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FINANCIAL PROTECTION AGAINST NATURAL DISASTERS An Operational Framework for Disaster Risk Financing and Insurance COVER PHOTO F&F Tower, Panama City FINANCIAL PROTECTION AGAINST NATURAL DISASTERS: FROM PRODUCTS TO COMPREHENSIVE STRATEGIES An Operational Framework for Disaster Risk Financing and Insurance 02 © 2014 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions.
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Table of Contents 05 Acknowledgments 07 Policy Messages PART 01 10 13 22 23 29 34 38 38 42 46 52 52 55 56 Section I: The Developmental and Financial Cost of Natural Disasters The Policy Maker’s Burden: Financial Impact across Society Section II: Disaster Risk Financing and Insurance - Tools for Financial Protection Definition and beneficiaries of disaster risk financing and insurance solutions Key considerations for financial protection The private sector’s role in the disaster risk financing and insurance agenda Section III: Evaluation of Progress Made on Financial Protection Beginnings to 2005: Early experience in disaster risk financing at the international level 2005-2010: New approaches to financial protection under the Hyogo Framework 2010-Present: From products to strategies for financial protection Section IV: Looking to the Future Areas of focus for strengthening public financial management of disasters Opportunities to expand the impact of disaster risk financing and insurance Disaster Risk Financing in the Next Hyogo Framework for Action 03 04 Table of Contents PART 02 59 An Operational Framework for Disaster Risk Financing and Insurance 70 Annexes 70 Annex I: Expanded Decision Tree for Disaster Risk Financing and Insurance Engagement by Governments Annex II: Some commonly asked questions when considering disaster risk financing and insurance Annex III: Natural Disaster Losses 1990-2012, in 2012 US$ millions Annex IV: Insurance and the financial resilience of countries Annex V: Further Information on Disaster Risk Financing and Insurance Initiatives Discussed Endnotes Bibliography Photo Credits Abbreviations 72 75 76 78 79 81 84 84 Acknowledgments This report was originally written in response to a request Paolo Bazzuro, University Institute for Superior by the United Nations Office for Disaster Risk Reduction Studies Pavia (UNISDR), as the coordinating author of the Global Assessment Report on Disaster Risk Reduction 2015 (GAR15).
The primary objective of this report is to take stock of the global progress on financial protection against natural disasters over the last decade and bring together the latest thinking on disaster risk financing and insurance.
This discussion will contribute to the drafting of the GAR15 and, importantly, will help inform the deliberations for the Charlotte Benson, Asian Development Bank Tim Bishop, Organisation for Economic Co-operation and Development Rowan Douglas, Willis Re Juan Jose Durante, Inter-American Development Bank Nick Harvey, Department for International Development, United Kingdom Michael Roth, Munich Reinsurance Company Monica Rubiolo, State Secretariat for Economic Affairs of successor agreement to the Hyogo Framework for Action, Switzerland (SECO) to be agreed upon at the 3rd World Conference on Disaster David Satterthwaite, Oxfam Risk Reduction in March 2015.
The report was authored by Olivier Mahul and Benedikt Signer, with contributions from Laura Boudreau in addition to Hannah Yi, Sevara Atamuratova, Daniel Clarke, and Emily White (all from the World Bank-GFDRR Disaster Risk Financing and Insurance Program).
The report benefitted greatly from the contributions and review of the Working Group on Financial Protection against Natural Disasters, bringing together representatives from the public and private sector Michael Schwarz, Swiss Reinsurance Company Simon Young, Africa Risk Capacity Inputs and reviews from Bianca Adam, Cinthya Aramayo, Sofia Bettencourt, Jack Campbell, Samantha Cook, Julie Dana, Marc Forni, Robert Reid, Benjamin Fox, Hector Ibarra, Felix Lung, Barry Maher, Niels Holm-Nielsen, Rachel Sberro, Joaquin Toro, Ana Maria Torres, and Jose Angel Villalobos greatly enhanced the final report.
Megan Cossey’s thorough editing ensured the final report remained readable.

Design and Layout by Bivee LLC.

with many years of experience in supporting countries The report has been prepared under the overall guidance vulnerable to natural disasters to implement financial protection solutions.

The working group includes: of Francis Ghesquiere, Manager of the Global Facility for Disaster Reduction and Recovery (GFDRR), and Michel Noel, Practice Manager, Global Practice Finance and Markets.
The team gratefully acknowledges funding support from GFDRR.

The DRFIP is grateful to the Swiss State Secretariat for Economic Affairs (SECO) for support which enables deep engagements with selected middle-income countries around the world.

This work has informed and shaped much of the operational framework presented in this document.

05 06 Policy Messages 1.

///Disaster risk financing and insurance helps 3.
///Financial protection requires strong minimize the cost and optimize the timing leadership by a country’s ministry of of meeting post-disaster funding needs finance./// Disaster risk financing and insurance without compromising development goals, fiscal stability, or wellbeing./// It promotes comprehensive financial protection strategies to ensure that governments, homeowners, small and medium-sized enterprises, agricultural producers, and the most vulnerable populations can meet post-disaster funding needs as they arrive.
brings together disaster risk management, fiscal risk and budget management, public finance, private sector development, and social protection.

Strong stewardship by the ministry of finance in coordination with other public agencies is crucial to successfully advance this agenda.

2.

///Disaster risk financing and insurance is an 4.


///The private sector is an essential partner./// integral part of disaster and climate risk management./// The financial impact of disasters is best managed when integrated into holistic risk management practices.

It complements disaster risk management activities by securing adequate financial resources to cover residual risks that cannot be mitigated and by creating the right financial incentives to invest in risk reduction and prevention.
By quantifying the The private sector can bring capital, technical expertise, and innovative financial solutions to better protect the government and society against natural disasters.

5.
5.

///Disaster risk financing and insurance is a long-term agenda that requires political will, technical expertise, and time./// While simple measures can quickly support improved financial protection, more complex financial financial and fiscal impact of risk, it elevates risk solutions and institutional change require management within the ministries that control technical expertise and political will.

Partnerships public investment.

can support governments on this path.


07 CHAPTER 01 PART01 10 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Section I: The Developmental and Financial Cost of Natural Disasters When record floods inundated large swaths of Global Assessment Report estimates that the actual Thailand, including its capital Bangkok, in the fall losses are at least 50 percent higher, once smaller of 2011, total damage and loss amounted to THB disasters are included (UNISDR 2013).
The true 1.43 trillion (US$46.5 billion1), more than 13 percent impact of disasters is of course much higher still.

of that year’s gross domestic product (GDP).

But These financial loss figures only account for direct the financial impact on the government continued loss, excluding indirect3 loss and the wider economic long after the water finally receded.

The floods and human effects of disasters.


were estimated to reduce real GDP growth in 2011 by 1.1 percent from pre-flood projections, reduced Thailand’s current account to US$11.9 billion from a projected $20.6 billion, and caused a 3.7 percent loss in tax revenue from estimated pre-flood revenues (World Bank and Government of Thailand 2012).

The trends in losses hide a wide range of impact.


Events that are comparable in terms of physical parameters, total loss, or affected population, have a vastly different macroeconomic impact depending on a country’s level of development, size (geographic and population), and degree of Financial losses from natural disasters continue insurance penetration.
The relative share of this to rise, with developing countries and their low- loss occurring in middle-income countries has seen income populations feeling the greatest effects.

a steady upward trend over the past 30 years (in Direct financial loss2 reached an average of $165 2012 U.S. dollar; ///see Figure 2///).
The rapid growth billion per year during the last 10 years, with loss of assets exposed to hazards in middle-income exceeding $100 billion in six of those years (///see countries—for example through urbanization and Figure 1///).

This compares to about $130 billion of new infrastructure—is likely responsible for much official development assistance in 2012.

Yet the 2013 of this increase.
PART 01 Figure 1 Direct disaster loss by income group s n o i l l i B , $ S U 2 1 0 2 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 High-Income Economies Middle-Income Economies Low-Income Economies Source: Authors, with data from Swiss Reinsurance Corporation, country income groups according to World Bank definitions Figure 2 Relative distributions of direct loss between high-, middle-, and low-income countries across time (as percent of total annual direct loss 100% 80% 60% 40% 20% 0% 1981-85 1986-90 1991-95 1996-00 2001-2005 2006-12 High-Income Economies Middle-Income Economies Low-Income Economies Linear Trend: Middle-Income Economies Source: Authors with data from Swiss Reinsurance Corporation F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 11 12 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Figure 3 Distribution of direct losses (1980-2012) on country income As a percentage of GDP, fast-growing middle-income groups as % of GDP 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0% High-Income Economies Middle-Income Economies Low-Income Economies Note: Loss figures from MunichRe NatCat Service; county groups according to World Bank 2012 classification.
Source: MunichRe, 2013a countries suffer the most, with average annual direct loss at 2.9 percent of GDP, followed by low-income countries (1.3 percent of GDP) and high-income countries (0.8 percent of GDP) (Munich Re 2013; /// see Figure 3///).

Much of this trend is due to the rapid increase of assets in developing countries that do not take disaster risk into account during construction, leaving them vulnerable to natural hazards.
Although average direct loss relative to GDP is less for low-income countries, this does not consider the most important impact—the loss of lives, livelihoods and negative effects on human capital.

The concentration of loss in small countries, and particularly in small island developing states, leads to even more severe macroeconomic effects.
The Figure 4 Average annual loss from disasters as percentage of GDP in small islands developing states PART 01 P D G f o % , 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Gre n a d a To n g a V a n u atu St. Kitts a n d N evis M aldives Micro n esia, Fe d. Sts.
S olo m o n Isla n ds Fiji M arsh all Isla n ds D o m inica Virgin Isla n ds C o ok Isla n ds M a d a g ascar P ala u Ja m aica T h e B a h a m as S a m o a M a uritius Source: Prepared by World Bank, based on historical disaster damage reported in the EM-DAT Disaster Database (www.emdat.be), and for Pacific Islands on modeled annual losses from cyclones, earthquakes and tsunamis.

devastation wrought by 2004’s Hurricane Ivan in (von Peter, et al.
2012).5 This compares to an average the Caribbean caused economic loss almost double for all countries of 0.8 percent decline in GDP the annual GDP of both Grenada and the Cayman growth per disaster occurrence and a cumulative, Islands as well as significant damage in Jamaica, a stark reminder of the catastrophic devastation disasters can inflict (Young and Pearson 2008).
Small island states across the Caribbean and Pacific bear average losses exceeding over 3 percent of their respective GDP every year (World Bank and United Nations 2010; Pacific Catastrophe Risk Assessment and Financing Initiative [PCRAFI] 2011; /// see Figure 4///).

Recent analysis has found that, on permanent loss of 2.4 percent, emphasizing the heightened vulnerability of these countries.
The Policy Maker’s Burden: Financial Impact across Society In mitigating the financial impact of disasters, experience shows that policy makers are primarily concerned with its effect on the government, average, in a small country the occurrence of a major homeowners and small and medium-sized disaster reduces GDP growth by 1.2 percent, with a enterprises (SMEs), farmers,6 and the poorest.7 cumulative permanent4 loss of 3.7 percent of GDP This segmentation is largely the result of the type F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 13 North America 5.48% 3.06% 5% $959.2 536.5 95% Europe 18% 1.95% 0.55% $366.4 $108.7 82% South America 3.73% 38% 0.52% $135.4 $19 62% Disaster Loss 1990-2012 AS % OF 2010 GDP, BY CONTINENT Percentage of 2010 GDP in US$ Billion 6.52% Weather-Related Losses by Percentage Total Losses Insured Losses 3.87% $69.5 $41.2 58% 42% Total Weather-Related Losses Earthquake Losses 12.23% Asia 1.06% 54% 46% $1292.9 $111.6 Africa 1.05% 0.07% 59% $16.8 $1.1 Oceania/Australia 6.52% 41% 3.87% 58% 42% $69.5 $41.2 World 5.34% Central America and the Caribbean are included in South America.
13% All amounts in constant 2012 dollar.

1.54% $2841.1 $818.6 87% Source for loss figures is SwissRe, total loss is the financial loss directly attributable to a disaster, but it does not include indirect losses.

GDP data from World Bank.

Underlying loss data in the annex.


16 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S of cost associated with a disaster—for example both to provide this support, social and political pressure homeowners and SMEs are concerned with building can make such support an implicit contingent damage.

///Table 1/// summarizes some of the ways that natural disasters directly and indirectly affect the financial and developmental stability of these groups.
These are then discussed in turn.

Direct financial impact on the government The government’s central role in natural disaster emergency relief, recovery, and reconstruction implies a large and direct financial burden.

While this burden varies greatly across countries depending on the definition of the government’s contingent liability to natural disasters,8 there are many universal features.
During and directly after an event, the government is required to provide emergency relief to the affected population.

These costs tend to be small in terms of the event’s overall costs, but require immediate mobilization of funds.

Emergency relief for the 2011 Great East Japan Earthquake represented less than 1 percent of total government expenditures related to the event, but importantly was first mobilized within just three days (Sato and Boudreau, 2012).
Such speed is essential for a successful government response.

liability.

These types of contingent liabilities are often the most difficult for the government to assess and can pose major fiscal risk.

Even in years without exceptional disasters, costs can be significant.
Between 1999 and 2011, the government of Mexico spent on average $1.46 billion annually (2011 US$) on the reconstruction of public assets like roads and bridges and low-income housing following more frequent but less severe disasters (Government of Mexico and World Bank 2012).

In addition to replacement of the damaged assets, governments’ should consider higher costs for improvement so they do not build back the risk.
For example, about 25 percent of post-disaster resources approved by Mexico’s natural disaster fund FONDEN are generally allocated for the improvement of public assets, to strengthen their resilience to future disasters.

Government-sponsored social and economic support programs for individuals, SMEs, and farmers can also be significant and even exceed the costs of reconstruction.
This was the case in Japan after the 2011 earthquake, where economic and social support programs (such as employment programs, Reconstruction of uninsured or underinsured public measures to support SMEs, housing grants, and infrastructure—including low-income housing— education assistance) cost more than direct repair typically accounts for the majority of public and reconstruction (Sato and Boudreau, 2012).

spending following disasters.


In some cases, middle- and high-income residents and SMEs exert pressure for public support of reconstruction.
The 1999 Marmara/Izmit Earthquake in Turkey generated fiscal costs in the range of $2.4 to $2.9 billion (2010 US$), with the largest direct cost (estimated between $970 million and $1.6 billion) coming from the reconstruction and repair of housing Finally, major natural disasters can trigger public contingent liabilities arising from state- owned enterprises and firms that are critical for economic recovery from the event.
Following the 2011 Canterbury Earthquake, New Zealand’s then second-largest residential insurer, AMI Insurance, found itself unable to meet the total value of claims stock, much of which was owned by middle- and resulting from the event.

To ensure Canterbury’s high-income residents (World Bank 1999).
While in recovery, the government decided to bail out many cases the government is not legally required and subsequently resell AMI, as well as to take PART 01 Table 1 Direct and indirect financial impact of natural disasters on different groups across society Government Direct Homeowners and SMEs Direct underinsured assets; infrastructure, public buildings, and oft en low-income housing;
 fatalities, injuries, and disabilities.
as for relocation of at-risk population; Indirect programs; unemployment or loss of wage earner; to firms that are critical to economic recovery, etc.
Indirect alternative accommodation during reconstruction.
declines in GDP growth; social programs to disaster response and reconstruction; nets);
nets); Farmers Direct The Poorest Direct
livestock or crops.
Indirect Indirect human capital (possibly combined with higher costs for due to interruption of crop/livestock/fish stock production; healthcare, education, etc); due to economic decline and/or lack
 of access to markets; net systems such as family and community support; leading to adoption of low-yield but safer seed varieties.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 17 18 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S responsibility for all of its outstanding claims governments, increasing sovereign bond spreads (Benson and Mahul 2013).
Indirect financial impact on the government The macroeconomic costs of natural disasters, including the immediate decline in GDP growth and the cumulative, permanent GDP loss during the years following a major disaster, affect the government’s budget.

The 2011 floods in Thailand reduced government revenues in 2011 and 2012 by 3.6 percent and 2.8 percent, respectively, based on pre- and post-flood projections (World Bank and Government of Thailand 2012a).
The impact on exports and imports of two droughts reduced government revenues in Malawi by 9 percent in fiscal year 1992/93 and by 11 percent in 1993/94.

At the same time, public expenditure rose by 30 percent,9 resulting in an increase in the fiscal deficit of over 23 percent over these two years (Benson and Clay 2004).

Natural disasters can also escalate borrowing costs, especially for already highly indebted nations.
For example, nearly all countries in the Caribbean are highly indebted, facing high borrowing costs from 6 to 8 percent for 10-year bonds.

Natural disasters raise the costs of borrowing for affected by 1 to 2 percent on average for up to nine months following an event (World Bank 2012c).
Following Hurricane Ivan in 2004, Grenada had to approach its creditors for a voluntary restructuring of public debt, extending its debt service payments by 20 years and adding significantly to its overall cost of funds (ibid).

Financial impacts on the population often increase demand on pre-existing social programs, with a related increase in public spending on safety nets and other social programs such as unemployment benefits for those who lost their job.
The 2010 earthquake in Chile caused a 3 percent (500,000 person) rise in the national poverty index to 19.4 percent (exacerbating an existing trend), and an increase in the number of people considered destitute by 80,000 to 700,000 (Muir-Wood 2011).

Together, the direct and indirect financial effects of disasters can seriously hurt public finances.

The government’s fiscal balance weakens as expenditures rise and the tax base shrinks, potentially generating or worsening fiscal deficits.
The country’s balance of payments deteriorates as exports decrease and imports increase.

Finally, long-term development prospects suffer as the government diverts public ///Photo Credit: /// NASA/NOAA GOES Project Hurricane Irene, 2011 PART 01 funding from social and economic development programs to fill these gaps.

Direct financial impact on homeowners and SMEs The middle class is projected to more than double globally from nearly 2 billion people today to 4.9 billion by 2030 (Kharas 2010).
The middle class is an essential driver of countries’ economic growth, and this group tends to have a significant portion of wealth invested in property—specifically the family home.

In the United States, the primary residence represents on average at least 58 percent of a family’s total assets for middle-class adults (Trawinski 2013).

A natural disaster shock to an uninsured middle class homeowner can thus easily destroy much of a family’s wealth, up to nearly 60 percent in the United States.
Disasters affecting a large, uninsured portion of a country’s middle class can have a devastating social and economic impact on the country as a whole.

Additionally, most homeowners go uninsured against natural disasters.
In the United States, the National Flood Insurance Program provides highly subsidized rates for existing homes in flood prone areas.10 Yet the percentage of homeowners in Louisiana with flood insurance at the time of Hurricane Katrina ranged from only 7.3 percent to 57.7 percent in affected counties (Kunreuther and Pauly 2006).

Loss due to direct damages to homes accounted for 69.1 percent of economic loss from Katrina (Property Casualty Insurers Association of America 2010).
The adverse effects of disasters on the middle class go far beyond the destruction of a family’s home, however.

SMEs—another key indicator of a thriving middle class—often go uninsured as well.

In Chile, 70 percent of small businesses with property damages from the 2010 earthquake had no insurance, generating losses of up to $500 million (2010 figures) that had to be shouldered by these SMEs.
Indeed, the Organisation for Economic Co- operation and Development (OECD) observed that the increased poverty rates in Chile, as discussed previously, were partly driven by the closure of small businesses following the earthquake (Muir-Wood 2011).

