PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Public Disclosure Copy Report No.: PIDC3947 Project Name Honduras and Nicaragua Catastrophe Risk Insurance Project (P149895) Region LATIN AMERICA AND CARIBBEAN Country Central America Sector(s) Non-compulsory pensions and insurance (50%), Flood protection (50%) Theme(s) Other Financial Sector Development (50%), Natural disaster management (50%) Lending Instrument Investment Project Financing Project ID P149895 Borrower(s) Republic of Honduras, Republic of Nicaragua Implementing Agency Ministry of Finance and Public Credit, Ministry of Finance Environmental C-Not Required Category Date PID Prepared/ 12-Mar-2014 Updated Date PID Approved/ 12-Mar-2014 Disclosed Estimated Date of 20-Mar-2014 Appraisal Completion Public Disclosure Copy Estimated Date of 01-May-2014 Board Approval Concept Review Track I - The review did authorize the preparation to continue Decision I. Introduction and Context Country Context Both Honduras and Nicaragua are highly vulnerable to the adverse effects associated with earthquakes, hurricanes and other major hydro-meteorological events such as excessive rainfall. Without adequate fiscal management strategies, major catastrophic events can jeopardize government efforts to end extreme poverty and boost shared prosperity while threatening to reverse hard-won development gains. Experiences from across Central America have shown that in the immediate aftermath of a disaster, countries experience significant macro-economic instability and major public sector budget variability. High levels of vulnerability to natural hazards aggravate the significant poverty and development challenges already experienced by Central American countries, including Honduras and Nicaragua. In 2012, Honduras and Nicaragua accounted for some of Latin America’s lowest rates of Gross National Income per capita – at US$2,120 and US$1,650 respectively. Additionally, both countries Page 1 of 6 experience some of the highest rates of poverty in the region. In Honduras, 60 percent of the country’s population of 7.9 million citizens lived below the poverty line in 2010, a worrying figure as it represents an increase from the four previous years. In Nicaragua, while the situation has Public Disclosure Copy improved recently, approximately 42 percent of the country’s 5.9 million inhabitants still live below the poverty line and one out of every seven live in extreme poverty. In socio-economic contexts such as those of Honduras and Nicaragua, the negative impacts of catastrophic events can have particularly extreme effects on the poor, who are the least able to cope with reduced access to and quality of public services resulting from limited budgets and higher public debt levels incurred and transferred onto future generations. Between 1990 and 2008, the total damages and losses associated with large-scale natural events (e. g. earthquakes and hurricanes) in Central America have been estimated at over US$21 billion. While earthquakes are associated with the highest probable maximum loss per event, adverse hydro- meteorological events are by far the most frequent in Honduras and Nicaragua. From 1990 to 2012, it is estimated that annual economic losses due to weather-related disasters (e.g. hurricanes, tropical storms, floods and landslides) was equivalent to 2.8 percent and 1.8 percent of GDP for Honduras and Nicaragua respectively. Public sector assets in the health, education, water, transport, agricultural and infrastructure sectors as well as in housing often incur the majority of damages associated with catastrophic events. Such events contributed to large fiscal deficits and debt accumulations requiring public debt restructurings while at the same time limiting country abilities to finance reduction and mitigation activities. In Nicaragua, the Managua earthquake (1972) generated damages and losses equivalent to 93 percent of GDP, while Hurricane Felix (2007) caused damages and losses equivalent to 14.4 percent of GDP; in addition heavy rains of 2007 in Nicaragua's north-western region and the 2011 Tropical Depression 12E eliminated 3 percent and 6.8 percent of GDP, respectively. In Honduras, Hurricane Mitch (1998) represented the worst disaster in the country’s recent history, affecting 90 percent of its territory, leading to over 5,700 deaths and 8,000 missing as well as displacing nearly Public Disclosure Copy half a million individuals. The overall damage amounted to 81 percent of GDP. Subsequent extreme hydrometeorological events since Hurricane Mitch would suggest that Honduras’ disaster vulnerability is on the rise. Between 1980 and 2010, over 15,000 people were killed and over 4 mill ion were affected by disasters, while economic damage amounted to US$4.5 billion. Sectoral and Institutional Context Over the past few decades, Honduras and Nicaragua have made significant institutional and programmatic advances to improve their disaster risk management capabilities and capacities. Both countries have passed legislation, developed policies, and created institutions to enable more efficient emergency management, while procedures are currently in place to help provide early warnings to citizens prior to when a disaster strikes. As a result, fewer lives are lost today per hazard event than in past decades. Efforts are also underway to increase national capacities to model risk, forecast potential disasters and utilize hazard data to inform public planning and development processes. Nevertheless, Honduras and Nicaragua remain fiscally vulnerable to disasters. Disaster losses and damages continue to be associated with large fiscal costs and represent a significant and explicit contingent liability for these two countries and their national budgets. The economic costs of disasters continue to rise due to the high level of exposure to risk and inadequate degrees of incorporating disaster risk management in private and public decision-making. The limited ability of Page 2 of 6 Honduras and Nicaragua to absorb fiscal shocks associated with natural hazard impacts is further related to restricted capacity for external borrowing as well as limited use of financial tools to manage fiscal volatilities. Public Disclosure Copy Honduras and Nicaragua would therefore benefit from applying a comprehensive budget protection strategy against natural hazards to safeguard fiscal accounts and balances, while