Contingent Liabilities: Issues and Practice; Aliona Cebotari; imf working Paper 08/245; October 1, 2008

U.S
. 
Federal Pension Benefit 
Guaranty Corporation 
(PBGC) 
It pays off pensions up to a specified amount if a private pension fund goes bankrupt. It is funded by 
premiums paid by companies, which, however, may not be properly scaled to offset the agency for the risk it 
takes (White, Lawrence, 1993, GM’s Bookkeeping Game, New York Times, December 18). 
 
Environmental 
Contingency Fund 
Set up in 1985 by the legislature for the purpose of controlling, investigating, and remediating the release of 
hazardous materials. The Fund is financed through the hazardous waste generator tax and managed by the 
Agency of Natural Resources. Expenditures out of the Fund, largely to cover the obligations of the 
Superfund (the trust fund set up in 1980 to pay for the cleanup of hazardous waste sites), require legislative 
authorization if exceeding $100,000.
 
Loan guarantee fund 
The guarantee fees paid by the beneficiaries or by the sponsoring departments (from their program account) 
are paid into an off-budget government financing account associated with the program. This is a notional 
account, in that the funds never leave the Treasury and no cash reserve is created. The transactions of the 
financing accounts do not appear in the government budget, although the transactions of the financing and 
program accounts are presented in budget documents for information and analytical purposes.
have more than a fourth of their total population in areas at relatively high mortality risk from one or more 
hazards. About a third of the world’s land area (and 82 percent of the population) is exposed to flooding.

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estimates, for example, that in some Latin American countries government exposure to 
extreme disasters (for infrastructure under its own responsibility) is up to 5.7 times the 
resources available to deal with these risks. Although the catastrophe insurance market is 
actively used by corporations, the Mexican government was the first to securitize natural 
catastrophe risk (earthquake) by issuing $160 million catastrophe bonds in 2006.
46
Catastrophe bonds forgive interest and principal in the event of specified catastrophes, 
allowing the money to be redirected towards disaster relief and with investors 
compensated for such provisions by higher interest rates before the disaster strikes.
47
More recently, following the devastation caused by Hurricane Ivan in the Caribbean, the 
Caribbean Community countries established in 2007, with assistance from the World 
Bank, the first regional disaster insurance facility in the world—the Caribbean 
Catastrophe Risk Insurance Facility (CCRIF). This facility will provide participating 
governments with immediate liquidity if hit by a hurricane or earthquake and, by 
allowing Caribbean countries to pool their risk, it would significantly reduce their 
individual insurance premium. CCRIF will serve as a pilot program for possible 
extension to or replication in other regions with small states (such as the Pacific basin).
48
Otherwise, countries have generally relied on self-insurance through the creation of 
contingency calamity funds. 
• Countries can also seek commercial insurance coverage for overruns in environmental 
cleanup costs of properties under their control. Public environmental liabilities—which 
consist of cleanup costs of contamination at nuclear test sites and from waste disposal, 
leaks, and other risky activities at defense activity sites—could be significant. The stock 
of these liabilities was estimated in the U.S. at around 2.3 percent of GDP at end-2006 
and in Canada at about 0.4 percent of GDP at end-March 2007.
49
Nevertheless, 
governments face significant risks of higher-than-estimated cleanup costs due to 
discovery of new contaminated sites or of higher-than-expected contamination, against 
which they could obtain insurance. Environmental insurance has evolved rapidly over the 
past decade, particularly in the private sector. 
46
The market for catastrophe insurance has grown rapidly between 1997 (the first year with multiple 
transactions) and 2007: 89 catastrophe bonds were issued by end-2006, with an outstanding principal of
$8.5 billion (MMC Securities, 2007). 
47
Only part of the bond issue represents risk transfer because only part of the bond’s principal and interest is at 
risk. 
48
World Bank, 2007, “Caribbean Catastrophe Risk Insurance Facility: a solution to the short-term liquidity 
needs of small island states in the aftermath of natural disasters,” Financing for Relief and Development, 
IAT03-13/3, and “The Caribbean Catastrophe Risk Insurance Facility: Brief for Journalists.” 
49 
These are environmental liabilities recognized in government financial accounts for the respective years. The 
public accounting standards in many countries (including Canada, New Zealand, and the United States) require 
the recognition and disclosure of environmental liabilities. 

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