Indirect financial impact on homeowners and SMEs Like the government, SMEs can suffer significant economic loss from the indirect effects of disaster, usually totaling more than their losses from direct damages.
Interruptions to business can arise from direct damage to the business’ property, or from damage to infrastructure or other business operations along the supply chain.

Following the 1999 Marmara/Ismit earthquake in Turkey, for example, businesses in the affected area reported being unable to resume production operations for 35 days on average.

In addition, these facilities did not return to operating at roughly pre-disaster capacity levels until 18 months after the earthquake (Munich Re 2013a).
Business interruption decreases GDP growth, stalls recovery, and hurts the local economy.11 Natural disasters can also cause significant reductions in household income and investment in human capital.
A recent study found that average household incomes in the Philippines declined by 6.6 percent in the year following a typhoon across all households exposed to average typhoon wind speeds (Anttila-Hughes and Hsiang 2013).12 The same study identified reductions in household spending and found particularly severe reductions in critical human capital investments such as education (13.3 percent) and health care (14.3 percent).
Direct financial impact on farmers The agricultural sector is a socially and economically important sector in many countries, particularly in low-income countries.

In many African countries for example, the agriculture sector is a key contributor to the overall economy.
In addition to being important for the balance of trade due to import and export of crops it is also a critical provider F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 19 20 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S of employment.13 Agricultural producers, such as little to no loss in this sector (Risk Management farmers, herders, and fishermen, are highly exposed Solutions 2005).
to multiple, often systemic risks to production, including natural perils, crop and livestock diseases, and insect invasions.

Brazilian farmers reported that regularly occurring risks—those occurring once every few years—resulted in an average production loss of 20-40 percent14 (Tüller, M, et.

al.

2009).
al.

2009).

In Kenya, the overall effect of the 2008-2011 drought was estimated at $12.1 billion,15 with the majority (72 percent) of the losses falling on individuals, households, or businesses that owned livestock.

Recent events, such as the 2010 drought in Russia reinforced the severe impact that large-scale natural disasters can have on agricultural production, even affecting global food prices.
The damage to wheat crops in Russia was so severe that the prime minister banned exports to curtail rising domestic food prices.

This in turn placed upward pressure on wheat prices abroad as Russia represented 17 percent of the global grain trade (New York Times 2010).

Additionally, a summer-long drought that affected much of the United States in 2012 cost the country around $20 billion in crop loss in that year alone (Munich Re, 2013).
Natural disasters also destroy public infrastructure and assets essential for agricultural production.

The Great East Japan Earthquake, for example, destroyed 90 percent of fishing vessels (25,000 vessels in total) in the three most affected prefectures, which alone accounted for 10 percent of the country’s annual production.
Luckily for Japanese fishermen, insurance for fishing vessels and fisheries helped to cover the damages and loss (World Bank, Indirect financial impact on farmers Similar to other economic sectors, farmers typically also suffer indirect losses.

Disasters can prohibit access to markets, making it difficult for producers to sell their crops.

They may also lower demand for products with a corresponding decrease in the earnings of producers.
In addition, a combination of factors, including the inherent riskiness of agricultural production, means that agricultural credit can be unavailable or carry high interest rates for smallholder farmers.

The occurrence of a natural disaster may exacerbate these credit constraints by destroying output, subsequently increasing default rates and reducing lenders’ willingness to lend.

In Peru, the 1998 El Niño created microfinance loan repayment problems that lasted for years.
In the north of the country, the increased risk of default associated with such El Niño events increased interest rates by approximately three percentage points (Collier and Skees 2012).

Finally, the additional risks that comes with investing in high-yield farming practices (such as investing in improved fertilizer) are often too great for vulnerable households to bear, resulting in the adoption of lower-risk, yet low-yield farming practices.
Direct financial impact on the poorest The poorest may own few physical assets, but what they do have is often highly exposed.

People living in low-income communities tend to live in more hazardous locations, have fewer savings, and lack insurance protection compared to those in higher- income communities.

In Katmandu, Nepal, almost unpublished working note).
Most fishermen in 25 percent of houses in rapidly growing squatter developing countries are not so lucky; the 2004 settlements are located on steep slopes along the Indian Ocean Tsunami destroyed over 111,000 banks of three rivers.

They regularly fall victim to fishing boats and generated over $520 million flooding during the monsoon season.
Storm water in damages to fishermen in affected countries.16 drains and sewage networks operate at only 40 The insurance industry, however, reported percent of their capacity, the result of blockages from accumulated debris and solid waste.

Thus, whereas higher-income populations recover fully in addition to physical damage, residents are also much faster (Anttila-Hughes and Hsiang 2013).

This susceptible to water-borne diseases (Baker 2012).
long-term income loss also prolongs decreases in Finally, while in absolute terms the damage to poor households may be small following a disaster, they household expenditures, including on education and healthcare.

are often the most devastating relative to income.

The extremely poor are also exposed to breakdowns Subsistence farmers can be hit particularly hard with in local social safety nets.
Community-based the destruction of crops or death of livestock often risk sharing mechanisms are burgeoning in the resulting in the complete loss of livelihoods.

Indirect financial impact on the poorest developing world, with the poor increasingly able to participate in local groups that provide loans or grants to households that have been exposed to a shock.
While these mechanisms perform The less visible financial impact on the poorest well for idiosyncratic shocks (such as the death is often the most detrimental and persistent.

The of a breadwinner), they often break down after poorest households suffer more financially and for a systemic shock from a natural disaster.

Formal longer periods of time than any other demographic.
government-subsidized social safety nets may also In the Philippines, income loss following a typhoon struggle with increased demand during disasters if persists for years in low-income populations, they lack the capacity to expand support.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 21 22 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Section II: Disaster Risk Financing and Insurance - Tools for Financial Protection Governments can take steps to reduce the negative financial effects of disasters in a way that protects both people and assets.
The World Bank and the Global Facility for Disaster Reduction and Recovery (GFDRR) have developed a framework that guides governments through a practical and comprehensive approach to disaster risk management.

This disaster risk management framework brings together necessary actions for building resilience, including: risk identification; risk reduction; preparedness; financial protection; and planning for disaster recovery (///See Figure 5///).
This framework is based on the fundamental principle of empowering citizens and governments to understand their risks and make informed choices about how best to address them.

To sustainably reduce the financial impact of disasters governments should always consider ways to reduce the underlying drivers of risk.

Financial protection complements risk reduction by helping a government address residual risk, which is either not feasible or not cost effective to mitigate.
Absent a sustainable risk financing strategy, as laid out under Pillar 4, a country with an otherwise robust disaster risk management approach can remain highly exposed to financial shocks, either to the government budget or to groups throughout society.

Financial protection helps a government manage those shocks without compromising development progress, fiscal stability, and wellbeing.
Disaster risk financing and insurance can also help countries prepare for increased climate variability Figure 5 World Bank-GFDRR Disaster Risk Management Framework PILLAR 1: RISK IDENTIFICATION Improved identification and understanding of di- saster risks through building capacity for assess- ments and analysis PILLAR 2: RISK REDUCTION Avoided creation of new risks and reduced risks in society through greater disaster risk consideration in policy and investment PILLAR 3: PREPAREDNESS Improved capacity to manage crises through developing forecasting and disaster management capacities PILLAR 4: FINANCIAL PROTECTION Increased financial resilience of governments, private sector and households through financial protection strategies PILLAR 5: RESILIENT RECOVERY Quicker, more resilient recovery through support for reconstruction planning PART 01 and extreme events associated with climate change.
comprehensive strategy can secure access to From a disaster risk financing perspective, while post-disaster financing before an event strikes, climate risks increase climate variability and ensuring rapid, cost-effective liquidity to finance uncertain extreme weather events, it does not recovery efforts.

fundamentally alter the underlying challenges.


Just as financial protection is a critical component of any disaster risk management approach it also plays an important role in helping countries become more resilient to climate risks.

Definition and beneficiaries of disaster risk financing and insurance solutions Governments normally seek to strengthen the financial resilience of the four different groups identified using appropriate strategies for each.
The main beneficiary groups of financial protection include national and local governments; homeowners and SMEs; farmers; and the poorest (///see Table 2///).

The respective strategies include: ///Sovereign disaster risk financing/// aims to Historically, governments mostly addressed the increase the capacity of national and subnational financial effects of natural disasters on an ad-hoc governments to provide immediate emergency basis following events.
Countries are increasingly funding as well as long-term funding for focusing on proactive planning before a disaster strikes, however.

This began with a handful of industrialized countries, but is gradually being taken up by governments from around the world.

reconstruction and development.


This policy area also works with governments to account for other contingent liabilities, such as government- supported agricultural insurance or social protection schemes that will require payouts Disaster risk financing and insurance aims to following a disaster.

Finally, it requires setting up increase the resilience of vulnerable countries systems for effectively allocating and disbursing against the financial impact of disasters.

A the necessary funds.


F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 23 24 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Example: Contingent credit is a financial crop insurance program.

As a result, farmers instrument that allows governments to secure receive the claims payments much faster and funds in advance of a disaster to be available have improved coverage of their assets.

immediately in case of emergency.


In 2008, the World Bank approved the first such loan, called a Catastrophe Deferred Drawdown Option (CAT-DDO).

Contingent credit complements other instruments such as national reserves to finance high frequency, low severity events— for example Mexico’s natural disaster fund, called FONDEN—and catastrophe risk transfer solutions to finance low frequency, high severity events—such as sovereign insurance pools created by Caribbean and Pacific island states.
To transfer risk to specialized risk carriers, the government of Colombia, for example, is building on international best practice in insuring public concessions for infrastructure worth $38 billion.

 ///Property catastrophe risk insurance/// aims to protect homeowners and SMEs against loss arising from property damage.
Example: The Turkish Catastrophe Insurance Pool (TCIP), a public-private partnership between the government of Turkey and the domestic insurance industry, provides earthquake insurance to homeowners.

TCIP increased catastrophe insurance coverage from less than 3 percent of residential buildings to 23 percent nationwide and over 40 percent in urban areas.

Since its establishment in 2000, the TCIP has paid nearly 21,000 claims, totaling over $70 million as of January 2014.
///Agricultural insurance/// aims to protect farmers, herders, and fishermen from loss arising from damage to their productive assets.

 ///Disaster-linked social protection/// helps governments strengthen the resilience of the poorest and most vulnerable to the debilitating effects of natural disasters.
It does this by applying insurance principles and tools to enable social protection programs such as social safety nets to scale up and scale out assistance to beneficiaries immediately following disaster shocks.

Example: The government of Ethiopia is integrating disaster risk contingency planning and financing into the Productive Safety Net Program, its food security safety net.
Starting in 2006, the program began using disaster risk financing and insurance tools on a trial basis to expand its capacity during extreme events.

A contingent financing window allowed Ethiopia to increase the number of beneficiaries of food assistance during the 2011 Horn of Africa drought from 6.5 to 9.6 million drought-affected people (World Bank 2013).
While a government may not need to pursue all four policy options, disaster risk financing and insurance strategies commonly build on some combination of them.
Together, they help the government clarify, reduce, and manage its contingent liabilities to natural disasters.17 These options do so by using financial risk information to clarify the financial costs and benefits of disaster risk reduction, retention, and transfer; by enabling greater risk transfer to the private sector; and by providing strategies and tools for more responsible management of the remaining costs associated with Example: The Indian government adopted risk financing and insurance principles to transition natural disaster risk.
its National Crop Insurance Program from a These interventions are not independent and can be social crop insurance scheme to a market-based aligned to bring about multiple wins.
For example, PART 01 Table 2 Disaster risk financing and insurance policy areas and benefits Sovereign Disaster Risk Financing Beneficiaries: Governments through improvements to: - Resource mobilization, allocation, and execution; - Insurance of public assets; - Social safety net financing.
Property Catastrophe Risk Insurance Beneficiaries: Homeowners & SMEs damage and indirect losses arising from that damage.
vulnerability to natural disasters.
the volatility of the cost of disasters, and hence protects and private sectors.
the stability of public finances.
exposure of public assets, the private sector and state- owned enterprises, and the poor.
Agricultural Insurance Beneficiaries: Farmers Disaster-Linked Social Protection Beneficiaries: The Poorest and damage to productive assets.
or asset losses through flexible social safety nets.
and private sectors.
to natural disasters.
vulnerability to agricultural risks.
farming methods.
for low-income households (insurance, banking, savings).
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 25 26 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S if a government decides to establish a risk financing financing per se, it is a prerequisite for effective use pool to retain some amount of agricultural risk— of disaster risk financing strategies and tools.
Many meaning this pool will cover certain pre-determined governments have chosen to include improving the losses—this same entity could be used to absorb a quality and availability of financial risk information layer of risk from a cash transfer program that will need to deliver significantly more payouts in case of a disaster.

This allows the government to build on the initial investment in developing a risk financing entity for multiple uses.
The need for financial risk information and risk analysis to enable progress in disaster risk financing and insurance highlights a fifth, crosscutting policy area: financial disaster risk analytics.

Financial risk analytics empowers governments to take more and the adoption of financial risk analytical tools as policy objectives in their overall disaster risk financing and insurance strategies.
For example, financial risk analytics helped policy makers in the Philippines to understand the all-important details when deciding between financial instruments for a sovereign risk transfer transaction.

This helped the government identify the most appropriate and financially efficient strategies to fund disaster losses, based on the country’s risk profile and political informed decisions by bridging the gap between raw constraints faced (see also Clarke and Poulter 2014).
risk data and information that is useful to policy makers.
While this is not a type of disaster risk Figure 6 DRFI at the nexus of related fields Disaster & Climate Risk Management Public Financial Management Disaster Risk Financing & Insurance Financial Sector Development Social Protection Disaster risk financing and insurance across policy fields Disaster risk financing and insurance sits at the nexus of four major policy practices: Disaster risk management, in terms of how it contributes to building resilience; Public financial management, in terms of how it addresses the impact of shocks on public finances; Financial sector development, in terms of how it builds a strong financial sector for risk transfer; and Social protection, in terms of how it supports contingent financing to reach the poorest.
Thus, disaster risk financing and insurance strategies are best advanced when integrated into broader strategies in one or more of these fields.

Indeed, strong public financial management of disaster risk is particularly important to support the execution of broader disaster risk management strategies.
Specifically, disaster risk financing and insurance programs: Figure 7 Five characteristics of cost-effective financial protection strategies that build resilience PART 01 Appropriate Risk Information Ownership Discipline Financial Resilience Cost of Capital Timeliness Brings about an awareness among financial The World Bank has identified five characteristics authorities of the need to include disaster risk that together build financial resilience across considerations in public investments; society which are improved through disaster risk financing and insurance.
These characteristics are Puts a price tag on risk, clarifying the costs not outcomes of one specific project or intervention, and benefits of investing in risk reduction, risk but an integrated set of features which support each retention, and risk transfer initiatives; and other towards strengthening financial resilience (///see Figure 7///; World Bank-GFDRR Disaster Risk Ensures that the government is financially Financing and Insurance Program Strategy 2015- prepared to enact a swift post-disaster response.
2019).

Characteristics that build financial resilience Sovereign disaster risk financing benefits governments in many different ways.

These include increased transparency and financial discipline, improved risk pricing through market signals, and greater access to capital at the time it is needed (Dana and von Dahlen 2014).
///Characteristic 1: Appropriate risk information./// Appropriate risk information allows public and private decision makers to assess the underlying price of risk, and clarify costs and benefits of investing in risk reduction or risk financing.

A lack of knowledge about a country’s exposure to risk—and about the ‘cost’ of this risk—can lead to sub-optimal investment decisions to protect welfare.
Putting a price on risk is also crucial to elevate disaster risk management to the Ministry F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 27 28 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S of Finance and integrate risk considerations in ///Characteristic 4: Timeliness of post-disaster public investments.
Moreover, better information financing./// Different levels of post-disaster on the potential impact of disasters can help overcome behavioral biases, such as the reticence of businesses and households to buy catastrophe risk insurance.

Disaster risk financing and insurance can also provide the short-term incentives for large scale investments in risk assessments that enable evidence-based decision making in disaster risk management beyond financial protection.
funds need to be available at the appropriate time following a disaster to cover relief, response, and reconstruction efforts.

In the aftermath of a major disaster, for example, the government does not require money for the entire reconstruction program at once.

The rapid mobilization of funds to support relief efforts is crucial to limit humanitarian costs.
This rapid response can also save money; ///Characteristic 2: Ownership of risk./// Clarifying for example well-targeted early interventions in who is responsible for risk—clearly establishing the slow-onset disasters such as drought cost a fraction contingent liability of the national and subnational of emergency aid after a famine develops.
While government, donors, the private sector, and immediate liquidity is crucial to support relief and households—overcomes challenges such as the early recovery operations, the government has Samaritan’s Dilemma.

The absence of clear rules more time to mobilize the majority of resources regarding the share of costs for response and for the reconstruction program.
Likewise, reconstruction assumed by the national government can turn into a disincentive for the businesses and households to invest in risk reduction or purchase catastrophe risk insurance, and cab trigger delays in post-disaster response and recovery.

Clearly businesses and households need to have access to timely financing following a disaster, for example through catastrophe risk insurance and/or post- disaster credit.
established rules for the amount and timing of ///Characteristic 5: Discipline./// Disaster risk payouts under social protection programs give financing helps governments, businesses, and predictability to vulnerable households, enabling households plan in advance of a disaster and better planning and budgeting.

///Characteristic 3: Cost of capital./// Access to capital is necessary for effective emergency response and reconstruction as well as for investment in risk reduction and prevention.
Yet different sources of money come with different costs.

Disaster risk financing policies can secure access to disaster financing for governments, businesses and households before an event strikes and ensure timely and cost-effective financial resources to support post-disaster recovery and reconstruction activities while minimizing the cost of these funds agree ex ante on rules and processes for securing funds through their budget (budget mobilization) and spending this money (budget execution).
This creates greater discipline, transparency, and accountability in post-disaster spending.

Market- based financial mechanisms further contribute to this.

For example, a government needs to have reliable and independent rules for payout in order to transfer risk to international financial markets; insured homeowners know precisely what they are eligible for through their contractual agreement with their insurer (insurance policy).
Discipline is also through an optimal use of financial instruments important for a government to be able to credibly such as reserves, contingent credit, risk transfer commit when it will not act and thus facilitate solutions, and post-disaster credit.

ownership of risk.
ownership of risk.

PART 01 Figure 8 Timing of post-disaster funding needs Relief Recovery Reconstruction ) $ ( s t n e m e r i u q e R e c r u o s e R Time Source: Ghesquiere and Mahul (2010) Key considerations for financial protection A government can access many different sources of financing for post-disaster response and reconstruction.

Some of these options can be mobilized by the government following a disaster, they simply address different needs.
For example, following a disaster a government could issue bonds or raise taxes in order to pay for reconstruction.

Such measures provide access to very large sums of money but take a long time to become available.

Insurance, on the other hand, can be much more expensive but can help governments manage the such as budget reallocations or credit.

Others need volatility of unplanned demands on budgets by to be established before a disaster hits, for example spreading the cost of disaster across time.
This contingent credit lines or insurance.

For some presents governments with a trade-off in managing options the government mobilizes money at the costs and risk.

sovereign level—including contingency funds— while other options transfer risk to international markets, like the use of reinsurance or catastrophe bonds.

To efficiently address the funding needs arising from disasters, a number of considerations are therefore important.

