May 14, 2014

Disaster Risk Financing & Insurance

An essential part of effective disaster risk management

Julie Dana, Lead Financial Officer

The World Bank
 1 2
What? Why?

Financial protection that

complements risk Cost of disasters is
reduction increasing

3 4 5
Who? How? When?

Governments, regional
Build on synergies with
organizations, market Next steps for FY14-16
other activities to develop a
participants, and
risk financing strategy
development partners
1. What is Disaster Risk Financing?

…the practice of arranging financing in advance

so that funding is available for rapid recovery
and response immediately following an event.

Risk financing complements, but does not

replace, risk reduction and resilience measures
1. What is Disaster Risk Financing?

Pillar 1: Risk Identification Risk assessment and risk communication

Structural and non-structural measures; e.g.

Pillar 2: Risk Reduction infrastructure, land-use planning, policies and
regulation

Early warning systems; support of emergency

Pillar 3: Preparedness measures; contingency planning

Assessing contingent liabilities; evaluating

Pillar 4: Financial Protection budget appropriation and execution; using ex-
ante and ex-post financing instruments

Resilient recovery and reconstruction policies;

Pillar 5: Resilient Recovery ex-ante design of institutional structures
2. Why is it a priority?

Disaster losses are a rising trend

USD 3.8 Trillion - Worldwide disaster related

losses from 1980 to 2012
 Increasing exposure (caused by poorly managed growth) will
continue to drive disaster risk
 Urbanization is a particular concern – Africa’s urban
population will grow to 1.2 billion or 60% by 2050
 Climate change is likely to exacerbate this trend

Risk financing complements risk-sensitive development

and planning
 2. Why is it a priority?

• Cost of explicit &

• Loss of assets and
implicit contingent Producers & livelihoods
liabilities
Governments Supply Chain • Loss of market
• Loss of revenue
Actors access
• Opportunity cost of
diverting funds

• Loss & damage to • Loss & damage to

Vulnerable homes and assets
homes and assets Homeowners Populations
• Loss of business • Loss of market
income
and SMEs & access
Communities • Loss of livelihoods
2. Why is it a priority?
Financial management capacity Capital

Discipline Speed

Knowledge Autonomy

Market signals
 3. Who is implementing it?

Indonesia:
Caribbean Philippines:
Mexico: Exploring Sovereign EQ
Catastrophe Risk DRFI Strategy, Climate and
FONDEN fund, risk transfer
Insurance Facility Disaster Resilience Fund,
Catastrophe bond
Sovereign risk transfer
Ethiopia
Scalable social safety net
African Union, Kenya
African Risk Capacity Agricultural
Insurance
Colombia:
DRFI Strategy,
Insurance of public
assets and concessions
Malawi Indian Ocean Islands:
Drought risk management Exploring regional risk
Uruguay: pooling initiative
Insurance for the
impact of drought / oil Seychelles: Contingent Pacific Catastrophe
prices on hydropower Credit (Cat0DDO) Risk Assessment and
Financing Initiative
 4. How is it done?

Risk financing
builds upon and Disaster &
provides leverage to Climate Risk
other policy areas Management

Public Disaster Risk Financial

Financial Financing & Sector
Mgmt Insurance Development

Social
Protection
4. How is it done?
Pillar 4

Financial Protection

Sovereign Disaster-linked Property

Agricultural
Disaster Risk Social Catastrophe Risk
Insurance Insurance
Financing Protection

Increase the financial
response capacity of
national and subnational
governments, and their
access to effective
reconstruction and recovery
funding
EVIDENCE
Protect agricultural
producers from losses
arising from damage to their
productive asset and
livestock
Protect the poorest through
the application of insurance
principles and tools to
social safety nets such as
cash transfer programs
Protect homeowners and
SMEs against losses arising
from property damage

Analytics (Risk assessment, Scenario Analysis, Cost-Benefit Analysis)

BASE

Empowering governments to take informed decisions on the financial management of natural disasters
4. How is it done? From data to decisions….
Analytical tools that help policy makers make use of data and
technical models…

Simulated
Hazard loss data Risk Analytics
Risk Exposure
Models
Vulnerability Cost Benefit Informed
Historical loss Analysis Financial
data
Decisions
Historical loss data
Scenario
Analysis

Macro economic data

…result in better planning and informed decisions.

4. How is it done? Financing different risk layers
Risk-layering - to match financing mechanisms to the severity and probability of events -
incorporates (i) budget reserves, (ii) contingent credit, and (iii) risk transfer
4. How is it done? Steps toward strategy

Who do I want to How frequent / large is What is the source of

protect? the financial impact?
National budget
Frequent events/
moderate impact
Producers / SMEs
Rare events /
catastrophic impact
Vulnerable populations
funds?
Savings / Reserves
Contingent credits /
loans
Risk transfer instruments

How will funds reach How can I implement

beneficiaries? this?
Budget execution Institutional framework
Operational policies &
Coordination mechanisms procedures

Targeting Monitoring & evaluation

Lessons Learned to date

• Risk financing and risk reduction are complementary, not

substitutes
• Data can be used to make informed financial decisions
• Ministries of Finance are taking the lead since disaster risks
are exogenous shocks that affect macro-fiscal stability
• Step-by-step approach to development of a strategy
• Focus on sources of finance and use of finance, budget
execution helps target resources effectively
• Risk layering uses instruments where they are most
financially efficient
• Customized solutions are critical, there is no one size fits all
approach
Next Steps

1. Scaling up support to Africa through capacity

building and technical assistance programs
2. Dissemination of draft operational framework and
guidelines for developing and implementing
disaster risk financing strategies (December-March,
2014)
3. Financial protection integrated into the HFA
successor agreement (March, 2015)
Next Steps

Suggested Priority for Action:

Reduce financial impact of natural disasters on the

government and society by implementing financial
protection strategies