurance premium for earthquake and tropical cyclone coverage for policy year 2015/2016 (US$1 million) in August 2015, and for policy year 2016/2017 (US$1.5 million) in June 2016. For the 2017/2018 policy period which begins on June 1, 2017, Nicaragua has indicated interest in renewing its earthquake and tropical cyclone policies with CCRIF SPC, and is currently in discussions with CCRIF SPC regarding the possibility of adding excess rainfall coverage. Under the insurance policies, CCRIF SPC has made a number of payouts to Nicaragua. These include: (i) US$500,000 on June 23, 2016 following a magnitude 6.1 earthquake that occurred on June 9, 2016; and (ii) US$1.1 million on December 9, 2016 following Hurricane Otto, which hit Nicaragua on November 25, 2016. Both payouts were transferred to Nicaragua within 14 days of the events, contributing to the achievement of the PDO indicator. The Project is also on track to achieve its two intermediate indicators as (i) CCRIF SPC premiums continue to be lower than the simulated price for a comparable coverage that could be purchased individually on the market; and (ii) compared to the baseline values in policy year 2015/2016, the policies purchased for policy year 2016/2017 resulted in an increase in insurance coverage of 0.39 percent for earthquake and 12.9 percent for tropical cyclones. Rationale for Restructuring. The proposed restructuring is necessary to reflect the outlined changes in the Project circumstances discussed above as well as changes requested by Nicaragua. II. DESCRIPTION OF PROPOSED CHANGES
Change in PDO. The proposed revised PDO reflects: (i) the withdrawal of the Credit offer to Honduras; and (ii) the availability of additional sovereign risk insurance products for Nicaragua to account for the development of new risk insurance products. As such, the broadened PDO enables access to sovereign risk insurance associated with geophysical events (including, but not limited to, earthquakes, volcanic eruptions, and landslides), and climate related events (including, but not limited to, tropical cyclones and excess rainfall). Change of Project Name. The name of the Project will be changed to Nicaragua Catastrophe Risk Insurance Project to reflect that Honduras is no longer part of the Project, which only finances activities in Nicaragua. Change in Financing Plan. The financing plan will be modified to reflect the withdrawal of IDA Credit No. 55300 HN to Honduras in an amount of SDR 7.8 million (US$12 million equivalent). The total amount of the Project will be US$12 million. Change in Credit Closing Date. The Closing Date for Credit No. 55310 NI will be extended by two years, from June 30, 2019, to June 30, 2021. This will enable the financing of annual insurance premiums under the Project for up to six years and contribute to the achievement of the PDO. Initially, the Project was designed to finance the entrance fee and the annual insurance premiums for seven years for Honduras and four years for Nicaragua. Thus, the closing date of the Project was established as July 31, 2021 (the expected closing date of Credit No. 55300 HN). In line with the proposed extension for Credit No. 55310 NI, the closing date of the Project will be changed to June 30, 2021. Change in Results Framework. The Project s Results Framework will be adjusted to reflect the change in the PDO and the extension of the closing date. The wording of the PDO indicator and intermediate indicators will be modified to reflect that Honduras is no longer part of the Project. Also, the end target dates will be aligned with the proposed closing date of June 30, 2021. Change in Components and Cost. The description of the Components and related costs will be revised to reflect that the Project will only finance activities in Nicaragua. More specifically, Component 2 will be modified to: (i) allow for the financing of annual insurance premiums for Nicaragua for two additional years (premiums will be financed on a decreasing basis for Nicaragua in the final two years); and (ii) expand the coverage to geophysical events and climate related events as described above. Depending on the country s risk profile and priority needs, Nicaragua has the option to select the amount of insurance coverage per type of risk annually. Reallocation between Disbursement Categories. Credit funds will be reallocated between disbursement categories and Categories to finance annual insurance premiums for Nicaragua. Given that no