First, understanding the timing of needs is essential.
In the aftermath of a major disaster, the These financing options all differ in terms of their government will not require the money needed for cost of use, amount of money available when a the entire reconstruction program at once.

While disaster hits, and speed of access.
Alternative immediate liquidity is crucial to support relief and instruments are not inherently better or worse, early recovery operations, the government has more F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 29 30 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S time to mobilize the majority of resources for the For example, market-based risk transfer can be an reconstruction program (///see Figure 8///).
This has effective but expensive proposition for governments clear implications on the design of cost-effective, that otherwise have access to sufficient sovereign financial management of disasters.

A second consideration is the cost of different financing.

Yet, they can effectively reduce volatility of disaster impact on government accounts by spreading the cost over time, and therefore promote sources of money.

Table 3 provides an indicative cost budget stability.
In addition, the swiftness at which multiplier for different financial risk instruments.

risk transfer instruments can provide liquidity This multiplier is defined as the ratio between the without requiring access to credit makes them cost of the financial product (such as the premium attractive to some governments.

This is particularly of an insurance product, or the expected net present value of a contingent debt facility) and the expected payout over its lifetime.
A ratio of two indicates that the overall cost of the financial product is likely the case for small states that generally do not have sufficient capacity to build reserves and are restricted in their access to credit due to already high debt ratios.

to be twice the amount of the expected payout Taking these considerations into account, a made.
These multipliers are only indicative and government can combine different instruments to aim to illustrate the cost comparison of financial protect against events of different frequency and products.

The speed at which funds can be obtained is also determined by the legal and administrative processes that drive their use (Ghesquiere and Mahul 2010).

severity.
severity.

Such risk layering ensures that cheaper sources of money are used first, with the most expensive instruments used only in exceptional circumstances.
For example, insurance can provide Table 3 Costs and benefits of different instruments for financing post-disaster expenditure INSTRUMENTS INDICATIVE COST DISBURSEMENT AMOUNT OF FUNDS (MULTIPLIER) (MONTHS) AVAILABLE Donor support (humanitarian relief) Donor support (recovery and reconstruction) Budget reallocations Domestic credit (bond issue) External credit (for example emergency loans, bond issue) EX-POST FINANCING 0-1 0-2 1-2 1-2 1-2 EX-ANTE FINANCING Budget contingencies Reserves Contingent debt facility (for example CAT DDO) Parametric insurance Alternative Risk Transfer (for example CAT bonds, weather derivatives) Traditional (indemnity-based) insurance Source: Ghesquiere and Mahul (2010) 1-2 1-2 1-2 1.5 and up 1.5 and up 1.5 and up 1-6 4-9 0-9 3-9 3-6 0-2 0-1 0-1 1-2 1-2 2-6 Uncertain Uncertain Small Medium Large Small Small Medium Large Large Large PART 01 Figure 9 Three-tiered risk layering strategy for governments International Assistance Sovereign Risk Transfer (e.g.
Cat Bond/Cat Swap, (re)insurance) Insurance of Public Assets Contingent Credit Lines Post Disaster Credit Government Reserves, Contingency Budget / Funds r e f s n a r T k s R i n o i t n e t e R k s R i / y c n e u q e r F w o L y t i r e v e S h g H i / y c n e u q e r F h g H i y t i r e v e S w o L Emergency Funding Reconstruction Source: Authors, building on Ghesquiere and Mahul (2010) cover against extreme events, but is not appropriate appropriate to the relative probability of events.
For to protect against low intensity events that recur example, a government could decide to purchase regularly.

In such a case the government could more expensive risk transfer instruments—such as consider setting up a dedicated contingency fund to catastrophe bonds—to ensure immediate liquidity retain this lowest layer of risk (///see Figure 9///).

for emergency response to extreme events.


But A comprehensive financial protection strategy for the government generally brings together pre-and post-disaster financing instruments that address it will raise the much larger amounts needed for reconstruction through budget reallocations and from capital markets through bond issues.

the evolving needs for funds—from emergency Historically, many governments have relied on post- response to long-term reconstruction—and are disaster (ex-post) funding sources.
Governments F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 31 32 Box 1 Challenges and opportunities for public financial management of a successful disaster risk financing and insurance agenda Section II detailed the financial strain that disasters place on governments’ budgets.
In principle, countries can take advantage of both pre- and post-disaster sources of financing for disasters, but the use of proactive financial protection instruments requires a certain level of experience for advance planning within the government.

can access these resources without previous financial arrangements that often require highly technical expertise and experience.
However, even when such post-disaster arrangements are cheaper than pre-arranged financing sources, they can take a long time to negotiate (such as emergency loans), Strong public financial management of natural disasters depends on the ministry of can be highly variable and unpredictable (like finance’s capacity to develop financing solutions before a disaster hits.
This requires strong public financial management experience and trained officials, including the ability to conduct complete fiscal forecasts that incorporate different disaster scenarios and that are then regularly monitored.

This includes a comprehensive overview of the aggregate donor assistance), and can endanger development programs that often take many years of preparation (for example due to budget reallocation).
On the fiscal risk arising from various contingent liabilities, for example from natural disasters or other hand, risk financing instruments that the from large state-guaranteed infrastructure projects.

These elements for fiscal monitoring are, however, not found in most countries.
An analysis of over 350 Public Expenditure and Financial Accountability (PEFA)19 assessments—international assessments reviewing the condition of national public financial management systems—show that most low- and middle-income countries either monitor the government’s fiscal position only once a year, with a consolidated overview often missing or incomplete, or do not do any kind of regular monitoring at all.

Adopting a proactive risk financing approach also has multi-year budget implications.
Multi-year forecasts for revenues, medium-term expenditure totals for mandatory expenditure, and potential debt financing would need to be in place.

This medium- term budget framework is led by the ministry of finance, but requires other ministries to complete the budget plan with specific line items.
Information from diagnostic tools such as the PEFA confirms, however, that most developing countries do not have good medium-term budget frameworks in place, which makes it more complicated to ensure that future expenditure is aligned with longer-term, strategic investment decisions.

While post-disaster financing mechanisms, such as increasing taxes and borrowing, do not require advance planning, they do rely on strong capacities in areas like tax administration and debt management.
Here, too, evidence indicates that the challenges are significant.

For example, increasing the tax burden in the wake of the kind of economic contraction often seen after a disaster can be almost impossible in countries without a well-organized system for defining tax policy and tax administration.

Even where processes for budget mobilization are in place, officials may not be familiar with their use as they are only activated in exceptional circumstances.
Contribution by Monica Rubiolo, State Secretariat for Economic Affairs of Switzerland government establishes before a disaster hits (ex- ante) can avoid these drawbacks but they do require advanced planning, and can be more expensive and limited in their amount.

Nevertheless, promoting the use of private insurance in both the public and private sector is crucial to increasing financial resilience across society.
Insuring public assets can help better manage the explicit contingent liability of governments and limit the volatility on government accounts.

For example, some middle-income countries such as Colombia, Mexico, and Panama already require that public assets have property insurance coverage against natural disasters.
Promoting competitive property insurance markets helps shift the burden of post-disaster recovery from households and SMEs to specialized risk carriers like insurance companies and contributes to increasing the economy’s resilience.

Governments can build an enabling environment for insurance markets and provide basic risk market infrastructure as public goods.
This can include catastrophe risk assessments, supporting the growth and building the capacity of domestic insurers while supporting the sale of reliable, cost-efficient insurance products, as in the example of the South East Europe and Caucasus Catastrophe Risk Insurance Facility.

This brings the additional benefit of building a deeper financial sector.
PART 01 The essential role played by ministries of finance in disaster risk financing and insurance In many countries, disaster risk management has traditionally been seen as an agenda belonging to specialized agencies such as the national disaster management agency, civil protection, or the ministry of environment.

In this case the disaster risk financing and insurance agenda can be an entry point for the ministry of finance to engage in disaster risk management, which, in turn, can hazards.
Numerous countries, such as Colombia, Indonesia, Panama, and Peru, have established fiscal risk management divisions within the ministry of finance tasked with the identification, quantification, disclosure, and management of fiscal risks associated with natural disaster.
These teams are often best placed for leading the disaster risk financing and insurance agenda, in partnership with other public entities for respective policy areas—for example, the ministry of agriculture for agricultural insurance programs or disaster inform development that is resilient to disaster risk management agencies for risk reduction and and climate risks through better integration of risk preparedness measures—as well as the private considerations in public investments.18 sector and the international community.
(///Box 1/// While risk financing cuts across different government agendas, successful disaster risk financing and insurance measures are almost always anchored in and driven by the country’s ministry of finance.

In a growing number of developing countries, the ministry of finance discusses some of the public financial management considerations that lydership by the ministry of finance can help overcome).
Anchoring financial protection to disasters within the ministry of finance also supports comprehensive approaches to fiscal and debt risk management, and allows governments’ is adopting integrated approaches to risk to build on existing capacity in managing other management, including those addressing natural contingent liabilities such as debt.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 33 34 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Even where dedicated risk management teams are not in place, the ministry of finance is typically best placed, and benefits the most from, implementing disaster risk financing.
In this case other units within the ministry of finance, for example those dealing with budget management, asset and liability management, debt management, economic policy, or sometimes insurance divisions or insurance supervisors can make sensible homes for the agenda.

Depending on the counterpart within the ministry of finance the focus of the disaster risk financing engagement is likely to differ.
The private sector’s role in the disaster risk financing and insurance agenda The private sector plays an essential role in the ongoing development of, and access to, disaster risk financing and insurance solutions.

It does this primarily by providing capital and technical expertise, and by driving innovation.
The private sector also plays a crucial role through public- private partnerships in insurance programs, for example in the delivery of payouts to beneficiaries as well as in the education of consumers.

Providers of risk capital As a provider of risk capital, the private sector (including insurers, reinsurers, banks, and investors) is a crucial risk bearer.
To guard against insolvencies from larger-than-expected losses—and to comply with regulatory requirements that maintain the financial stability of the industry—insurance companies must have sufficient capital.
Capital in the reinsurance market alone is estimated at over $500 billion.20 In addition, convergence between insurance and reinsurance markets and capital markets through the emergence of alternative risk transfer solutions (such as catastrophe bonds and catastrophe swaps) has allowed the pool of catastrophe risk-bearing capital to increase flexibly over the past decade.
For example, investors such as pension funds who typically would not have interacted with the world of catastrophe risk have had the opportunity to put their capital to work in instruments such as catastrophe bonds.

Risk takers such as insurance and reinsurance companies have been able to increase their capacity to underwrite risk by passing excess risk on to new capital sources.
PART 01 Box 2 Global Index Insurance Facility Established in 2009, the Global Index Insurance Facility (GIIF) is a multi-donor trust fund, jointly operated by the IFC and the World Bank, supporting the development and growth of local markets for weather and disaster index-based insurance in developing countries, primarily Sub-Saharan Africa, Latin America and the Caribbean and Asia Pacific.
GIIF’s implementing partners have issued more than 600,000 policies to cover farmers, pastoralists and micro-entrepreneurs with US$119 million in sums insured and reached over one million with information and access to index insurance.

GIIF's objective is to expand the use of index insurance as a risk management tool in agriculture, food security, disaster risk reduction and access to finance.
Index insurance is a relatively new but innovative approach to insurance provision that pays out benefits on the basis of a pre-determined index (e.g.

rainfall level, seismic activity, livestock mortality rates) for loss of assets and investments, primarily working capital, resulting from weather and catastrophic events, without requiring the traditional services of insurance claims assessors.

It also allows for the claims settlement process to be quicker and more objective.
Source: http://www.ifc.org/GIIF The availability of risk-bearing capital in the insurance and capital markets has allowed a number of developing country governments to transfer excess risk to private sector risk carriers such as international reinsurance companies.

Furthermore, this pool of capital has shored up domestic insurance markets in developing countries by allowing accumulated catastrophe risk to be passed out of the country and into the international markets.
It is notable, for example, that an estimated 95 percent of the $8 billion of insured loss incurred in the aftermath of the devastating 2010 Chilean earthquake was passed out of the Providers of technical expertise and innovation The private insurance sector also offers extensive technical expertise in quantifying and managing risk accumulations—the total combined risks that could be involved in a single loss event, designing products, underwriting catastrophe exposure, and settling claims.
Drawing on this expertise can help overcome the challenges that impede the development of catastrophe insurance markets in developing countries.

These challenges include a lack of data and trained people, the high cost domestic market and onto international reinsurers.21 of offering products, and a generally low level of Access to international reinsurance can support the awareness and understanding of catastrophe risk sustainable growth of a domestic insurance market.

exposure.
exposure.

Private sector insurance companies and Within domestic markets, private sector entities that provide risk-bearing capital help individuals, businesses, and the government manage shocks.
At the business and household level, a developed domestic insurance market for property catastrophe risk can speed household and business recovery through provision of rapid financial liquidity banks can improve catastrophe risk modeling, the collection of data on the cost of extreme events, and the promotion of risk awareness through educational programs.

The Global Index Insurance Facility is one example of how the World Bank helps bring this private sector expertise to developing countries (Box 2).
following an event; use premiums to signal risk Developed country insurance and reinsurance and promote risk reduction; and reduce the burden companies can transfer established tools, products, on the fiscal budget in the aftermath of a disaster and methodologies to developing country insurance by reducing the need for state compensation of markets as a way to support their growth.

For businesses and individuals.
example, in 2009 the World Bank-supported F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 35 36 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S South-East Europe and the Caucasus Risk sector insurance companies to develop the Insurance Facility resulted in the establishment of a catastrophe risk models, underwriting platform, specialized regional reinsurer, Europa Reinsurance and design insurance products to stimulate Facility (Europa Re).
The initiative is working to market development.

build a sustainable mass market for standardized catastrophe risk insurance products in participating countries in South-East Europe.

It does this by offering options for reinsurance, standardized Finally, the private sector has proven its ability to innovate to overcome market development challenges.
This led to the design of new products products, and web-based tools for underwriting and tools increasing the efficiency of product and accumulation management through Europa offerings and access to coverage for previously Re.

The facility is using expertise from private excluded groups.
PART 01 Box 3 Examples of technical contributions from the private sector ///Quantification of risk/// Although catastrophe risk modelling has been undertaken in the academic, public, and private spheres, it is the private sector that has driven this discipline forward the most.
High resolution probabilistic catastrophe risk modelling (detailed computer simulations to quantify loss that could be sustained from a particular disaster) was first developed in response to the needs of the private insurance industry, for pricing and accumulation management.22 These sophisticated modelling tools are now being used in less developed insurance markets around the world, and the improved understanding of risk they enable also informs disaster risk management beyond financial protection.
///Risk-based pricing/// One way the insurance industry has managed its catastrophe risk exposure is through risk-based pricing.

Insurance companies calculate premiums on the basis of modelled expected loss.

The cost of cover then serves as a signal of the risk customers are exposed to and provides an economic incentive to minimize this risk.

This could include investing in disaster resistant construction and retrofitting, and settling outside of risk prone areas.
///Introducing technical and transparency standards/// Cooperation with the private sector can play an important role in instilling and strengthening technical and transparency standards in public financial management.

To access insurance, governments need a solid damage assessment methodology and transparent handling of payouts.
Through adopting terms and conditions based on international standards for the insurance contracts themselves, governments can also bring international best practice to domestic insurance markets.

In Colombia, the government uses standardized terms and conditions from international insurance market best practices to purchase catastrophe insurance for its public buildings.

The government of Mexico has in place an indemnity-based excess-of-loss insurance contract since 2011.
In order to place the contract with the private markets, it was necessary for the government to develop transparent and robust processes for loss reporting.

Such improvements will have applications well beyond the contract itself.23 ///Product expansion/// The private sector led the development of risk-transfer products that trigger—meaning they pay-out—based on predetermined parameters such as wind speed instead of loss estimates.
The development of these parametric products has increased access to insurance to areas and consumers that could not have been reached effectively using a traditional claims-based model of insurance provision.

For example, the first weather insurance product in India, and indeed in the developing world, was a rainfall insurance contract underwritten and designed in 2003 by ICICI-Lombard General Insurance Company for groundnut and castor farmers (Clarke, et al., 2012).
This pilot, supported by technical assistance from the World Bank, spurred rainfall insurance product offerings from other insurers, such as IFFCO-Tokio and the public insurer Agriculture Insurance Company of India, leading to a high rate of growth in the number of farmers insured between 2003 and 2007.
As a result of this private sector-led pilot, the government of India launched a pilot of the Weather-Based Crop Insurance Scheme in 2007, now a largely compulsory, publicly-subsidized program that insures more than 10 million farmers for a range of crops.
While the private sector plays a key role in the design of new products, experience has shown that the public sector is needed to reach the critical mass required to sustainably scale up such products and initiatives and hence encourage innovation by the private companies.

Similar innovations also supported sovereign risk transfer via parametric products for developing country governments.
Sovereign risk transfer initiatives that have used parametric products include: the catastrophe bonds issued by the government of Mexico in 2006, 2009, and 2012 for earthquake and hurricane risk; the first- ever multi-country regional risk pool, established in 2007 as the Caribbean Catastrophe Risk Insurance Facility; the Pacific Catastrophe Risk Insurance Pilot in 2013; and the African Risk Capacity in 2014.
Private sector partnerships can also unlock new delivery channels, for example by making agricultural insurance products available to farmers as a bundle with seed purchases.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 37 38 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Section III: Evaluation of Progress Made on Financial Protection Governments have used public policy to mitigate against disaster shocks or on increasing post- the financial impacts of disasters for nearly a disaster liquidity.

century.
century.

The U.S. Federal Crop Insurance Program was established in the 1930s to support farmers suffering from the combined effects of the Great Depression and the Dust Bowl, one of the worst ecological disasters in American history.

Japan’s Earthquake Reinsurance Scheme dates back to 1966.
Governments established these and similar programs in recognition of the need for public financial support to better protect residents, SMEs, and agricultural producers against the economic impact of natural disasters and agricultural risk.

Initially, this kind of public policy was mostly limited to industrialized countries.
But over the past two decades, interest in financial protection has surged around the world, receiving greater attention from developing country governments, the private sector, donors, and international organizations.

As a result, over the past decade, developing countries have started to catch up—and even get ahead—in developing and implementing public policy for financial protection, mostly through learning-by- doing and with support from international partners.

This path, however, has not been linear.


Progress often took place in steps and spurts of activities as countries experimented with new tools and approaches.

Advances in different areas of disaster risk financing have often taken place at the same time in different countries as governments were looking to address their unique challenges, from their own starting point.
For example, some But patterns have emerged in the kinds of challenges that countries encountered while innovation has taken place in waves, pushing the boundaries of disaster risk financing and insurance.
This section provides a broad overview of progress and evolution in disaster risk financing in developing countries since the beginning of the millennium, when an increasing awareness of proactive financial protection against devastating natural disasters had started to take hold.24 Too much has happened to capture here comprehensively, but key developments will highlight the lessons learned from this period (///see Figure 10/// on the following page).
Building on these lessons, this paper then presents an operational framework for financial protection.

Beginnings to 2005: Early experience in disaster risk financing at the international level At the beginning of the 21st century, most governments relied primarily on ad-hoc financing secured after an event to respond to natural disasters.

The limited public sector experience in disaster risk financing and insurance remained mainly confined to industrialized countries.
Historically, the establishment of publicly-supported catastrophe and agricultural insurance programs followed in the wake of major natural disasters.

