The Emergence of Disaster Risk Financing in a Changing World
Societies continue to bear increasing costs from natural hazards as population growth, the geographic concentration of economic and infrastructural assets in vulnerable areas, and the effects of climate change are accelerating exposure to potential losses. As governments try to recover and rebuild in the aftermath of disasters, they are confronted with staggering economic and financial costs because the immediate expenditures needed for reconstruction are compounded by a weakened economy, damaged infrastructure, destroyed businesses, reduced tax revenues, and a rise in poverty levels. These costs are particularly acute for low- and middle-income economies that tend to depend on ad hoc solutions such as emergency loans, retroactive budget realignments that divert limited financial resources from other areas of need, tax increases, or donor assistance to fund reconstruction and recovery efforts. The lack of a disaster-oriented financial resilience mechanism delays economic recovery and prolongs hardships for governments, households, businesses, and vulnerable communities.
Disaster risk financing (DRF) is therefore a critical component in strengthening the resilience of developing countries and in protecting poor and vulnerable communities from the financial and economic impacts of disasters. Since the 21st Conference of the Parties (COP21) in Paris in 2015, momentum has been growing in establishing partnerships dedicated to DRF and in coordinating the activities of international organizations, donors, governments, civil society organizations, the private sector, and academic institutions, which has led to the emergence of a coordinated international DRF community. Through these partnerships, stakeholders can share research, best practices, technical assistance, and data on risk finance. These multistakeholder networks include the InsuResilience Global Partnership that was launched in 2017 at COP23 in Bonn as an initiative of the G7, G20, and Climate Vulnerable Forum Groups. InsuResilience aims to improve disaster response by implementing climate, disaster risk finance, and insurance-oriented solutions, and promotes the expansion of financial protection in developing countries and the establishment of a common set of standards for its members to adhere to. Networks such as the InsuResilience Global Partnership are crucial for coordinating the agendas and implementation efforts of DRF stakeholders coming from different fields of expertise.
The international DRF community has shifted the way financial responses to disasters are designed, moving away from a focus on reactive post-disaster responses to a more proactive approach focusing on prevention and preparedness. Initiatives such as the Disaster Risk Financing and Insurance Program (DRFIP), a partnership between the World Bank Group’s Finance, Competitiveness, and Innovation (FCI) Global Practice and the Global Facility for Disaster Reduction and Recovery (GFDRR), are helping governments negotiate the transition from handling emergencies to planning ahead for risk.
Instruments such as the Global Risk Financing Facility (GRiF) demonstrate the added value of establishing pre-arranged risk finance mechanisms in accelerating recovery from disaster shocks not only for the poor and vulnerable populations within the country but also for the economy, government services, and infrastructure. GRiF helps countries overcome financial barriers to implement early risk financing solutions that mitigate climate and disaster shocks. By providing prearranged funding, GRiF incentivizes risk preparedness and resilience by investing in countries’ safety net mechanisms and pre-established national disaster funds. The focus on early risk financing as evidenced by initiatives such as GRiF and the DRFIP also allows countries to plan for the delivery of recovery assets to the more vulnerable groups of their population.
Global DRF policy makers and stakeholders have increasingly solicited expertise from and leveraged partnerships with the private sector to improve the effectiveness of risk financing strategies. This is especially true of the role of insurance in risk finance because access to insurance markets and the quality of insurance coverage can determine how resilient economies are against disasters and how quickly they can recover. Yet in many developing economies significant gaps exist in insurance coverage for vulnerable economic assets, which threaten gains from development and place vulnerable livelihoods, communities, businesses, and public services at risk of significant financial loss.
This challenge has inspired the formation of partnerships between international organizations, governments, and the private sector, such as the Insurance Development Forum (IDF), a public–private partnership launched in 2016 by representatives from the United Nations, the World Bank, and the insurance industry. The IDF provides (i) expertise on the insurance sector and its related risk management capabilities to international organizations, and (ii) insight on how this key industry can support solutions that close the coverage gap between insured losses and vulnerable assets. Other actors developing insurance-based resilience financing include the World Bank’s Global Index Insurance Facility, which facilitates access to insurance financing for individual beneficiaries such as smallholder farmers, microentrepreneurs, and microfinance institutions.
The European Union (EU) has been at the forefront of supporting innovations in DRF and provided funding for several important DRF-related programs. The Africa Disaster Risk Financing Initiative for instance, was implemented between 2015 and 2020, and worked with 21 African countries to design and implement tailored financial protection policies and instruments tailored to each national context such as helping countries establish shock-responsive social safety nets. The EU also supports the Strengthen Financial Resilience and Accelerating Risk Reduction in Central Asia Program, which was launched in July 2019 to improve financial resilience and risk-informed investment planning in Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan.
With the emergence of several fields of expertise within the DRF community, the availability and quality of data has substantially improved, laying an essential foundation for the development of effective financial protection solutions against disaster risk. However, in the context of the highly complex nature of disasters and crises, new trends and shifting patterns related to climate change, and constantly changing socioeconomic exposures, these technical data still need to be aggregated, processed, analysed, and refined into actionable information so it can be used by stakeholders to develop and implement risk financing strategies.
Without suitable background knowledge and the right quantitative tools, governments would be unable to properly determine whether certain strategies provide more effective financial protection over others, how cost effective they would be, and how suitable these would be in a country-specific context. As a result, a gap has emerged between the availability of raw technical data and the capacity of stakeholders to adequately use this data to plan the best financial resilience strategy. For this reason, there has been significant demand from governments and other DRF stakeholders for high quality analytics that translate technical data into useable information so they can be empowered to make decisions based on a sound analysis of economic, financial, and disaster data.