allowing for rapid resource mobilization in the wake of a disaster. Both countries could increase their disaster resilience by utilizing market-based risk transfer instruments combined with other financial mechanisms. Catastrophe risk pooling at the regional level can be considered a cost-efficient means to safeguard against extreme events – as it enables the aggregation of risk into larger, more diversified portfolios thereby resulting in more affordable premiums and wider access to international reinsurance and capital markets. Insurance would mobilize additional funds, which could contribute to the overall reduction of the gap between the contingent liability of Central American countries, including Honduras and Nicaragua, to natural catastrophes and the amount of readily available resources that can be mobilized following a natural catastrophe. An example of regional risk pooling and transfer is the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which has covered 16 countries of the Caribbean Community (CARICOM) with tropical cyclone (wind and storm surge) and earthquake risk insurance since 2007. A CCRIF policy would provide coverage at a rate significantly cheaper than if a country were to approach the reinsurance market individually. Expanding the membership of the CCRIF to Honduras and Nicaragua – as well as other countries in Central America and the Dominican Republic (COSEFIN countries) as part of a regional risk pooling and transfer partnership – would therefore provide strategic, cost-effective and high quality fiscal protection against disasters and help maintain essential government services until additional resources become available. Relationship to CAS Public Disclosure Copy The Project is consistent with the World Bank Group’s Country Partnership Strategy 2012-14 for Honduras as well as the Country Partnership Strategy 2013-17 for Nicaragua, in which disaster risk management is identified as a critical theme to include in each country’s program outcomes. II. Proposed Development Objective(s) Proposed Development Objective(s) (From PCN) The Project Development Objective is to increase the fiscal resilience of Honduras and Nicaragua to catastrophic events resulting from tropical cyclones, earthquakes, and excess rainfall. This will be achieved by providing financing to allow participating countries to access regional risk insurance against tropical cyclones, earthquakes, and excess rainfall through CCRIF membership. Affordable entrance and membership will be achieved by joining CCRIF with other COSEFIN countries. The IDA credit will be instrumental in positioning Honduras and Nicaragua to obtain catastrophic risk protection more efficiently and cheaply through CCRIF. Key Results (From PCN) The PDO level result indicator is as follows: Honduras and Nicaragua are eligible for catastrophe risk coverage and have received payment in the case of a covered (insured) event. Accordingly, the following outcome is expected: Honduras and Nicaragua benefit from partial Page 3 of 6 coverage against hurricane, earthquake, and/or excess rainfall risks. This will be measured by monitoring the following intermediate results indicators: i. Premium multiples, with respect to the direct expenses associated with CCRIF’s Public Disclosure Copy management of insurance policies, in Honduras and Nicaragua decrease successively during project implementation (for a period of three years). Premium multiples correspond to the insurance premium divided by the annual expected insurance loss. ii. Policies provide increasing insurance coverage and/or lower attachment point (insurance deductibles) for a given premium cost. III. Preliminary Description Concept Description The Project will finance the entrance fee and the annual insurance premiums necessary for Honduras and Nicaragua to participate in the CCRIF. Component 1: Payment of the entrance fee to the CCRIF for Honduras and Nicaragua The objective of this component is to assist Honduras and Nicaragua to join the CCRIF by financing their entrance fees. This fee is equivalent to the first year’s insurance premium for each of the two participating countries. Component 2: Payment of annual insurance premium to the CCRIF for Honduras and Nicaragua The objective of this component is to assist Honduras and Nicaragua to purchase the catastrophe insurance coverage offered by the CCRIF during the first three years of membership. Annual insurance premiums will initially cover risk associated with tropical cyclone (wind and storm surge) and earthquake during Year 1. Upon availability of an additional excess rainfall product in Year 2, Component 2 may also be used towards financing annual insurance premiums meant to cover against excess rainfall. Every year, members will have the choice of selecting the exact mix of Public Disclosure Copy insurance coverage (i.e. how much coverage for which event) depending on country prioritization. IV. Safeguard Policies that might apply Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment OP/BP 4.01 ✖ Natural Habitats OP/BP 4.04 ✖ Forests OP/BP 4.36 ✖ Pest Management OP 4.09 ✖ Physical Cultural Resources OP/BP 4.11 ✖ Indigenous Peoples OP/BP 4.10 ✖ Involuntary Resettlement OP/BP 4.12 ✖ Safety of Dams OP/BP 4.37 ✖ Projects on International Waterways OP/BP 7.50 ✖ Projects in Disputed Areas OP/BP 7.60 ✖ V. Financing (in USD Million) Page 4 of 6 Total Project Cost: 24.00 Total Bank Financing: 24.00 Financing Gap: 0.00 Public Disclosure Copy Financing Source Amount BORROWER/RECIPIENT 0.00 International Development Association (IDA) 24.00 Total 24.00 VI. Contact point World Bank Contact: Ana Campos Garcia Title: Senior Disaster Risk Management Specialist Tel: 458-0700 Email: acamposgarcia@worldbank.org Borrower/Client/Recipient Name: Republic of Honduras Contact: Wilfredo Cerrato Rodriguez Title: Minister Tel: 50422221278 Email: Name: Republic of Nicaragua Contact: Ivan Acosta Title: Minister Public Disclosure Copy Tel: 50522669744 Email: Implementing Agencies Name: Ministry of Finance and Public Credit Contact: Ivan Acosta Title: Minister Tel: 50522669744 Email: Name: Ministry of Finance Contact: Wilfredo Cerrato Rodriguez Title: Minister Tel: 50422221278 Email: VII. For more information contact: Page 5 of 6 The InfoShop The World Bank 1818 H Street, NW Public Disclosure Copy Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop Public Disclosure Copy Page 6 of 6