In 1966, the Japanese government established a public-private earthquake insurance program for countries began by looking to develop strong homeowners.
The scheme relied on the Japan domestic insurance markets to absorb disaster risk, Earthquake Reinsurance Company, an earthquake while others focused on protecting their budget reinsurance pool backed by the government.
In the PART 01 United States the government has been providing management that eventually led to the government federally-administered residential flood insurance establishing the Natural Disaster Fund (FONDEN) through the National Flood Insurance Program, in 1996 as a mechanism to support post-disaster set up in 1968 in response to a long history of flood reconstruction of damaged public infrastructure.

loss and increasing challenges in finding private sector firms willing to insure flood risk.
Similarly the California state government established the California Earthquake Authority as a public-private organization to provide earthquake insurance when California’s insurance companies stopped writing earthquake coverage following the 1994 Northridge earthquake, the costliest earthquake in the history of the United States (OECD, 2013).
In France, the Since then, FONDEN has evolved into an inter- institutional vehicle that finances and plays a central role in all stages of the disaster risk management cycle.

Similarly, following the 1999 Marmara earthquake, the Turkish government established the Turkish Catastrophe Insurance Pool as a compulsory earthquake insurance system for all residential buildings located on registered land in urban areas.
Catastrophes Naturelles insurance system was With few exceptions, agricultural insurance established in 1982 to mitigate the effect of disasters on the local or national economy through insurance and by providing incentives for risk reduction and avoidance measures (Government of Mexico and World Bank, 2012).

For most developing countries, however, these types of policy options were neither available nor feasible.
Underdeveloped insurance markets, low programs were in their infancy or performing poorly across developing countries.

Following a period from 1950 onwards that saw major growth in public sector multi-peril crop insurance programs that ended up performing poorly, developing countries began to shift from public to market-based programs in the 1990s, often promoted under public-private partnerships (Mahul and Stutley, 2010).
The most technical and financial capacity of governments, and important changes in this new wave of catastrophe a longstanding culture in many countries of dealing and agricultural insurance programs came about with disasters mainly as a humanitarian issue in the role played by the private sector.

Newer meant that financial management remained mostly models were often built around public-private impromptu.
Governments often relied on limited partnerships, which take advantage of private sector and uncertain means such as disaster funds, budget insurance companies’ established financial and reallocation, and on donor assistance.

Yet in many technical capacity.

This development was in part countries with recurrent disasters donors have been unwilling to contribute to a pooled disaster fund when they did not trust the existing operational and fiduciary procedures.
The role of the ministry of finance was confined to approval of expenditures and identification and mobilization of funding sources after an event.
Early adopters came mostly from upper middle- income countries where major natural disasters due to significant strides in the private sector’s ability to quantify, price, and manage catastrophe risk, increasing its willingness to carry such risk.25 The increased ability to analyze infrequent events and understand the uncertainty in that analysis led to a significant dampening in global reinsurance prices and enabled new risk transfer products.
Nonetheless, many agricultural insurance pilots done by the private sector—usually implemented initiated change.

For example, the 1985 Mexico with support from donor partners and mainly for City earthquake, which caused over 10,000 deaths, index-based crop insurance—still failed to scale sparked a national dialogue on disaster risk up sustainably.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 39 40 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 1999 2000 2001 2002 2003 2004 2005 2006 Sovereign Disaster Risk Financing & Insurance 1996 Mexican Fund for Natural Disasters (FONDEN) Agricultural Insurance Property Catastrophe Risk Insurance Turkish Catastrophe Insurance Pool (TCIP) Taiwan Residential Earthquake Insurance Program Disaster-Linked Social Protection International Dialogue UN Office for Disaster Risk Reduction (UNISDR) established India’s first weather index insurance pilot by ICIC- Lombard General Insurance Co. Indonesian Earthquake Reinsurance Pool (MAIPARK) established Mexico first- ever sovereign catastrophe bond ($160 million) Mongolia index- based Livestock Insurance Program Hyogo Framework for Action I Munich Climate Insurance Initiative by Munich re- established Figure 10 Historical evolution of disaster risk financing and insurance in developing countries since 200027 PART 01 2007 2008 2009 2010 2011 2012 2013 2014 Caribbean Catastrohpe Risk Insurance Facility (CCRIF) World Bank launches contingent credit product for natural disasters Loan with a Catastrophe Deferred Drawdown Option - Cat DDO) Malawi index-based weather derivative Pacific Catastrophe Risk Assessment and Financing Initiative Mexico indemnity- based excess-of- loss insurance for public assets IDB launches contingent credit product for natural disasters Central American countries join CCRIF African Risk Capacity sells first policies for sovereign drought risk insurance Pacific Catastrophe Risk Insurance Pilot JICA launches contingent credit product for natural disasters (SECURE) Weather derivative with Uruguay, intermediated by World Bank India large-scale Weather-Based Crop Insurance Scheme Launch of Global Index Insurance Facility by the World Bank, IFC, and private Sector Partners Kenya and Ethiopia index-based livestock insurance Vietnam agricultural insurance pilot Modified Area Yield Crop Insurance
 Scheme in India Romanian Catastrophe Insurance Scheme Indonesia flood micro-insurance Manizales, Colombia earthquake property insurance First disaster-linked contingent financing protection for Productive Safety Net Program (PSNP) in Ethiopia HARITA pilot in Ethiopia with “insurance for work” option for farmers Micro-insurance Catastrophe Risk Organization (MiCRO) established Phillipines CLIMBS micro-insurance HARITA in Ethiopia expands to R4, building on PSNP infrastructure Kenya crop and livestock insurance public-private partnership under development South East Europe and Caucasus Catastrophe Risk Insurance Facility Global Facility for Disaster Reduction and Recovery established AOSIS proposes “Multi-Window Mechanism to Address Loss and Damage from Climate Change Impacts” World Economic Forum publishes report “A Vision for Managing Natural Disaster Risk” Sendai Dialogue G20 adopts DRFI on agenda OECD/G20 Methodological Framework Political Champions Group for Resilience Insurance Initiative set up by major develop partners and donors World Development Report 2014 stresses role of DRFI F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 41 42 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Mongolia is a notable example of successful community began to support financial protection activity in a low-income country during this time.26 measures before disasters hit and at the same time A combination of droughts and severe winters the 2005 Hyogo Framework for Action (HFA) went between 1999 and 2002 led to a loss of 35 percent into effect, promoting more proactive disaster of the country’s total livestock.
In the face of a risk management.

significant negative impact on GDP and economic growth the government set up a public-private partnership with domestic insurance companies to provide affordable index-based livestock insurance to herders (Cummins and Mahul, 2009).
As of 2014, the program covers approximately 16 percent of herders nationwide (19,500 herders out of approximately 120,000 herders), and has successfully scaled up from three pilot provinces to cover the entire country, reducing the impact of livestock mortality on herders’ livelihoods, and providing the government with a vehicle to transfer part of its fiscal exposure to international reinsurance markets.
Challenges and lessons During this period policy makers in developing 2005-2010: New approaches to financial protection under the Hyogo Framework The Hyogo Framework for Action provided greater clarity and a holistic structure for putting into place disaster risk management measures by countries, donors, and international partners.
While it did not emphasize financial protection as a priority action for governments, it took note of the growing realization of the need for disaster risk financing (///see Box 4///).

Overall, the HFA provided an opportunity to encourage greater innovation in disaster risk financing and insurance within the framework of new approaches to disaster risk management.
countries began to recognize the benefits of New kinds of financial instruments to help address proactive planning for the financial management common problems in risk financing resulted in a of disasters.
Early signs of success showed that string of market-based products for developing setting up financial protection measures could help countries, including parametric catastrophe bonds developing countries better manage the financial and weather derivatives for national governments; impact of natural disasters.
The international disaster-dedicated contingent credit; and regional Box 4 Disaster risk financing in the Hyogo Framework for Action The Hyogo Framework for Action recognized a role for risk transfer and the need for some sort of financial tool or reserve to support effective response and recovery.

HFA’s Priority for Action #4 alludes to financial risk transfer as an important step to reducing underlying disaster risk factors.
Paragraph 19 (k) calls for promoting “the development of financial risk-sharing mechanisms, particularly insurance and reinsurance against disasters.” The framework also states the need to set up “financial reserves and contingency mechanisms … to support effective response and recovery when required.” Disaster risk financing as a proactive agenda to manage and reduce financial risks is, however, not reflected in the monitoring questions for reducing the underlying risk factors.
The HFA did not explicitly discuss disaster risk financing as a priority agenda for governments, nor was it recognized as a core component of the disaster risk management agenda.

At the time the framework was drafted, disaster risk financing was still not very well understood nor viewed as a priority.
Countries, the international community, and others involved in thinking about financial protection were only just beginning to realize the extent to which it is a fundamental component of comprehensive disaster risk management.

PART 01 Box 5 Regional risk pooling for Caribbean States Caribbean countries have been at the forefront of developing new risk transfer tools to address some of the natural hazards they face, including hurricanes and earthquakes.
The region has historically faced numerous challenges in absorbing the financial impact of natural disasters in the traditional insurance marketplace, including a limited ability to diversify risk, limited budgetary capacity, insufficient vulnerability reduction measures, limited reserves of domestic insurance capital, high insurance costs, and issues with underinsurance (existing but inadequate insurance coverage by policy holders).
In 2007, 16 Caribbean island countries came together to form a regional risk insurance pool, the Caribbean Catastrophe Risk Insurance Facility (CCRIF), with technical assistance from the World Bank and initial capitalization by the international donor community and the World Bank.

CCRIF is a first-of-its-kind government risk-sharing platform, aimed at assisting members manage part of their catastrophe risk exposure through access to affordable and effective insurance coverage against natural disasters.
For almost all Caribbean governments, a direct hit by a major hurricane or earthquake is the largest single risk it faces.

Prior to CCRIF, the economic aspects of disasters had gone largely unmanaged by governments, which had mostly relied on post-disaster humanitarian assistance from donors.
With CCRIF, the member governments have developed a parametric insurance mechanism that enables them to share their risk between all participating countries and provides rapid payouts—similar to business interruption insurance—to finance an initial disaster response while maintaining basic government functions immediately following an event.
By pooling their risks into a single diversified portfolio, member countries’ insurance costs are significantly lowered, with pricing reduced by half or more of what it would cost if countries were to purchase the same coverage individually and directly from global markets.

CCRIF retains a significant level of risk thanks to initial capitalization from the participating countries, bilateral donors, and the World Bank, and transfers part of its risk to the international reinsurance and capital markets.
CCRIF was the first ever multi-country risk pool and was well received by the reinsurance market.

The success of CCRIF, which thus far has made eight payouts totaling more than $32 million to seven member governments, brought about the development of a regional catastrophe risk pool in the Pacific and Africa as well as ongoing discussions on disaster risk financing solutions among the Indian Ocean island countries.

Contribution by Simon Young on behalf of CCRIF risk pooling mechanisms.
Product innovation multiple geographic regions in Mexico) catastrophe remained the focus until the end of the decade.

bonds issued by the Mexican government in 2009, Between 2005 and 2008 a number of new financial instruments emerged to help developing countries access international financial markets.

In addition, private sector innovations from the 1980s and 1990s were increasingly being used by developing countries.
In 2006, Mexico became the first middle- or low-income country to issue a sovereign catastrophe bond as part of its disaster risk financing strategy.28 The $160 million parametric29 worth $290 million, and in 2012, worth $315 million, under the World Bank’s newly established MultiCat Program (World Bank, 2012a).
Launched in 2007, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) was a groundbreaking government risk-sharing platform aimed at assisting member countries to manage part of their catastrophe risk exposure (///see Box 5///).

catastrophe bond, called CatMex, transferred The last decade has also seen international earthquake risk to the international capital markets.
organizations offering new financial instruments to This set the foundation for further multi-hazard (adding hurricane risk), multi-region (triggers in support developing countries to access affordable funds.
In 2008, the World Bank introduced a F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 43 44 Box 6 Providing contingent lines of credit for disaster risk financing Contingent credit is one type of financial instrument to help governments secure funds in advance of a disaster.
Starting with the World Bank’s first approval of a loan with a Catastrophe Deferred Drawdown Option (CAT-DDO) to Costa Rica in 2008, other international organizations have started offering contingent credit as a disaster risk financing product that not only increases financial resilience but helps incentivize better disaster risk management polices overall.

To date, the World Bank has approved Cat-DDOs in nine countries for a total value of $1.38 billion.
These loans include: $7 million to the Seychelles in 2014; $102 million to Sri Lanka in 2014; $250 million to Colombia in 2011; $50 million to El Salvador in 2011; $66 million to Panama in 2011; $500 million to the Philippines in 2011; $100 million to Peru in 2010; $85 million to Guatemala in 2009; $150 million to Colombia in 2008; and $65 million to Costa Rica in 2008.
The Inter-American Development Bank (IDB) launched its Contingent Credit Line for Natural Disasters in 2012 to help countries cover urgent financing needs that arise immediately after a natural disaster.

This complements the 2009 Contingent Credit Facility for Natural Disasters, a more restrictive facility created to help countries deal with catastrophic natural disasters.
In 2013, the Japan International Cooperation Agency (JICA) established a program called the Stand-by Emergency Credit for Urgent Recovery (SECURE).

Similar to the other contingent credit lines, SECURE provides post-disaster financing of up to JPY10 billion or 0.25 percent of GDP, whichever is less, immediately following a natural disaster, based on prior agreement with JICA.
Contingent credit triggered by natural disasters has been successful in bringing about a dialogue on broader disaster risk management and has been instrumental in engaging the ministries of finance on the disaster risk management agenda.

For example, in order to be eligible for a World Bank-provided contingent credit line, the borrowing country must implement a comprehensive disaster risk management program, which the Bank then monitors on a periodic basis.
This is often the first time that finance ministry officials are brought to the table with other agencies dealing with disaster risk management.

A contingent credit loan can also be the cornerstone of developing an integrated sovereign disaster risk financing and insurance strategy.

As a concrete and fairly quick product to establish, a contingent line of credit can be an important deliverable for a government as it is building a comprehensive financial protection strategy.
contingent loan for disaster response, called the Development Policy Loan with Catastrophe Deferred Drawdown Option, or Cat DDO (///see Box 6///).

Created first and foremost to encourage investment in risk reduction by governments and to engage ministries of finance in disaster risk management, the Cat DDO is a quick disbursing contingent line of credit that provides middle- income countries with immediate access to funds following a major natural disaster.
An active national disaster risk management program is one prerequisite to qualifying for this financing.

Catastrophic risk insurance programs for property and agriculture were increasingly tested during this period and improved in developing countries with a continued emphasis on public-private partnerships.
The government would take on the public role to jumpstart domestic insurance markets through policies that stimulated demand for catastrophe and agricultural insurance products and that increase disaster risk awareness among the population.

The private sector, meanwhile, provided distribution channels, insurance expertise, and financial capacity.
For instance, after setting up the Turkish Catastrophe Insurance Pool in 2000, the government of Turkey legally abolished its obligation to fund the reconstruction of residential dwellings in the aftermath of an earthquake, strengthened its building construction codes, and improved supervision of these new construction standards.

By 2013, the pool had sold more than 6 million policies, compared to the only 600,000 covered households when it was first set up.
30 Partnerships between governments, the private sector, and international organizations contributed to overall improved performance of agriculture insurance programs.

In 2005, the government of India started to explore ways to improve its National Agriculture Insurance Scheme.

Building on international best practice and in-country experience, the government of India has since been PART 01 at the forefront in driving innovation in agriculture households when flooding in Jakarta reached a insurance.
With technical support from the World predefined level.

Bank, this included the use of mobile phone and satellite technology to improve the quality, timeliness and reliability of yield data gathered through crop-cutting experiments—increasing the accuracy of crop yield estimates; and improved index and product design for weather index insurance products.
New developments during this period, in particular index-based insurance products, were embraced enthusiastically, yet despite the initial enthusiasm the experience yielded mixed results.

In agriculture insurance, for example, index-based insurance pilots have faced challenges to reach large scale outreach.
Key reasons included underinvestment in the data Innovative disaster risk financing and insurance market infrastructure and lack of government products and partnerships help micro-insurance involvement.33 In Malawi, a rainfall index-based or disaster-linked social safety net programs to benefit the poor.
In 2005, Ethiopia established the Productive Safety Net Program, now one of the largest disaster-linked food security programs in Sub-Saharan Africa, to provide cash and food transfers to its chronically food-insecure population.

Since 2006, several disaster risk financing and insurance tools have been piloted and implemented to support Ethiopia’s safety net program.
For example, the program includes a 20 percent subnational-level contingency budget to scale up coverage beyond the capacity of the core program during harsher droughts.

In 2010, a federal-level contingent financing window became a permanent feature of the program.

crop insurance pilot was initially offered directly to groundnut farmers in 2005 but was subsequently redesigned to be bundled with loans due to low uptake.
Still, the product was not able to scale up beyond the pilot phases.34 The same rainfall index was used to structure a weather derivative contract for Malawi in 2008, yet the contract was not renewed beyond 2012.

Other examples include a flood micro-insurance product in Indonesia that was not renewed in 2010 after a one-year pilot.
Limited uptake has stunted the performance of the Romanian Catastrophe Insurance Scheme—closely modeled after Turkey’s—that was launched in 2008 in partnership with insurance companies Aon Benfield, Guy Carpenter, Stellar Re, and Willis Re to provide property insurance for homes against In 2007, Oxfam, together with a group of partners earthquakes, landslides, and floods.

35 including the reinsurer Swiss Re, launched the Horn of Africa Risk Transfer for Adaptation (HARITA) project in Ethiopia.
A pilot program to address the needs of small-scale farmers through drought insurance, credit, and risk reduction, HARITA allowed farmers to pay for insurance through labor, an idea based on “food-for-work” programs.31 In 2009, Indonesian insurer Wahana Tata piloted the first-ever flood micro-insurance product in Jakarta in partnership with reinsurer Munich Re and Germany’s development agency.32 Designed as Challenges and lessons Increasingly, tailored financial products opened new opportunities for thinking about proactive financial protection in developing countries.
Experiences, however, showed that stand-alone financial instruments are not silver bullets; they cannot solve all the challenges associated with the impact of disasters and must be integrated into a comprehensive disaster risk management strategy.

A greater understanding of the need for more strategic livelihood coverage against floods, the aim of the risk management began to emerge towards the product was to provide immediate cash to insured end of the decade.
Efforts at better integrating the F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 45 46 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S disaster risk financing and insurance agenda into the greater disaster risk management agenda was a turning point for the development of comprehensive financial protection against natural disasters in developing countries (Ghesquiere and Mahul, 2010).
Yet, this understanding of disaster risk financing as a broader strategic agenda, and as a core component of disaster risk management, was still at its early stages.

To move toward comprehensive financial protection programs, political and institutional challenges, such as political resistance to financial risk management policies with perceived uncertain payoffs, had to be overcome.
But the political support needed for sustained government commitment usually only materialized in the aftermath of a disaster and often remained focused on specific, politically-attractive financial products.

While stand-alone products may not be ideal from a purely financial perspective, the traction and interest they tend to create at a high level amongst policy makers can enable more strategic discussions on disaster risk management and financial protection more broadly.
For example, under the larger umbrella of the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI), the prospect of participating in a regional risk pool provided incentives for Pacific island countries to participate in long-term initiatives to improve the financial resilience of their budget.
Such initiatives included technical assistance to improve budget execution following shock events, the development of emergency procurement procedures to enable disaster response agencies to respond rapidly, and a long-term risk assessment program.