additional disbursements are anticipated under Category 1, the remaining balance (SDR1.23 million) will be reallocated to Category 2. The percentage of expenditures to be financed will also be modified to allow financing of 100 percent of premiums during Years 3 and 4, and financing of 50 percent of premiums during Years 5 and 6. Change in Disbursement Estimates. Given the extension of the closing date and taking into consideration changes in the SDR exchange rate, the disbursement estimates are being revised as follows: Original Disbursement Estimates in US$ for Nicaragua (4 years) Year 1 Year 2 Year 3 Year 4 Up to $3 million (100%) Up to $3 million (100%) Up to $1.5 million (50%) Up to US$1.5 million (50%)
Year 1 (FY15) No disbursement Revised Disbursement Estimates in US$ for Nicaragua (6 years) Year 2 Year 3 Year 4 Year 5 (FY16) (FY17) (FY18) (FY19) $1m (Entry Fee) $1m (Premium 15/16) (100% payment for premium) $1.5m (Premium 16/17) (100% payment for premium) ~$2.30 m (Premium 17/18) (100% payment for premium) ~$2.30 m (Premium 18/19) (100% payment for premium) ~$1.1m (Premium 19/20) (50% payment for premium) Year 6 (FY20) ~$1.1m (Premium 20/21) (50% payment for premium) Change in Implementing Agency. The Ministry of Finance of Honduras will be removed as an implementing agency under the Project. Change in Implementation Schedule. The Project s implementation schedule will be revised to reflect the extension of the closing date from June 30, 2019 to June 30, 2021. Change in Systematic Operations Risk Rating Tool (SORT). The SORT has been revised to reflect the risks solely associated with Nicaragua. As a result, the overall risk rating of the Project has been changed from substantial to moderate. Risk is related to Technical Design of the Project, and Sustainability are rated Moderate due to issues that may arise from: (i) the client s understanding of (or lack thereof) the risk models, products and policy benefits and limitations; and (ii) the ability of Nicaragua to continue as a CCRIF SPC member after Project closing. With respect to mitigation measures, the careful design of the terms and conditions of the parametric insurance policy is a critical element to minimize project risks. Specifically, (i) trigger points of the insurance contracts are set to balance affordability and frequency of payouts; (ii) participating countries are recommended to limit insurance coverage to a fraction of their potential losses, using CCRIF SPC as a safety net rather than full insurance; and (iii) parametric contracts that clearly explain the terms of the insurance policy provided. Furthermore, technical assistance provided by CCRIF SPC helps stakeholders to fully understand the risk models, products and policy benefits and limitations, particularly that the Project is not meant to cover entire losses faced by affected states, but to guarantee a minimum level of liquidity in case of a major adverse natural event. As a complement, the technical assistance provided by the World Bank enhances governments capacity to understand their disaster related financial gaps and consider more comprehensive Disaster Risk Financing and Insurance (DRFI) initiatives. This includes understanding the cost benefit analysis of different financial instruments and creating a layered DRFI strategy that combines a set of instruments to address different needs (emergency funds, budget reallocation, contingent credits, parametric insurance, etc.). Also, it is expected that the Government of Nicaragua and its citizens will reap the benefits of CCRIF SPC membership through quick payouts, increase in coverage over time, and the accompanying technical assistance, and that they will become sensitized to the benefits of such coverage and more generally to the value of having ex ante risk financing instruments in place. Understanding these benefits will provide an incentive for the Government to remain a member of CCRIF SPC. Other Changes:
Amendment to the Financing Agreement (Credit No. 55310 NI). Some of the proposed changes to the Project require an amendment to the Financing Agreement signed between the International Development Association and the Government of Nicaragua. The Financing Agreement will be amended to (i) reflect the revised PDO; (ii) extend the closing date to June 30, 2021; (iii) reallocate funds between categories of Eligible Expenditures; (iv) modify the percentage of expenditures to be financed (enabling financing of 100 percent of premiums during years three and four of the Project and financing of 50 percent of premiums during years five and six); and (v) update the description of Component 2 to reflect that the Project will provide financing for annual insurance premiums for six years. Integrated Safeguards Data Sheet. No safeguards policies are triggered. The Integrated Safeguards Data Sheet has been revised to reflect the new PDO and remove all references to Honduras. III. SUMMARY OF CHANGES Change in Implementing Agency Change in Project's Development Objectives Change in Results Framework Change in Components and Cost Change in Loan Closing Date(s) Reallocation between Disbursement Categories Change in Disbursement Estimates Change in Systematic Operations Risk Rating Tool (SORT) Change in Implementation Schedule Other Change(s) Cancellations Proposed Change in Financing Plan Change in Disbursements Arrangements Change in Safeguard Policies Triggered Change of EA category Change in Legal Covenants Change in Institutional Arrangements Change in Financial Management Change in Procurement Changed Not Changed
PDO_IND_TABLE The World Bank Change in Economic and Financial Analysis Change in Technical Analysis Change in Social Analysis Change in Environmental Analysis IV. DETAILED CHANGE(S) IMPLEMENTING AGENCY Implementing Agency Name Type Action Ministry of Finance and Public Credit of Nicaragua Implementing Agency No Change Ministry of Finance of Honduras Implementing Agency Marked for Deletion PROJECT DEVELOPMENT OBJECTIVE Current PDO The Project Development Objective is to enable the access of Honduras and Nicaragua to efficient sovereign risk insuranceassociatedwith tropical cyclones, earthquakes, and/or excess rainfall. Proposed New PDO The Project Development Objective is to enable access of Nicaragua to efficient sovereign risk insurance associated with geophysical and climate related events. RESULTS FRAMEWORK Project Development Objective Indicators Nicaragua as member of CCRIF is eligible for catastrophe risk coverage and has received payment within a month of the occurrence of a covered (insured) event Unit of Measure: Percentage Indicator Type: Custom Baseline Actual (Current) End Target Action Value 0.00 100.00 100.00 Revised
IO_IND_TABLE The World Bank Date 01 Jun 2014 03 Mar 2017 30 Jun 2021 Intermediate Indicators Policies provide increasing insurance coverage and/or lower attachment point (insurance deductible) for a given premium amount Unit of Measure: Yes/No Indicator Type: Custom Baseline Actual (Current) End Target Action Value No Yes Yes Revised Date 01 Jun 2014 06 Dec 2016 30 Jun 2021 CCRIF premiums for Nicaragua are lower than the simulated price for a comparable coverage purchased individually in the market Unit of Measure: Yes/No Indicator Type: Custom Baseline Actual (Current) End Target Action Value Yes Yes Yes Revised Date 01 Jun 2014 06 Dec 2016 30 Jun 2021 COMPONENTS Current Component Name Component 1: Payment of the entrance fee to the CCRIF for Honduras and Nicaragua Component 2: Payment of annual insurance premium to the CCRIF for Honduras and Nicaragua Current Cost (US$M) Action 4.50 Revised 19.50 Revised Proposed Component Name Component 1: Payment of the entrance fee to the CCRIF for Nicaragua Component 2: Payment of annual insurance premium to the CCRIF for Nicaragua Proposed Cost (US$M) TOTAL 24.00 12.00 1.00 11.00
LOAN CLOSING DATE(S) Ln/Cr/Tf Status Original Closing Revised Closing(s) Proposed Closing Proposed Deadline for Withdrawal Applications IDA 55300 Not Effective 31 Jul 2021 18 Jan 2017 18 Jan 2017 IDA 55310 Effective 30 Jun 2019 30 Jun 2021 30 Oct 2021 REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Current Allocation Actuals + Committed Proposed Allocation Financing % (Type Total) Current Proposed IDA 55310 001 Currency: XDR ilap Category Sequence No: 1 Current Expenditure Category: Recipient Entrance Fee CCRIF Pt 1 1,950,000.00 720,165.35 720,165.35 100 100 ilap Category Sequence No: 2 Current Expenditure Category: Rec Annual Insur Premiuns CCRIF Pt2 5,850,000.00 1,778,240.67 7,079,834.65 100 100 Total 7,800,000.00 2,498,406.02 7,800,000.00 SYSTEMATIC OPERATIONS RISK RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance Macroeconomic Sector Strategies and Policies Technical Design of Project or Program Institutional Capacity for Implementation and Sustainability Low Low Low Moderate Moderate
Fiduciary Environment and Social Stakeholders Low Low Low Other Overall Moderate