In many cases, a limited understanding of countries’ disaster risk restrained governments that were looking towards more comprehensive approaches.
Here a clear role emerged for the international community to support countries in better understanding their disaster risks and supporting policy makers in dealing with the uncertainty inherent in risk management.

It also became clear that accurate financial risk information—which reveals the full potential financial impact faced by the government—is crucial for disaster risk financing and insurance.
2010-Present: From products to strategies for financial protection By 2010, disaster risk financing and insurance practitioners had started working with a number of governments to design comprehensive disaster risk financing strategies rather than focusing on individual products (Mahul & Ghesquiere, 2010).
Increasingly, the international community has recognized the disaster risk financing and insurance agenda’s importance in disaster risk management, public financial management, and financial sector development agendas.

Development banks, such as the Asian Development Bank, the Inter-American Development Bank, and the World Bank, began integrating financial protection into their disaster risk management frameworks.
The G20 discussed risk financing on their agenda under the Mexican Presidency in 2012, supported by the World Bank and the OECD.

The Sendai Dialogue at the 2012 International Monetary Fund (IMF) and World Bank Group Annual Meetings demonstrated a commitment by development partners at the highest levels.
In addition, the 2014 World Development Report: Managing Risk for Development, emphasized the role of risk management, including disaster risk financing and insurance, as a powerful instrument for the international development agenda.

Moreover, the international community began to consider disaster risk financing and insurance, especially market-based risk transfer mechanisms, as an effective part of climate change adaptation strategies.
This built on earlier initiatives such as the 2005 Munich Climate Insurance Initiative launched by MunichRe, and a proposal in 2008 by the Alliance of Small Island States for an insurance mechanism to address damages from climate change.
In 2013, the UN established an international mechanism PART 01 Box 7 Post-disaster budget execution Sustainable and effective disaster risk financing and insurance strategies can help governments raise funds to address potential financial needs and manage fiscal volatility after a disaster hits.
Equally important are the administrative and legal procedures to ensure that the available resources are used effectively in the aftermath of a natural disaster, including a legal framework for declaring emergencies, a clear process for budget appropriation and execution, as well as fiduciary control and management of funding channels during an emergency.
In Mexico, the Natural Disaster Fund (FONDEN) is the centerpiece and operator of the government’s disaster risk financing and insurance strategy, combining several financial instruments for various sources of funding, depending on the timing and amount of funding needs as well as the cost of securing said funds.

The main role of FONDEN, however, is to ensure coordination between federal, state, and municipal governments and the private sector.
For example, following a disaster, FONDEN’s coordination and budget execution role includes collecting information on affected public infrastructure and services; managing and allocating disparate requests for funds based on a transparent damage and loss assessment methodology; coordinating administrative capacities across geographical locations; and monitoring the use of funds and reconstruction progress.
to promote a comprehensive approach to address Strong developments in sovereign disaster risk loss and damage associated with the effects of financing also reflect increasing engagement by climate change.

At the same time, the European Commission produced a discussion paper (Green Paper) on insuring against natural and man-made disasters.

ministries of finance.
Colombia, along with Panama and the Philippines, was among the first countries to develop a national disaster risk financing and insurance strategy, which integrates disaster-related contingent liabilities into existing disaster risk The same year, the Political Champions Group and fiscal risk management agendas (World Bank for Disaster Resilience—a collaboration between major donor countries to strengthen resilience in development planning—introduced a new initiative to develop stronger partnerships between governments and the private sector to use market-mediated insurance solutions as a way to increase the resilience of vulnerable populations to the economic effects of natural disasters.
The expert groups supporting this initiative includes representatives from the U.K. Department for International Development, the U.S. Agency for International Development, the World Bank, the International Labor Organization, the German and Government of Colombia, 2013).
Colombia’s strategy focuses on improving financial risk information and quantification; improving budget management of disaster risk through multiple financial instruments (including a disaster risk management fund, a contingent line of credit from the World Bank, and possibly a market-based earthquake risk transfer solution); and scaling up the insurance of public assets.
For the latter, the strategy paved the way for a group approach to insuring central government buildings in addition to increasing insurance requirements for government concessions in transport infrastructure such as roads and ports.36 The public financial management Agency for International Cooperation (GIZ), the aspects of disaster risk financing are becoming Swiss State Secretariat for Economic Affairs, the European Commission, and insurance companies Swiss Reinsurance Corporation, Munich Re Group, Willis, and Allianz.
So far the group has identified opportunities to stimulate disaster risk insurance increasingly important as countries realize the need for effective post-disaster budget execution (///see Box 7///).

Governments across South and Central America have maintained the region’s strong pace of in Bangladesh, Haiti, Kenya, the Philippines, and innovation.

In Peru, the Ministry of Finance has Senegal.


begun to develop a national disaster risk financing F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 47 48 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S strategy, which includes a strong focus on the In January 2014, Tonga received the first payout of insurance of public assets and improving domestic US$1.27 million within two weeks of cyclone Ian insurers’ earthquake risk-carrying capacity.
The reaching landfall.

The speed of the payout proved countries of Central America committed to join the important in supporting the government of Tonga to CCRIF risk pool.

This initiative is complementing effectively launch initial relief efforts.

already ongoing disaster risk financing efforts in the region.
For example, when Panama established a sovereign wealth fund in 2012, it designated disaster losses larger than 0.5 percent of GDP (excluding insurance coverage and the amount of contingent credit lines) as one of three reasons for a payout.

This shift in Latin America reflected a wider trend of governments looking to their neighbors to share experience, access expertise, and in some cases establish joint risk financing mechanisms.
The Pacific Catastrophe Risk Insurance Pilot launched in 2013, building on work started in 2007.

The pilot allows the six participating countries37 to pool risk and access earthquake and tropical In 2013, Indian Ocean island states started exploring a similar scheme.

In Sub-Saharan Africa, the African Risk Capacity was set up as a specialized agency of the African Union states as an extreme weather insurance scheme to estimate and disburse immediate funds to countries hit by severe drought.
Following the example of the CCRIF, the African Risk Capacity, a pan-African risk pool to manage drought risk, launched in spring 2014.

In addition to looking outward, governments have also begun to focus on applying disaster risk financing and insurance strategies at the subnational level (///see Box 8///).
cyclone parametric risk coverage from reinsurance Significant developments are also taking place in companies, providing governments with immediate insurance programs focused on the most vulnerable liquidity in the aftermath of a severe natural disaster.

groups of society.

In 2011 Oxfam partnered with Box 8 Strengthening subnational disaster risk financing capabilities A significant share of the public cost of disaster recovery and reconstruction ultimately falls on local governments.
For example, they often must pay for the repair of provincial, district, and community roads, schools, health clinics and other infrastructure within their remit.

Local governments may face additional pressures to support the recovery of local businesses and livelihoods, speeding the restoration of local economies.
While local governments in developing countries are often required by law to make budgetary provisions for post-disaster needs, they typically have limited discretionary financing, and what little funds they do have are quickly spent in the event of a disaster.

As a consequence, reconstruction efforts can extend over a number of years, exacerbating the indirect economic and social costs of a disaster.
State-owned enterprises can face similar challenges and pose additional contingent liabilities to national governments.

Over the past decade, there has been an increasing recognition of the need to address this issue by strengthening local, as well as national, disaster risk financing capabilities.
National governments can help stimulate this growth at the local level by providing explicit incentives for uptake and through regulatory and legislative reforms supporting the growth of financially sustainable risk transfer solutions tuned to the needs of local government.
For instance, in addition to limiting the availability of post-disaster federal funds for states that continuously do not insure their assets, Mexico also incentivizes states to build reserve funds, similar to its national-level program FONDEN by providing seed funding.

Colombia has begun to improve guidelines on insurance requirements for concessions at the subnational level, modeled after the 2013 reform of insurance requirements of national government concessions.
In Indonesia, provincial and municipal governments voluntarily insure critical public assets (World Bank, 2011).

International Financial Institutions are supporting the development of disaster risk financing and insurance strategies and risk transfer schemes tailored to the subnational level.
The Asian Development Bank, for example, has been focusing on climate risk adaptation in megacities and is currently developing disaster risk financing and insurance instruments at the city level in Indonesia, the Philippines, and Vietnam.
Contribution by Charlotte Benson, Asian Development Bank Box 9 How risk modeling and analytics are informing disaster risk financing in Mexico The government of Mexico developed the probabilistic catastrophe risk modelling software R-FONDEN to improve the effectiveness of Mexico’s disaster risk management system.

Combined with actuarial analysis of historical loss data, this tool helps inform decision making about the government’s risk financing and insurance strategy, and provides risk visualization.
An in-depth understanding of its risks allowed the Mexican government to develop a comprehensive financial protection strategy relying on risk retention and transfer mechanisms, including successfully accessing international reinsurance and capital markets.
To identify assets exposed to natural disasters—including roads and bridges, hospitals, schools, hydraulic infrastructure, and low-income housing—and the potential financial impact of their destruction, R-FONDEN was developed in three steps: 1) ///Data Gathering///: The required database was prepared, including hazard information, an asset inventory with the key variables such as building characteristics required for evaluation of vulnerability and loss of infrastructure, and the integration of historical loss data to complement simulated data.
2) ///Catastrophe Risk Modeling///: The government, together with the Universidad Nacional Autónoma de México (UNAM), developed hazard models for earthquakes, tropical cyclones, and floods, and vulnerability functions for all types of infrastructure.

Together with the exposure database this enabled the government of Mexico to carry out deterministic and probabilistic risk modeling used to inform financial analysis of probable disaster loss.
3) ///Financial Analysis///: Finally, the government carried out actuarial analysis of the simulated risk data and historical losses to develop and fine tune the federal disaster risk financing strategy for public infrastructure—including both risk retention and risk transfer.

This also includes the development of a decision support tool to facilitate this process in the future.
As a result, R-FONDEN has informed the development of the federal disaster risk financing strategy and helped improve individual insurance policies for federal agencies.

For instance, it enabled the design of an insurance program for the Ministry of Transport in charge of federal roads and bridges, a scheme that previously was difficult to insure due to insufficient asset information.
the World Food Program to build on the HARITA public-private partnership, MiCRO includes Swiss insurance project in Ethiopia, designing the Rural Re, Guy Carpenter, Mercy Corps, CaribRM (a Resilience Initiative, or R4, a large-scale initiative Caribbean specialist consultancy), and Fonkoze.

that has expanded coverage to Senegal.
The In 2013, CCRIF began broadening its reach into initiative focuses on developing tools to help the micro-insurance territory by supporting a trial of most vulnerable people build livelihoods resilient to a parametric personal weather-insurance product the effects of natural disaster, such as ‘insurance for in Grenada, Jamaica, and St. Lucia, supported by work’, and will soon roll out in two more countries in the region.38 Similarly, the government of Kenya is looking to complement its Hunger Safety Net Program—which currently provides cash transfers to the 100,000 most vulnerable households in four northern counties—with a mechanism to rapidly scale up payments to the affected area immediately following shock events such as drought.
Munich Re under the Munich Climate Insurance Initiative.40 Increasingly, the use of financial decision making tools empowers governments to make more informed decisions.

For example, financial decision tools can be used to evaluate potential fiscal risk caused by an earthquakerisk transfer options to protect public debt portfolio.
Or they allow In 2011, MiCRO (Microinsurance Catastrophe governments to analyze the costs and benefits Risk Organization) was established to provide of different financial product and their potential micro-insurance coverage to women-owned micro-enterprises in Haiti.39 MiCRO’s coverage was bundled with loans from Fonkoze, Haiti’s largest impact on its medium-term budget.

A coherent methodology has started to emerge to help governments assess the economic costs and benefits microfinance institution.
If triggered by a natural of alternative risk financing strategies (Clarke and disaster, its payouts can be used to repair homes or businesses and replace inventory that has been Poulter, 2014).

///See Box 9/// for an example of how risk information is helping financial decision making destroyed or damaged.

Set up as a donor-capitalized in Mexico.


The development of many of these new F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 49 50 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S tools is being spearheaded by the World Bank’s Disaster Risk Financing and Insurance Program.
Meanwhile, it has also become clear that in order to develop sustainable large scale agricultural insurance markets the public and the private sector need to work closely together, with each playing key, differentiated roles.

The past decade saw numerous private sector agricultural insurance pilots implemented in developing countries, usually with support from donor partners and mainly for index-based crop insurance (World Bank, 2005).
However, only a few, notably the crop insurance programs in India and the index-based livestock insurance program in Mongolia have scaled up to sustainable programs, due to close involvement by the government.

In contrast, the private sector- led weather index-based insurance pilot in Malawi did not successfully address all challenges such as low demand from farmers, and the pilot failed to achieve scale.
initiative focuses on public-private partnerships and approaches agricultural insurance as one component of an overall integrated agricultural risk management strategy.

It also looks to take advantage of investments made in developing the agriculture insurance markets to bring about multiple benefits.
For example, investments in data and risk financing can be used to improve existing cash transfer programs by making it technically possible to automatically increase welfare payments to the poorest and most vulnerable rural households following a disaster.

Challenges and lessons Overcoming institutional challenges to disaster risk financing and insurance requires well-defined institutional accountability and responsibility, together with a strong champion at the highest level of government.
Over the past five years, ministries of finance have been increasingly taking the leadership in the development of Experience suggests that sustainable, scaled up disaster risk financing strategies, collaborating agricultural insurance should be based on an equal with other government entities such as disaster partnership between the public and private sectors.
risk management agencies, insurance supervisors, The public sector is essential in the provision of and ministries of social welfare or agriculture.

public goods, such as agriculture data and risk Additionally, the idea of a central government financing structures, which allow national insurance agency responsible for risk management has companies pass on agriculture risk to international been proposed by international organizations reinsurance markets.
Government should also foster and the private sector.

For example, The World an enabling legal and regulatory environment to Development Report 2014 recommends setting up unlock the innovative potential of the private sector, national risk boards, an institutional reform already work to improve the technical capacity building of in place in Singapore and under consideration in local insurance companies, and ensure products Jamaica, Morocco, and Rwanda.
Yet there is still developed for farmers are of high quality.

Finally, the much work to do in bridging the gap between public sector can implement policies to support the international recognition and actually implementing wide scale outreach of agriculture insurance, which such an agenda in the countries that need it the is essential to achieving the market size required for most.

While a number of developing countries are sustainability (///see Box 10///).
leading the way in this field, in many others progress Building on lessons learned from more than 20 years of experience in supporting agricultural insurance, Awareness has been growing of the need for in 2013 the World Bank launched a new initiative on Agricultural Insurance as part of its Disaster Risk Financing and Insurance Program.

This institutional arrangements and mechanisms to complement the financial instruments used to secure funds.
Often overlooked, these administrative remains extremely limited.

Box 10 Munich Re’s experience in agricultural insurance Providing appropriate risk management tools for agriculture is a key challenge for development.

Agricultural insurance can play a vital role in that process by providing cover against natural perils, serving as collateral for agricultural loans and providing a safety net for investments.
While agricultural insurance systems have been successfully implemented in recent decades, this was mostly in industrialized countries.

One key requirement is the integration of insurance in the broader context of agricultural development and risk management.

Sustainable agricultural production methods and use of the best available production techniques specific to each site are prerequisites of insurance.
Second, only systems based on public-private partnerships have proved to be successful and sustainable, whereas purely private or purely state-organized systems have often failed.

In such public-private partnerships the government, farmers, and the insurance industry play complementary roles: The government provides the enabling legal and regulatory framework.
It can also provide part of the financing for risk premiums and administrative costs, invest in creating, auditing, and managing the required data, and facilitate market penetration through premium subsidies and state reinsurance for catastrophe losses.

This helps keep insurance terms affordable for farmers.

 Farmers finance part of the risk transfer through insurance premiums.

They also retain part of the risk in the form of a deductible or as basis risk in the case of index products.
Agricultural producers also have a crucial role in making such insurance programs sustainable through overall agricultural risk management.

 Insurance and reinsurance companies take on roles as risk carrier and take care of the marketing and administration of insurance policies.

They also manage the portfolio, develop new products, and carry out loss adjustment.
Especially in developing countries, where insurance companies are often short of risk capital, reinsurance arrangements are essential to maintain adequate solvency margins for insurance companies.

Besides much-needed capital, global reinsurers also bring international expertise and experience to developing countries.
sustainability of the system.
Contribution by Joachim Herbold, Senior Underwriter and Agricultural Risk Expert, Munich RE and legal dimensions—such as a legal framework for sector, investing in building insurance markets declaring emergencies, a clear process for budget in developing countries helps unlock access to appropriation and execution, and fiduciary controls previously unavailable markets and allows further of post-disaster funding channels—are essential diversification of their current portfolios, which are to an effective and timely response.
For example, highly concentrated in developed countries.

the government of Indonesia had to pass a new government regulation (PP 45/2013) in 2013 to explicitly allow its Ministry of Finance to purchase insurance with funds allocated in the national budget (World Bank, forthcoming).

However, it also became clearer that financial protection needs to be complemented by prevention and risk reduction.
The insurance industry has been warning that in some high-risk areas, such as parts of the United Kingdom and the U.S. state of Florida, Key lessons learned emerged during this period.

climate change already threatens the insurability Financial protection can help groups across society of catastrophe risk.

Here the government plays a understand, price, and manage financial risk.
The crucial role—such as through adequate government government and the private sector share roles regulation of both insurance markets and land and an interest in managing financial impacts use planning—to avoid market failure (Geneva faced by the government and in empowering Association, 2013).

For rapidly urbanizing developing homeowners, businesses, and agricultural producers countries this is an important reminder to integrate to access risk transfer solutions.
For the private risk early in development and land use planning.

F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 51 52 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Section IV: Looking to the Future Governments of developing countries have made ministry of finance typically leads the disaster significant progress in implementing disaster risk risk financing policy agenda, the expertise and financing solutions.
Much has been learned, and collaboration of other public entities such as these lessons have informed the first operational ministries of agriculture or public works is essential disaster risk financing and insurance framework for implementation.

Bringing together these to help governments structure work on financial different agencies is an important role for ministries resilience, laid out in this document.

But disaster of finance to play.


Challenges can also arise if the risk financing and insurance is a sophisticated legal liability for financing damages is not clear agenda with complex institutional and technical between national and subnational governments.

aspects.
aspects.

Many challenges that have emerged over Finally, the design of national financial protection the years remain unsolved while at the same time strategies must be careful of the kind of incentives there has been a real growth in innovation and new they may unwittingly generate; for example, a opportunities.
Areas of focus for strengthening public financial management of disasters Institutional ///Legal environment///: The legal environment varies significantly between countries and can either support or restrict the development of disaster risk financing and insurance solutions.

For example, while some countries have a legal requirement to insure public assets, others prohibit the use of public funds to purchase insurance.
Similarly, administrative and legal dimensions are crucial for post-disaster decisions such as declaring emergencies and budget appropriation and execution.

national-level program might discourage subnational governments from investing in risk reduction.

///Disaster risk financing funds///: A dedicated disaster fund can form the backbone of the government’s ability to manage the financial impact of natural disaster risk.
It provides not only financial resources solely dedicated to allowing risk retention but it can also anchor the development of a more comprehensive disaster risk financing and insurance strategy.

However, the development of a dedicated fund requires discussion and agreement with the ministry of finance and, in many cases, with the legislative branch, bringing political considerations into play.
Technical ///Risk information and risk analytics for evidence-based decision making///: Even ///Cooperation in the public sector///: Disaster when governments are aware that they face a risk financing and insurance cuts across significant, often open-ended, contingent liability numerous agendas, including those of disaster from disasters, they mostly lack the information, risk management, public financial management, expertise, and tools to understand and quantify financial sector development, and, increasingly, financial and fiscal disaster risk.
The government social protection.

Often, numerous public agencies may not know what kind of data is needed, such as oversee different aspects of these policy agendas, historical records of how disasters affected public emphasizing both the need for and challenge of finances in the past and information for probabilistic coordinating between these players.
While the financial and actuarial analysis such as modelled Box 11 Challenges of assessing risk for risk financing and insurance Successful financial protection solutions rely on underlying risk data.

Yet appropriate risk modelling tools are still lacking in countries that need them the most.

Lack of appropriate solutions and tools for developing countries: Disaster risk financing requires sophisticated risk modelling tools generally unavailable for low- and often also middle-income countries.
Their development requires substantial seed investment for example for the collection of the required data on exposed assets, even before there is a reasonable certainty that the government will use the tools once completed.

Where financial risk models do exist, they are usually not tailored to answer governments’ specific disaster risk financing questions and needs, such as modelling for collapsed buildings, fatalities, impact on crops and food security, and taking into account the homeless population.
Almost always developed for the insurance industry, these models often only assess the impact on “insurable” assets, excluding, for example, low-income housing.

Exposure data may also rely heavily on official census data that often excludes infrastructure and public buildings and disregards unofficial settlements—such as shantytowns or squatter towns—that regularly suffer the most damage in a disaster.
Even where countries can access risk modelling tools, they go out of date quickly; some are even born obsolete or inaccurate.

For example, many models rely on census data that can be 10 years old.

Even if growth trends are used to update figures, using old census data to collect information on exposure in fast growing countries is potentially inaccurate.
///Lack of disaster risk information in developing countries///: Disaster risk financing solutions are only as reliable as the risk models that support them, and the latter are only as good as the data used to develop them.

Unfortunately, developing countries often lack adequate data to build and validate risk assessment tools, not least because gathering the necessary data sets requires large investments.
If not already available, exposure data—such as information on public and private assets—are the hardest and most expensive to gather and organize.

Use of satellite imagery is often the only way to gather up-to-date exposure data, but the cost of acquiring such images can be prohibitive for developing countries, unless companies such as Google provide information already in their possession free of charge for development purposes, including disaster risk financing.
Data on exposure may be scattered among different government ministries and other organizations, and may be kept in precarious conditions.

For example, when the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI) undertook a risk assessment in the region in 2012, some of the only existing maps about crops in the South Pacific were available in a single paper copy in the archive of the Secretariat of the Pacific Community in Suva, Fiji.
///Data sharing is often not the norm///: Even within the same government, different ministries may not share data, and are even more reluctant to share data with international organizations for the purpose of developing risk assessment models.

Data are still seen in many countries as a source of power not to be relinquished lightly, often for security concerns.

And when countries do share data, they often receive no reward for their efforts such as usable feedback or products based on the data.
///Looking ahead///: Developing countries are increasingly requesting support in managing the fiscal costs of natural disasters.

New financial instruments and strategies are needed, however, to help governments increase post-disaster financial response capacity, and build domestic catastrophe insurance markets.

Probabilistic risk assessment and catastrophe risk modelling are important tools that empower policy makers to take better-informed decisions in financial protection.
Technical support helps countries collect the underlying data and build the required models.

More work is also needed to bridge the gap between catastrophe risk data and informed decision making, establishing the link from technical outputs to financial analysis that is useful to nontechnical decision makers.

Simplifying complex technical data and providing key financial figures ensures that policy makers have the information they need to make the best decisions about financing disaster risk.
Contribution by Paolo Bazzurro, Professor, University Institute for Superior Studies Pavia, Italy F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 53 53 54 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S disaster losses.
It may also lack the expertise needed most ministries of finance, disaster risk financing to quantify its contingent liability to disasters, which can leverage existing capacity while contributing often requires heavy statistical and financial lifting towards bringing together these different sources of as well as analytical tools that are only recently risk for comprehensive fiscal risk management.
becoming available to governments as they are being developed for the public sector through institutions such as the World Bank.

The private sector and international institutions have a critical role to play in training governments to use financial risk data and analytical tools.

See Box 10 for a more detailed discussion of these challenges.
///Increasing the evidence///: In recent years, the number of developing country governments adopting pre-disaster financial protection measures has increased rapidly along with the number of available tools.

Yet, actual evidence on impact, effectiveness, and efficiency is still limited.
Initiatives such as the World Bank’s Impact ///Ability to comprehensively manage fiscal risk///: Appraisal Program are tackling this need for The ability of ministries of finance in developing countries to manage fiscal risk is often limited, if it exists at all.

Without a proactive approach to managing fiscal risk in general, ministries may also lack the mindset, knowledge, and institutional support to integrate fiscal risks from natural disasters.
Such a shift often requires technical and improved evidence.

But monitoring and evaluation must be included as an essential component in all disaster risk financing and insurance programs to build the evidence base and to establish meaningful indicators.

Operational financial support from international organizations ///Post-disaster budget execution of sovereign and donors.
By building on ongoing government disaster risk financing///: Many countries lack the work in areas such as debt or commodity risk dedicated mechanisms, experience, and expertise to management that are already better known to effectively allocate, disburse, and monitor recovery PART 01 and reconstruction funds following disasters.
For ///Subnational disaster risk financing and example, limited experience with and awareness of insurance agendas///: Expanding disaster risk emergency procedures for public procurement can financing and insurance to the subnational level lead officials to apply business-as-usual procedures, will not only increase the financial resilience of leading to costly delays.
Part of the challenge for regional or local governments, but it also reduces countries that want to implement a sovereign the potential financial burden on the central disaster risk financing and insurance strategy, government.

This often requires additional including setting up budget execution systems investments in building capacity and expertise, to address specific post-disaster challenges, is which tend to be weaker at the subnational level.
that it requires strong collaboration between the Integrating disaster risk financing and disaster risk ministry of finance and the public entity tasked with management into city-level planning has become spending the money, such as local governments particularly urgent in the face of rapid urbanization.

or public infrastructure maintenance agencies.


In In Asia, for example, unprecedented levels of addition, the system must balance policy makers’ economic and population growth have led to a rise concerns for fast disbursement with the public’s and in megacities—cities with over 10 million people— donors’ needs for transparency and accountability.
that tend to be located near coastlines and rivers, For example the government of Mexico established making them highly vulnerable to rising sea levels a post-disaster loss reporting mechanism managed and other effects of climate change.

by its Natural Disaster Fund (FONDEN), which lets affected states access timely payments directly from FONDEN, reducing time-consuming coordination problems.
Opportunities to expand the impact of disaster risk financing and insurance ///Social safety net programs and disaster risk financing///: Few developing countries are currently supporting their social safety nets by disaster risk financing strategies to help governments manage the potential cost of scale up following disasters.
One challenge to increasing this critical link is to forge the partnerships required—such as between ministries of finance and officials working in public welfare agencies—to financially and institutionally adapt safety nets to expand during and after disasters.
Additionally, since it is low-income countries who would benefit the most from linking safety nets to disaster risk financing and insurance strategies, it is essential that the international community provide technical and financial support to make this happen.
///Financial protection against climate risk which is exacerbated through climate change///: Disaster risk financing and insurance should be considered an integral part of comprehensive climate change risk management, in part because it provides tools to manage the financial impact of climate risks that cannot be prevented or reduced.
Inherently designed for managing losses and damages caused by uncertain events, disaster risk financing and insurance can help countries prepare for increased climate variability and extreme events expected to increase with climate change.

From a financial risk management perspective, while climate risks may lead to an increase in uncertain extreme weather events it does not fundamentally alter the underlying challenge of managing contingent liability from natural hazards.
Just as it is a critical component of any disaster risk management approach, financial protection plays a crucial role in helping countries become more resilient to climate risks.

Disaster risk financing instruments can also support measures to reduce vulnerability by quantifying risk and providing price signals to climate adaptation investments.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 55 56 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Disaster Risk Financing in the Next Hyogo Framework for Action forum and OECD are taking it up as an important topic.
Signed in 2005, in the early stages of the field of The successor to the Hyogo Framework for Action, disaster risk financing and insurance, the Hyogo to be agreed on in early 2015 after the original Framework for Action acknowledged a role for risk expires, provides an opportunity to recognize and financing in risk reduction as well as the importance integrate financial protection as a core priority of financing in the post-disaster phase (///see Box 3///).
for action in countries’ disaster risk management Looking back, however, it is clear that Hyogo did not reflect the full scope and significance of disaster risk financing and insurance, and is no longer agendas.

Drawing on the experience captured in this background paper, four key activities emerge that governments could consider including under such a representative of the importance that governments priority for action.

and the international community give to this area.


For example, since then, the Asian Development Bank, Inter-American Development Bank, and the World Bank have all incorporated disaster risk financing as core pillars of their disaster risk management frameworks for engagement with As already discussed, monitoring and evaluation tools and indicators for disaster risk financing and insurance programs and instruments are still largely lacking, but a concerted effort is underway to create and improve them.
The results of these efforts governments.

Other global policy groups like the could be reflected in the outcome and impact-level G20, Asia Pacific Economic Cooperation (APEC) indicators selected for the second Hyogo framework.
Table 4 Recommended treatment of financial protection in HFA2 PRIORITY FOR ACTION: KEY ACTIVITIES: I II III IV REDUCE FINANCIAL IMPACT OF NATURAL DISASTERS ON THE GOVERNMENT AND SOCIETY Improve understanding and assessment of public contingent liabilities related to natural disasters Develop national financial protection strategies to be implemented through a dedicated Disaster Risk Management Fund.
Leverage private financial institutions to offer affordable, sustainable, cost-effective financial solutions, including insurance, to governments, homeowners, SMEs, and agricultural producers.

Integrate disaster risk considerations into the design of social protection programs.
Table 5 Expanded recommendations for financial protection in the successor to the Hyogo Framework for Action PRIORITY FOR ACTION: KEY ACTIVITIES: I II III IV REDUCE FINANCIAL IMPACT OF NATURAL DISASTERS ON THE GOVERNMENT AND SOCIETY Improve understanding and assessment of public contingent liabilities related to natural disasters.

(a) (b) Promote the availability, quality, and consistency of risk data.
Develop and promote catastrophe risk pricing models such as probabilistic catastrophe risk and actuarial models.

(c) Assess implicit and explicit contingent liabilities of the state to disasters and improve their integration in fiscal risk management.

(d) (e) (f) Establish transparent, timely, and effective post-disaster loss reporting mechanisms.

Build the required capacity and technical expertise for disaster risk financing and insurance.
Strengthen the use of financial risk information to guide risk reduction activities.

Develop national financial protection strategies to be implemented through a dedicated disaster risk management fund.

(a) (b) Assess potential post-disaster (short-term and long-term) funding gaps.

Develop and use financial decision making tools to assess the costs and benefits of disaster risk financing options.
(c) Develop a national strategy for financial protection to clarify contingent liability, secure immediate liquidity following disasters for the short-term, and ensure longer-term reconstruction financing.

(d) (e) Establish a national disaster fund with dedicated resources.

Adopt pre-disaster budget management and post-disaster budget execution mechanisms for natural disasters.
Leverage private financial institutions to offer affordable, sustainable, cost-effective financial solutions, including insurance, to governments, homeowners, SMEs, and agricultural producers.

(a) Quantify potential property and agricultural disaster losses and identify losses incurred by public and private stakeholders.
(b) Develop public market infrastructure (such as systems for collecting and managing data or modeling catastrophe risk) to better develop domestic catastrophe risk insurance and agricultural insurance markets.

(c) Improve supervision and regulation of domestic catastrophe risk insurance markets.

Integrate disaster risk considerations into the design of social protection programs to protect the most vulnerable.
(a) Quantify potential disaster-related financial losses on the poorest and the fiscal impact that disasters pose for social protection programs.

(b) (c) (d) Secure contingent funding by the government for social protection programs against disasters.

Complement social protection programs with insurance principles and private sector products.

Improve the process for identifying beneficiaries and assessing their eligibility for post-disaster payouts.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 57 PART02 An Operational Framework for Disaster Risk Financing and Insurance Part two seeks to tie together the experience and financing and insurance to help solve the challenges collected knowledge from partners in the public of disaster and its impact.
Some of these solutions and private sector in order to create a practical for urgent, short-term problems can be implemented operational framework for governments looking immediately while decision makers consider long- to establish or improve disaster risk financing term and more comprehensive financial protection and insurance programs.

As a framework for the policies.


For example, in many cases before the development and implementation of cost-effective ministry of finance can use risk transfer, an existing and sustainable solutions it aims to provide a practical approach and a comprehensive overview of policies for the public financial management of disasters by governments.
Years of sustained dialogue and working with governments and the private sector—in particular insurance and reinsurance companies—have created the structure of this framework.

For the World Bank alone, it builds on more than 15 years of intensive law must first be revised or replaced, a goal that may take several years to accomplish.

Eventually, the development of a strategy around ongoing activities can help the government build a comprehensive approach to the financial management of disasters.
This could take place in an iterative manner, refining policy objectives—and actions to achieve these objectives—during the implementation of disaster risk financing and insurance activities, and complementing other disaster risk management partnerships with over 60 countries worldwide.

It investments.
It investments.

complements more conceptual work undertaken by partners such as the OECD Methodological Framework on Disaster Risk Assessment and Risk Financing and the 2014 World Bank World Development Report on Managing Risk for Development.
The operational framework also introduces a common language to enable and strengthen the international cooperation often required between governments and their partners, as well as between governments themselves as they seek to exchange This framework should serve as a practical guide experiences and good practice.
A structured, supporting decision makers looking at disaster risk consistent way of approaching disaster risk F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 59 60 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S financing helps governments better identify and policy makers situate this instrument in the larger implement their priorities, and enables international context of financial protection and disaster risk development partners and the private sector to management.
Second, governments may also be better support them in doing so.

seeking help in achieving a particular development The operational framework, however, is not a blueprint for action, and as such does not provide detailed guidance on how to carry out each step.

Given the nuanced and specific challenges faced by goal, such as protecting smallholder farmers against drought or ensuring access to immediate post-disaster liquidity for central or subnational governments.
countries, this requires a sustained commitment In both cases, this operational disaster risk financing by countries and their partners that responds to a and insurance framework provides decision makers country’s specific needs.
For example, low-income with a practical guide for beginning relevant countries constrained by a lack of capacity may not discussions with all stakeholders—from government be able to use financial instruments in the same way agencies and taxpayers to donors and private as middle-income countries.

Small island developing insurance companies—and to gain an understanding states subject to financial shocks where the loss of how the work might evolve over time.
As a can exceed their annual GDP face vastly different second step, it helps governments to identify and challenges than large middle-income countries prioritize policy options and the necessary actions trying to safeguard low-income populations against to implement these choices, depending on the disasters.
particular situation and timeframe While the overall goal of disaster risk financing The Operational Disaster Risk Financing and Insurance and insurance—to increase the financial resilience Framework is presented in three components: (i) an of society to disasters—is common across all overview of the core technical steps in developing countries, experience has shown that governments and implementing financial protection solutions become interested in disaster risk financing and (see Figure 11); (ii) a decision process for insurance primarily for two different reasons.
governments engaging in the disaster risk financing First, governments are often looking to address a and insurance process, which brings together the particular problem through implementing a specific technical steps with the guiding policy questions product or financial instrument such as risk transfer (see Figure 12); and, (iii) an overview of actions to international markets; the challenge is to help governments can consider for each of these steps ///Photo Credit: /// Nicholas Kingston, Cairo, Egypt PART 02 Eff ective post disaster re- sponse and recovery relies on access to suffi cient and timely resources following a disaster.
This includes: (i) Arranging the required financial resources for the government to meet its contingent liabilities (ii) Developing catastrophe risk and agricultural insur- ance markets, building on Public-Private Partnerships (iii) Develop rules and arrange financing instruments for scalable social protection Figure 11 Operational Disaster Risk Financing and Insurance Framework: Core technical steps Risk assessments for financial protection quantify potential disaster impacts based on historical and simulated data.
This of- ten requires investments in the necessary underlying hazard, exposure, and vulnera- bility data.

This also includes building an ef- fective interface between the policy maker and underlying technical models.

Assess Risks Sustainable financial protec- tion requires reducing under- lying drivers of this risk.

It complements risk reduc- tion by managing residual risk which is not feasible or not cost eff ective to mitigate.
It also creates incentives to invest in risk reduction and prevention by putting a price on risk and clarifying risk own- ership.

Reduce Underlying Risk (Links to DRM) Arrange Financial Solutions Deliver Funds to Beneficiaries POST-DISAS T E R Resources should reach beneficiaries in a timely, transparent, and accountable fashion.
This requires eff ective administra- tive and legal systems for the appro- priation and execution of funds for the government budget, insurance distribution and settlement (oft en through private channels), as well as social protection programs.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 61 PRE-DISASTER 62 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S to increase the financial resilience of the four main overall disaster risk management strategy.

Annex I groups of beneficiaries and illustrative examples contains an extended decision tree to guide policy from international experience (///see Figure 13 and makers through this process.

Figure 14).
Figure 14).

As the first step in implementing disaster risk The second component (///see Figure 12///) lays out financing and insurance solutions, policy makers a decision process for a government interested in should clarify the overall development goals and financial protection, with decisions to be made on identify the intended beneficiary of their risk both the policy and the technical side.

This process financing policy.


As discussed earlier, most often seeks to first identify and prioritize the key policy this is one or multiple of four main groups of objectives of the government and subsequently beneficiaries of financial protection policies: the develop the required actions to achieve them.
This (national or subnational) government, homeowners decision process guides policy makers through a set and SMEs, farmers, and the poorest and most of fundamental questions that determine the shape vulnerable in society.
Second, historical information and direction of the country’s disaster risk financing and risk assessments help identify the financial and insurance engagement, embedded within an impact on these groups and the underlying causes Figure 12 A decision process to guide governments in building financial resilience DRFI Work Process Policy: Financial Protection Strategy & Action Plan What do I want to do/ are my overall goals?

Why do I want to do this?

How will I go about achieving these development goals?
Start Who do I want to be protected?

What do I want them to be protected against?

Who will pay and how?

How will the funds reach the beneficiaries?

How can I implement these policy decisions?
Identify and prioritize beneficiaries Idenfity and prioritize Identify source financial impact and underlying problems driving this impact of funds Identify delivery channels Identify necessary human, technical, financial resources and partnerships Assess Risks Arrange Financial Solutions Deliver Funds to Beneficiaries Implementation Technical: Operational Framework Monitoring & Evaluation PART 02 driving these effects, for example recurring budget comprehensive financial protection strategy and volatility caused by emergency spending following action plan.
hurricanes and reconstruction of uninsured public assets.

Following this, officials will have to consider possible solutions.

These include mechanisms to manage financial risk and mobilize the required resources, such as risk transfer to international markets or deciding to rely on post-disaster budget reallocations.

Decision makers must also determine how these funds will reach the intended beneficiaries.
Finally, they must establish the required resources and partnerships to implement Bringing together the four main policy areas of disaster risk financing and insurance as discussed earlier in the operational framework provides a more detailed matrix of policy objectives that policy makers can consult (///see Figure 13///).

This also places individual activities in the larger context, potentially leading to multiple wins.
For example, scalable social protection and agricultural insurance can work hand in hand, often drawing on the same distribution systems and indexes to trigger payouts and protect different segments of the population.

these policies.

Once these policy decisions are made ///Figure 14/// presents illustrative examples of and the government is addressing its immediate how governments are implementing disaster concerns, it can consolidate all of them into a risk financing and insurance solutions.
Annex F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 63 64 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S GOVERNMENT ACTIONS FOR FINANCIAL GOVERNMENT ACTIONS FOR FINANCIAL PROTECTION OF THE STATE PROTECTION OF SOCIETY BENEFICIARIES GOVERNMENT - NATIONAL AND SUBNATIONAL HOMEOWNERS AND SMES FARMERS THE POOREST ACTIONS (SOVEREIGN DRFI) (PROPERTY CATASTROPHE RISK INSURANCE) (AGRICULTURAL INSURANCE) (DISASTER-LINKED SOCIAL PROTECTION) Collect and manage risk and loss data Collect and manage risk and loss data Collect and manage risk and loss data Collect and manage disaster risk and loss data Assess and legally establish the state’s contingent Quantify potential disaster-related loss from property Quantify potential disaster-related loss from property damage Quantify potential disaster-related losses on the poor (welfare impact) liabilities to disasters damage Quantify potential disaster losses on low-income households Quantify potential disaster-related loss through social protection on Quantify potential disaster-related loss from fiscal and Quantify potential disaster losses on low-income (including farmers), in addition to the impact of losses on welfare and government budget (fiscal impact) ASSESS RISKS budget perspective Assess potential post-disaster (short-term and long- households (including farmers), in addition to the impact of losses on welfare and human development term) funding gaps Identify share of loss incurred by public and Situate financial protection in overall disaster risk private stakeholders management agenda Assess capacity and solvency of domestic insurance markets Understand level of demand from target population for risk transfer products
 human development Identify share of loss incurred by public and private stakeholders Assess capacity and solvency of domestic insurance markets Understand level of demand from target population for risk transfer products Develop financial decision-making tools Promote domestic demand for insurance through Promote domestic demand for insurance through reducing cost Secure contingent funding for disaster linked social protection Develop a national strategy for financial protection reducing cost to beneficiary to beneficiary Enhance cash transfer programs with insurance principles and scalability within broader fiscal risk management - Public provision of risk market data and risk - Public provision of risk market data and risk financing structures mechanism, including transparent rules for payout - Secure immediate liquidity for budget support financing structures following disasters through risk layering using - Compulsory versus voluntary schemes financial instruments such as reserves, contingent credit, and catastrophe risk transfer - Secure longer-term reconstruction financing, such as a public asset insurance program ARRANGE FINANCIAL SOLUTIONS - Awareness/education of consumers about insurance products - Financial incentives through premium subsidies or tax breaks Develop domestic supply of insurance - Assess legal and regulatory environment and insurance supervision to allow private sector to develop private insurance solutions while also protecting consumers - Risk data collection, management, and sharing - - Indemnity and Index-based product development Insurance pools - Compulsory versus voluntary schemes Develop eligibility criteria for post-disaster component - Awareness/education of consumers about insurance products Determine targeting mechanism for
 beneficiaries - Financial incentives through premium subsidies or tax breaks Develop domestic supply of insurance - Assess legal and regulatory environment and insurance supervision to allow private sector to develop private insurance solutions while also protecting consumers - Risk data collection, management, and sharing Indemnity and Index-based product development - - Insurance pools DELIVER FUNDS TO BENEFICIARIES LINKAGES TO DISASTER RISK MANAGEMENT Establish a national disaster fund Develop risk market infrastructure to support Develop risk market infrastructure to support delivery channels Develop systems and processes to enable effective execution of Establish transparent, timely, and effective delivery channels disaster declaration and post disaster loss - Underwriting and claims settlement process reporting mechanisms Establish post-disaster budget execution mechanisms to transfer funds from national to subnational level and from the Ministry of Finance to line ministries - Delivery channels through insurance intermediaries - Alternative delivery channels: Banks, micro-finance Intermediaries, nongovernmental organizations, etc.
- Underwriting and claims settlement process - Delivery channels through insurance intermediaries - Alternative delivery channels: Banks, micro-finance Intermediaries, nongovernmental organizations, etc.
scalability component targeting of payouts Improve assessing eligibility of beneficiaries for post-disaster payouts and Figure 13 Operational DRFI Framework: Actions for governments to build financial resilience across society GOVERNMENT ACTIONS FOR FINANCIAL GOVERNMENT ACTIONS FOR FINANCIAL PROTECTION OF THE STATE PROTECTION OF SOCIETY GOVERNMENT - NATIONAL AND SUBNATIONAL HOMEOWNERS AND SMES FARMERS THE POOREST (SOVEREIGN DRFI) (PROPERTY CATASTROPHE RISK INSURANCE) (AGRICULTURAL INSURANCE) (DISASTER-LINKED SOCIAL PROTECTION) Collect and manage risk and loss data Collect and manage risk and loss data Collect and manage risk and loss data Collect and manage disaster risk and loss data Assess and legally establish the state’s contingent Quantify potential disaster-related loss from property Quantify potential disaster-related loss from property damage Quantify potential disaster-related losses on the poor (welfare impact) liabilities to disasters damage Quantify potential disaster losses on low-income households Quantify potential disaster-related loss through social protection on Quantify potential disaster-related loss from fiscal and Quantify potential disaster losses on low-income (including
 farmers), in addition to the impact of losses on welfare and government budget (fiscal impact) budget perspective human development Identify share of loss incurred by public and private stakeholders Assess capacity and solvency of domestic insurance markets Understand level of demand from target population for risk transfer products ASSESS RISKS Assess potential post-disaster (short-term and long- term) funding gaps Identify share of loss incurred by public and households (including farmers), in addition to the impact of losses on welfare and human development Situate financial protection in overall disaster risk management agenda Assess capacity and solvency of domestic private stakeholders insurance markets risk transfer products Understand level of demand from target population for Develop financial decision-making tools Promote domestic demand for insurance through Promote domestic demand for insurance through reducing cost Secure contingent funding for disaster linked social protection Develop a national strategy for financial protection reducing cost to beneficiary to beneficiary Enhance cash transfer programs with insurance principles and scalability within broader fiscal risk management - Public provision of risk market data and risk - Public provision of risk market data and risk financing structures mechanism, including transparent rules for payout - Secure immediate liquidity for budget support financing structures following disasters through risk layering using - Compulsory versus voluntary schemes - Compulsory versus voluntary schemes Develop eligibility criteria for post-disaster component - Awareness/education of consumers about insurance products Determine targeting mechanism for
 beneficiaries - Awareness/education of consumers about insurance products - Financial incentives through premium subsidies or tax breaks Develop domestic supply of insurance - Assess legal and regulatory environment and insurance supervision to allow private sector to develop private insurance solutions while also protecting consumers - Risk data collection, management, and sharing Indemnity and Index-based product development - - Insurance pools - Financial incentives through premium subsidies or tax breaks Develop domestic supply of insurance - Assess legal and regulatory environment and insurance supervision to allow private sector to develop private insurance solutions while also protecting consumers - Risk data collection, management, and sharing - - Indemnity and Index-based product development Insurance pools financial instruments such as reserves, contingent credit, and catastrophe risk transfer - Secure longer-term reconstruction financing, such as a public asset insurance program ARRANGE FINANCIAL SOLUTIONS Establish a national disaster fund Develop risk market infrastructure to support Develop risk market infrastructure to support delivery channels Develop systems and processes to enable effective execution of DELIVER FUNDS TO BENEFICIARIES reporting mechanisms Establish transparent, timely, and effective delivery channels disaster declaration and post disaster loss - Underwriting and claims settlement process Establish post-disaster budget execution mechanisms to transfer funds from national to subnational level and from the Ministry of Finance to line ministries - Delivery channels through insurance intermediaries - Alternative delivery channels: Banks, micro-finance Intermediaries, nongovernmental organizations, etc.
- Underwriting and claims settlement process - Delivery channels through insurance intermediaries - Alternative delivery channels: Banks, micro-finance Intermediaries, nongovernmental organizations, etc.
scalability component Improve assessing eligibility of beneficiaries for post-disaster payouts and targeting of payouts LINKAGES TO DISASTER RISK MANAGEMENT F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 65 66 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S BENEFICIARIES GOVERNMENT - NATIONAL AND SUBNATIONAL HOMEOWNERS AND SMEs FARMERS THE POOREST ACTIONS (SOVEREIGN DRFI) (PROPERTY CATASTROPHE RISK INSURANCE) (AGRICULTURAL INSURANCE) (DISASTER-LINKED SOCIAL PROTECTION) The government of Colombia included the assessment of contingent In Taiwan, China, the Residential Earthquake India has developed detailed agricultural risk assessment tools to help In the Philippines, a survey is mapping out the poorest communities, making liabilities from disasters in the government’s 2011 fiscal risk Insurance Fund has developed an earthquake policymakers better understand the economic consequences of drought, it easier to deliver social welfare support, including assistance following a management strategy.
In Mexico, R-FONDEN—a probabilistic catastrophe risk modeling tool— risk model to strengthen the independence and professionalism of earthquake risk assessments.

both the farm and state levels.

quantify its effects, and investigate the impact of risk coping strategies, at disaster, to those most in need.
Kenya’s Hunger Safety Net Program is investing in poverty mapping to creates probabilistic simulations of potential material and human losses The preparation of the Southeast Europe and In Mongolia, livestock census and surveys are used to inform the government understand levels of household vulnerability.

The International Livestock from disasters.


Caucasus Regional Catastrophe Risk Insurance about the economic and fiscal impact of adverse weather events, and in the Research Institute developed models to understand drought risk in ASSESS RISKS Morocco developed a probabilistic catastrophe risk modeling tool to help the government prioritize risk reduction investments.
The Philippines has developed a catastrophe risk model to evaluate options for risk transfers and insurance to reduce the fiscal burden of disasters.

The Pacific Risk Information System, under the Pacific Catastrophe Risk Assessment and Financing Initiative, includes a database of over 3.5 million geo-referenced buildings and infrastructure in 15 Pacific island countries.

It was used to develop the Pacific Catastrophe Risk Insurance Pilot.
Facility includes extensive multi-hazard country risk design and pricing of index-based livestock insurance policies.

northern Kenya assessments for climate and geological hazards.

Africa Risk View, the technical model underlying the African Risk Capacity risk pool, combines existing rainfall-based drought early warning models with data on vulnerable populations to form a standardized approach for estimating the cost of responding to food insecurity across the continent.
Contingent lines of credit provide developing countries with funds The Turkish Catastrophe Insurance Pool, a public- The Index-Based Livestock Insurance Pilot in Mongolia protects the livelihoods The Productive Safety Net Programme (PSNP) in Ethiopia aims to help the immediately following disasters.
Products are offered by the World private partnership with the domestic insurance of 11,000 herders, or 22 percent of all herders in piloted provinces in 2012. rural poor facing chronic food insecurity to resist shocks and become food ARRANGE FINANCIAL SOLUTIONS Bank, IDB and JICA.

The first multi-country risk pool, the Caribbean Catastrophe Risk Insurance Facility, established in 2007, offers 16 small island states countries over $150 million in hurricane and earthquake coverage.
In 2006, Mexico transferred $450 million of earthquake risk to financial markets by combining the world’s first government catastrophe (cat) bond ($160 million) with parametric reinsurance ($290 million).

In Colombia, the government uses standardized terms and conditions informed by international best practices to purchase catastrophe insurance for its public buildings.
industry, provides compulsory, affordable earthquake insurance to homeowners, and has catastrophe insurance coverage from less than 3 percent to over 40 percent of residential buildings in urban areas.

The Japanese public-private earthquake insurance program for homeowners relies on the Japan Earthquake Reinsurance Company, an earthquake reinsurance pool backed by the government.
India’s weather-based crop insurance has been in place since 2007 for 11 growing seasons, with 11.6 million farmers and $370 million covered in the Bank for emergency scale up.

self-sufficient.

The PSNP includes including continent grants with the World most recent season.
The national crop insurance program, operating since Insurance products offered through the ‘Center for Agriculture and Rural 2010, offers more than 1.1 million farmers a total of $67 million coverage in Development Mutual Benefit Association (CARD MBA)’ in the Philippines are mandatory for members of a network of institutions including CARD NGO and CARD Bank, providing scale and preventing adverse selection.

yield crop insurance.


In Morocco, the government and the agricultural mutual insurance company have established a crop insurance program for cereal crops that currently covers 700,000 hectares and will soon be extended to fruit trees.
The government of Mexico established a post-disaster loss reporting A public-private partnership, the Turkish Distribution of insurance policies in the Moroccan multi-peril crop insurance HARITA, (since renamed to R4), was launched in Ethiopia in 2007 as a pilot mechanism managed by the Natural Disaster Fund (FONDEN).
Affected Catastrophe Insurance Pool relies on the domestic program takes place either by linkage to loans made by Crédit Agricole or by program to address the needs of small-scale farmers through drought states can therefore access timely payments from FONDEN, reducing insurance market for the distribution and direct marketing of MAMDA, the sole provider of agriculture insurance in the insurance, credit, and risk reduction, allowing farmers to pay for insurance time-consuming coordination problems.
settlement of claims.

country, structured as a mutual.

through labor, an idea based on “food-for-work” programs.
DELIVER FUNDS TO BENEFICIARIES In the Cook Islands, the establishment of the government’s Disaster MiCRO’s coverage in Haiti is bundled with The national crop insurance program in India uses GPS-enabled mobile Emergency Trust Fund has served to reduce delays in emergency loans from Fonkoze, the country’s largest phones and video recording technology to improve crop-cutting experiments response.

microfinance institution.


A collective voluntary insurance scheme against earthquakes in Manizales, Colombia uses the property tax system to collect insurance premiums.

and the accuracy of claims assessments, which also reduces fraudulent claims.

Claims settlement takes place through direct payment to bank accounts.
LINKAGES TO DISASTER RISK MANAGEMENT Mexico’s natural disaster fund FONDEN has evolved to include financial After setting up the TCIP, the government of Indian farmers’ agricultural insurance premiums are now based on their Members of PSNP households must participate in productive activities accounts to finance investment in risk reduction.
It promotes informed Turkey legally abolished its obligation to fund the individual risk profile after the national crop insurance program moved to to build more resilient livelihoods, such as rehabilitating land and water decision by requiring state governments to complete a risk assessment reconstruction of residential dwellings following a risk-based “actuarial regime”.
This allows farmers to see the riskiness of resources and developing community infrastructure, such as rehabilitating (including development of a risk atlas) before becoming eligible for risk earthquakes.

It also strengthened building planting different crops and choose appropriately.

rural road and building schools and clinics.

reduction project financing.

construction codes and ensured they were adhered to.

ASSESS RISKS assessments for climate and geological hazards.
Morocco developed a probabilistic catastrophe risk modeling tool to help the government prioritize risk reduction investments.

The Philippines has developed a catastrophe risk model to evaluate options for risk transfers and insurance to reduce the fiscal burden of disasters.

The Pacific Risk Information System, under the Pacific Catastrophe Risk Assessment and Financing Initiative, includes a database of over 3.5 million geo-referenced buildings and infrastructure in 15 Pacific island countries.
It was used to develop the Pacific Catastrophe Risk Insurance Pilot.

ARRANGE FINANCIAL SOLUTIONS Bank, IDB and JICA.

The first multi-country risk pool, the Caribbean Catastrophe Risk Insurance Facility, established in 2007, offers 16 small island states countries over $150 million in hurricane and earthquake coverage.
In 2006, Mexico transferred $450 million of earthquake risk to financial markets by combining the world’s first government catastrophe (cat) bond ($160 million) with parametric reinsurance ($290 million).

In Colombia, the government uses standardized terms and conditions informed by international best practices to purchase catastrophe insurance for its public buildings.
industry, provides compulsory, affordable earthquake insurance to homeowners, and has catastrophe insurance coverage from less than 3 percent to over 40 percent of residential buildings in urban areas.

The Japanese public-private earthquake insurance program for homeowners relies on the Japan Earthquake Reinsurance Company, an earthquake reinsurance pool backed by the government.
Figure 14 Operational DRFI Framework: Illustrative examples of financial protection GOVERNMENT - NATIONAL AND SUBNATIONAL HOMEOWNERS AND SMEs FARMERS THE POOREST (SOVEREIGN DRFI) (PROPERTY CATASTROPHE RISK INSURANCE) (AGRICULTURAL INSURANCE) (DISASTER-LINKED SOCIAL PROTECTION) The government of Colombia included the assessment of contingent In Taiwan, China, the Residential Earthquake India has developed detailed agricultural risk assessment tools to help In the Philippines, a survey is mapping out the poorest communities, making liabilities from disasters in the government’s 2011 fiscal risk Insurance Fund has developed an earthquake policymakers better understand the economic consequences of drought, it easier to deliver social welfare support, including assistance following a management strategy.
In Mexico, R-FONDEN—a probabilistic catastrophe risk modeling tool— risk model to strengthen the independence and professionalism of earthquake risk assessments.

quantify its effects, and investigate the impact of risk coping strategies, at disaster, to those most in need.

both the farm and state levels.


Kenya’s Hunger Safety Net Program is investing in poverty mapping to creates probabilistic simulations of potential material and human losses The preparation of the Southeast Europe and In Mongolia, livestock census and surveys are used to inform the government understand levels of household vulnerability.

The International Livestock from disasters.


Caucasus Regional Catastrophe Risk Insurance about the economic and fiscal impact of adverse weather events, and in the Research Institute developed models to understand drought risk in Facility includes extensive multi-hazard country risk design and pricing of index-based livestock insurance policies.
northern Kenya Africa Risk View, the technical model underlying the African Risk Capacity risk pool, combines existing rainfall-based drought early warning models with data on vulnerable populations to form a standardized approach for estimating the cost of responding to food insecurity across the continent.
Contingent lines of credit provide developing countries with funds The Turkish Catastrophe Insurance Pool, a public- The Index-Based Livestock Insurance Pilot in Mongolia protects the livelihoods The Productive Safety Net Programme (PSNP) in Ethiopia aims to help the immediately following disasters.
Products are offered by the World private partnership with the domestic insurance of 11,000 herders, or 22 percent of all herders in piloted provinces in 2012. rural poor facing chronic food insecurity to resist shocks and become food India’s weather-based crop insurance has been in place since 2007 for 11 growing seasons, with 11.6 million farmers and $370 million covered in the self-sufficient.

The PSNP includes including continent grants with the World Bank for emergency scale up.

most recent season.
most recent season.

The national crop insurance program, operating since Insurance products offered through the ‘Center for Agriculture and Rural 2010, offers more than 1.1 million farmers a total of $67 million coverage in Development Mutual Benefit Association (CARD MBA)’ in the Philippines are yield crop insurance.
In Morocco, the government and the agricultural mutual insurance company have established a crop insurance program for cereal crops that currently covers 700,000 hectares and will soon be extended to fruit trees.

mandatory for members of a network of institutions including CARD NGO and CARD Bank, providing scale and preventing adverse selection.
The government of Mexico established a post-disaster loss reporting A public-private partnership, the Turkish Distribution of insurance policies in the Moroccan multi-peril crop insurance HARITA, (since renamed to R4), was launched in Ethiopia in 2007 as a pilot mechanism managed by the Natural Disaster Fund (FONDEN).
Affected Catastrophe Insurance Pool relies on the domestic program takes place either by linkage to loans made by Crédit Agricole or by program to address the needs of small-scale farmers through drought states can therefore access timely payments from FONDEN, reducing insurance market for the distribution and direct marketing of MAMDA, the sole provider of agriculture insurance in the insurance, credit, and risk reduction, allowing farmers to pay for insurance time-consuming coordination problems.
settlement of claims.

country, structured as a mutual.

through labor, an idea based on “food-for-work” programs.
DELIVER FUNDS TO BENEFICIARIES In the Cook Islands, the establishment of the government’s Disaster MiCRO’s coverage in Haiti is bundled with The national crop insurance program in India uses GPS-enabled mobile Emergency Trust Fund has served to reduce delays in emergency loans from Fonkoze, the country’s largest phones and video recording technology to improve crop-cutting experiments response.

microfinance institution.


A collective voluntary insurance scheme against earthquakes in Manizales, Colombia uses the property tax system to collect insurance premiums.

and the accuracy of claims assessments, which also reduces fraudulent claims.

Claims settlement takes place through direct payment to bank accounts.
LINKAGES TO DISASTER RISK MANAGEMENT Mexico’s natural disaster fund FONDEN has evolved to include financial After setting up the TCIP, the government of Indian farmers’ agricultural insurance premiums are now based on their Members of PSNP households must participate in productive activities accounts to finance investment in risk reduction.
It promotes informed Turkey legally abolished its obligation to fund the individual risk profile after the national crop insurance program moved to to build more resilient livelihoods, such as rehabilitating land and water decision by requiring state governments to complete a risk assessment reconstruction of residential dwellings following a risk-based “actuarial regime”.
This allows farmers to see the riskiness of resources and developing community infrastructure, such as rehabilitating (including development of a risk atlas) before becoming eligible for risk earthquakes.

It also strengthened building planting different crops and choose appropriately.

rural road and building schools and clinics.

reduction project financing.

construction codes and ensured they were adhered to.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 67 68 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S VI contains links to additional information for Once a strategy has been developed, the government these examples.

The government of Colombia, followed by can formulate an action plan outlining specific steps it will take to implement its policy goals over the next two to three years.
While the government’s Panama and the Philippines, was among the longer-term strategy is likely to remain in place for first governments to develop and publish a five to ten years, the action plan should be a living comprehensive disaster risk financing strategy.

Engaged in identifying and managing the fiscal risk posed by natural disasters since the mid-2000s, the document; the government may want to regularly review and update it, reflecting changes and developments in implementation.
Risk Management Unit of the Ministry of Finance Monitoring and evaluation is crucial during the led the strategy’s preparation (see Table 6).

strategy’s implementation to identify what works, In the Philippines, the National Treasury within the what doesn’t work, and why, and subsequently refine the policy goals and actions.

This includes both Department of Finance finalized a national financial monitoring progress as well as evaluating the impact protection strategy in 2014 (see Table 7).
thereof and results achieved.

Continuous feedback Table 6 Government of Colombia's policy strategy for public financial management of disaster risk OVERARCHING GOAL: The Ministry of Finance seeks to assess, to manage, and to reduce its contingent liability related to natural disasters to support achievement of macroeconomic stability and fiscal balance.

POLICY OBJECTIVES: 1.

Improve identification and understanding of fiscal risk due to natural disasters; 2.
Strengthen financial management of disaster risk, including the implementation of innovative financial instruments; and 3.

Enhance catastrophe risk insurance for public assets.

To achieve its objective of enhancing catastrophe risk insurance for public assets over the next five to ten years, the Ministry of Finance will: 1.
Build an information system on public buildings, including information on physical characteristics of buildings and insurance policies already in effect; Example of longer-term actions to achieve Policy Objective 3: 2.

Partner with other public agencies and authorities to establish a centralized system for purchasing and managing insurance for government buildings, starting with the health and education sectors; 3.
Improve insurance requirements for buildings and road infrastructure concessions, that align with international reinsurance market technical standards; and 4.

Share the Ministry of Finance’s experience by providing best practice insurance guidelines to subnational governments, in collaboration with the country’s disaster risk management agency.

Source: Government of Colombia, 2013.


PART 02 Table 7 The government of the Philippines’ national strategy for disaster risk financing and insurance OVERARCHING GOAL: disaster shocks; and (ii) reduce the impact on the poorest and most vulnerable and prevent them from The Department of Finance seeks to (i) sustain economic growth and protect development gains from falling into a cycle of poverty.

1.
1.

National Level: Improve the financing of post-disaster emergency response, recovery, and reconstruction needs.

POLICY OBJECTIVES: 2.

Local Level: Provide local governments with funds for post-disaster recovery and reconstruction efforts.

3.

Individual Level: Empower poor and vulnerable households and owners of small and medium-sized enterprises to quickly restore their livelihoods after a disaster.

4.

Risk Analytics: Use disaster risk data to support decision making on financial protection.
Examples of actions to achieve Policy Objective 1: To achieve its objective of improving the financing of post-disaster funding needs at the national level, the Department of Finance will: 1.

Improve the financing of post-disaster emergency response, recovery, and reconstruction needs; 2.

Build up multi-year reserves through annual contributions to a response contingency fund set aside for post-disaster response efforts; and 3.
Use risk transfer to access international private reinsurance and capital markets Source: Government of the Philippines, 2014. from monitoring and evaluation enables an iterative While it can offer countries many possibilities in process with regular refinement and adjustments to addressing the financial impact from disasters, both the strategy and action plan.
This is important financial protection policies cannot be sustainable not only when directly looking at the benefits and cost of risk financing instruments.

A better understanding of the public finance implications of risk financing instruments helps understand their true value.
While a $3.2 million payout by CCRIF to St. Lucia following a 2010 hurricane may have only represented 0.7 percent of total expenditure, this was an estimated 49.3 percent of the total contingency budget available (Bevan and Cook, 2014).

unless they are integrated into a larger framework of risk reduction activities.
Once a government is addressing the most direct human suffering from disasters, financial protection can help protect society against many of the direct and indirect effects that cannot be reduced or prevented.
Improved evidence to better understand the benefit and costs of alternative risk financing activities helps governments develop more effective risk management strategies overall by deciding when it Disaster risk financing and insurance is only one is prudent to invest in risk financing and when other aspect of comprehensive disaster risk management.

options should be chosen first.


F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 69 70 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Annex I: Expanded Decision Tree for Disaster Risk Financing and Insurance Engagement by Governments Determine and prioritize specific problems to address in the short-* and long-term Do I have suffi cient financial risk and other information to identify solutions to these problems?
YES NO Identify financial impacts, such as direct impact on government’s budget; impact on the poor, etc.

Am I aware of the underlying factors causing this impact?

YES NO Do I understand the financial impact of natural disasters on my country?

YES NO Conduct in-depth diagnostic of risk financing needs Does diagnostic reveal suffi cient information on underlying factors to identify financial problems and solutions?
YES NO Conduct preliminary diagnostic of financial impact Does diagnostic reveal any financial impacts that concern me?

YES NO * If there are concrete actions that could reduce financial risk in the short-term, begin implementation of these actions in parallel.

Do I understand the financial impact of natural disasters on my country?

YES NO Conduct in-depth diagnostic of risk financing needs Does diagnostic reveal suffi cient information on underlying factors to identify financial problems and solutions?
YES NO Identify financial impacts, such as direct impact on government’s budget; impact on the poor, etc.

Am I aware of the underlying factors causing this impact?

YES NO Conduct preliminary diagnostic of financial impact Does diagnostic reveal any financial impacts that concern me?

YES NO Determine and prioritize specific problems to address in the short-* and long-term Do I have suffi cient financial risk and other information to identify solutions to these problems?
YES NO Define a set of long-term policy objectives (next 5-10 years) and a strategy to achieve them Do I understand the short-term actions required to implement this strategy?

YES NO Define a short- to medium-term action plan for the next 2-3 years to implement policy objectives as set out in strategy Do I have human, technical, and financial resources as well as partnerships in place to implement the action plan?
YES NO BEGIN IMPLEMENTATION SEEK ADDITIONAL SUPPORT MAINTAIN STATUS QUO 71 Benefits of seeking more information outweigh costs?

YES NO F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 72 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Annex II: Some commonly asked questions when considering disaster risk financing and insurance Why should the government invest in risk market infrastructure?

(And what does that mean anyway?)


Risk market infrastructure is the public goods and institutions to align incentives of the private sector with those of the beneficiary.

Specifically this requires building or improving systems for collection, auditing, financing, and managing data; product distribution, underwriting, and portfolio and claims management; as well as adapting the country’s legal and regulatory framework to support catastrophe risk insurance markets.
Public investment in this infrastructure can lower the cost of insurance for beneficiaries, enable the development of insurance markets, and encourage demand while avoiding the possible disadvantages and sustainability issues that direct premium subsidies can create.

Often, government already possesses such data, but it is not accessible for the purpose of developing insurance solutions.
High quality data41 is indispensable for developing insurance markets, as it forms the basis for effective and sustainable insurance solutions for all segments of society.
Agricultural insurance products for low-income farmers or herders, for example, are usually built on indices that use agricultural or climatic data.42 Only an index that accurately reflects conditions experienced by the farmer is likely to provide cost-effective, reliable protection with low basis risk (see also next question on index insurance).
Policy makers play an important role in establishing a framework for data collection, auditing,43 financing, and management, as well as equal access to this data by all market participants.

For example, the government can support investments in audited area average yield data— average crop yield in a given area, controlled for quality and accuracy, that indicates harvest size—enabling the construction of indexes that reliably protect farmers.
Reliable data auditing and data management are also necessary for governments if they hope to access international reinsurance markets, which require a high standard of data to develop and price insurance products.

If these companies have concerns about how the data is audited, they will charge significantly higher premiums.

An enabling legal and regulatory framework for insurance market development is also crucial.
Policy makers need to decide on the legal foundation for catastrophe risk insurance products and determine the capital and reinsurance requirements for insurance companies underwriting the risk.
For example, the World Bank Global Index Insurance Facility assisted the Conférence Interafricaine des Marchés d'Assurances—the regional body of the insurance industry for 14 countries in francophone Africa—in drafting amendments to their current regulation to allow for micro-insurance, including agricultural index insurance.

This has been ratified by all 14 ministers of finance.
Banking regulations may also be relevant, since linking agriculture insurance to loans to the rural sector is often an effective way of achieving large scale outreach of agriculture insurance.

In India, for example, all loans to the rural sector must be accompanied with insurance.

This protects rural banks against agricultural shocks; protects the farmer through insurance; and can increase rural lending, leading to increased productivity.

What is index insurance and should I consider it?


Unlike traditional insurance indemnity-based products that requires the assessment of individual losses following an insurable event, index-based (including parametric) insurance policies make payouts based on a predetermined trigger, such as crop yield estimates, in a given geographical area.

Other triggers could be based on the location or intensity of a natural hazard, such as wind speed, rainfall levels, or ground acceleration from earthquakes.
The particular index used can be tailored to the availability of data, such as using a parametric index when only hazard data are available (which pays out on a given hazard event), but using a modeled loss index when exposure data are available (which pays out in line with loss modelled using actual exposure data and the parameters such as wind speed from the actual event).
Parametric coverage demands improved accuracy of hazard risk data collection systems because of the heavy reliance on objective measurement of weather and hazard parameters.

Index insurance offers several advantages in relation to traditional or indemnity insurance, such as quicker payouts, lower administrative costs, and reduced moral hazard and adverse selection .
For example, at the micro-level it allows domestic insurance companies to offer simple and transparent solutions to farmers to transfer weather risks such as drought, excess rainfall, or low temperatures.

But index insurance is not without its challenges.

In particular basis risk, implicit in all index insurance, is the risk that the index measurement will not match individual losses.
For example, an insured individual or asset may experience a loss from a disaster that does not reach the threshold of the set trigger and hence does not lead to a payout.

Alternatively, a payout could be triggered without any damage and losses incurred.

Improved accuracy of hazard data collection systems, increased openness and centralization of historical data, and better quality risk assessments could reduce basis risks, enabling a more efficient and effective use of parametric insurance.
For any government it is crucial to understand basis risk given the proposed insurance options, and to carry out a cost-benefit analysis of different potential indexes with different levels of basis risk.

What role do premium subsidies play in disaster risk financing and insurance?

Achieving scale is fundamental to the sustainability of insurance programs at the country level, as this enables costs to be spread among numerous policyholders.
Government policies play an important role in increasing outreach and achieving this scale and can reduce the cost paid for insurance by beneficiaries in many different ways.

As governments make policy decisions, they should limit public subsidy programs to those that minimize distortions of market price signals and keep in mind that premium subsidies are not always economically efficient.
Often practitioners focus on public subsidy programs as a way of making insurance more affordable and achieving scale.

There are, however, several disadvantages to providing direct premium subsidies.

For example, they can lead policyholders to underinvest in risk reduction activities—such as irrigation or diversifying crops—or to investing in nonviable crops as they are insured against crop failure.
In addition, subsidies by the government are often not sufficiently targeted to reach the poorest in society and once put in place they are politically very difficult to phase out.

Direct subsidies, however, could be justified as part of a social safety net program, where the government uses the insurance industry as a delivery system to distribute financial assistance to households in need.
Rather than, or in addition to, providing direct premium subsidies, governments or donors can invest in overcoming market inefficiencies that in developing countries often cause underinvestment by insurance companies.

For example, the government could provide subsidies by paying for risk-related data; acting as a reinsurer of last resort; or enforce or encourage the buying of insurance.
For instance, many large- scale agricultural insurance programs in low- and middle-income countries, such as in India or China, have achieved scale in part due to insurance being bundled with agricultural credit on a compulsory basis.

Turkey’s national catastrophe risk insurance program, which currently protects over six million households, achieved scale in part due to coverage being compulsory for homeowners.
The government of India significantly subsidizes the cost of providing data to the country’s private agriculture insurance market.

Similarly, the government of Mongolia pays for the collection of all data used in its Index-Based Livestock Insurance Scheme and provides it to accredited insurance companies.
It also provides a fully-financed social F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 73 74 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S safety net to all farmers at no additional cost that kicks in when major losses exhaust insurance payouts.

In addition, government extension workers provide education to herders about livestock insurance and how it can complement holistic herd risk management.
How can catastrophe risk pools benefit a disaster risk financing and insurance program?

By aggregating risk into larger, more diversified portfolios, catastrophe risk pooling at the national or regional level between countries can reduce the cost of accessing international insurance markets.

Pooling risks generates diversification benefits that are reflected in reduced insurance premiums (see Figure 15 which illustrates a total premium and its components before and after risk pooling).
In addition to aggregation and scale, catastrophe risk pooling can accumulate financial reserves over time, allowing participants to self-insure or cover the first loss from these funds.

By increasing risk retention—which reduces the probability of an insurance payout—participants can achieve a further reduction in insurance premiums (Cummins and Mahul, 2009).

The Pacific Catastrophe Risk Insurance Pilot, launched in 2013, illustrates how risk pooling can reduce premium costs.
Country policies were placed on the international reinsurance market as a single, diversified portfolio, significantly reducing the cost of catastrophe coverage compared to the cost of individual governments maintaining reserves or independently purchasing insurance.

The six participating Pacific island countries have obtained an estimated 50 percent reduction in premium payments compared to what they would pay if buying the same coverage individually.
Figure 15 How insurance premiums benefit from risk pooling and improved risk data Uncertainty Loading Cost of Capital (reserves and cost of risk transfer) Uncertainty Loading Cost of Capital (reserves and cost of risk transfer) 1.

Lower reinsurance costs due to better structured and diversified portfolio 2.

Joint reserves to retain the first aggregate loss Operating Costs Operating Costs Economics of scale in operating costs (e.g.
fixed costs) Annual Expected Loss Annual Expected Loss Underlying risk is unchanged Technical Insurance Premium Technical Insurance Premium Before risk pooling Weak risk information Aft er risk pooling Improved risk information Source: World Bank-GFDRR Disaster Risk Financing and Insurance Program Figure 15 How insurance premiums benefit from risk pooling and improved risk data Annex III: Natural Disaster Losses 1990-2012, in 2012 US$ millions AFRICA $ 16,821 $ 1,073 EARTHQUAKES $ 6,895 $ 93 WEATHER-RELATED $ 9,926 $ 981 TOTAL LOSS INSURED LOSS ASIA $ 1,292,907 $ 111,601 EARTHQUAKES $ 596,857 $ 46,521 WEATHER-RELATED $ 696,050 $ 65,080 EUROPE $ 366,363 $ 108,682 EARTHQUAKES $ 65,379 $ 4,502 WEATHER-RELATED $ 300,984 $ 104,181 NORTH AMERICA EARTHQUAKES $ 959,159 $ 536,499 $ 48,746 $ 22,237 WEATHER-RELATED $ 910,413 $ 514,263 OCEANIA/AUSTRALIA $ 69,515 $ 41,243 EARTHQUAKES $ 29,456 $ 22,690 WEATHER-RELATED $ 40,059 $ 18,554 SOUTH AMERICA $ 135,448 $ 18,988 EARTHQUAKES $ 51,017 $ 9,747 WEATHER-RELATED $ 84,431 $ 9,242 WORLD $ 2,841,077 $ 818,554 EARTHQUAKES $ 798,350 WEATHER-RELATED $ 2,042,728 $ 105,788 $ 712,766 Source: Swiss Reinsurance Corporation; all figures rounded to nearest million Source: World Bank-GFDRR Disaster Risk Financing and Insurance Program F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 75 76 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Annex IV: Insurance and the financial resilience of countries The full story of disaster losses cannot be told without looking at the financial vulnerability of insignificant when insurance coverage reaches 60 percent of disaster losses.45 countries.
For example, the macroeconomic cost of natural disasters is directly related to a country’s development of property catastrophe insurance markets.

Analysis has shown that following a major natural disaster, average decline in GDP growth (0.8 percent) and cumulative permanent loss (2.53 percent) are driven by uninsured losses, whereas In the absence of strong indicators on the financial vulnerability of countries, non-life insurance penetration can be seen as a proxy for this aspect of financial resilience.
The level of non-life insurance penetration, however, varies widely around the world (see Figure 16).

the effects of insured losses are insignificant (von A comparison of a number of recent catastrophic Peter, et.

al., 2012).

The pivotal role played by the disasters highlights the low percentage of direct private insurance sector is further highlighted by loss insured, especially in low- and middle-income findings that show cumulative GDP loss becoming countries (see Figure 17).
Figure 16 2012 Penetration of non-life insurance, premiums as percentage of GDP P D G f o % s a s m u m e r P i 5% 4% 3% 2% 1% 0% North America Oceania Europe Latin America Asia Africa World & Caribbean Source: Authors with data from Swiss Reinsurance Corporation.

While this gives an indication of the state of development of insurance markets, it is important to note that catastrophe risk insurance is a small fraction of overall non-life insurance.
Figure 17 Insured versus uninsured loss of selected events Uninsured Losses Insured Losses i c m o n o c E l a t o T s e s s o L 100% 80% 60% 40% 20% 0% In d o n esia (E Q Tsu n a m i 2 0 0 4) C olo m bia (E Q Ar m e nia 19 9 9) M e xico (E Q M exico City 19 8 5) N e w Z e ala n d (E Q 2 011) U.S. (H U K atrin a 2 0 0 3) C hile (E Q 2 010) P akista n (E Q 2 010) H aiti (E Q 2 010) H o n d uras (H U Mitch 19 9 8) In dia (E Q G ujarat 2 0 01) Fra nce (Stor m Loth ar 19 9 9) El S alva d or (E Q S a n S alva d or 2 0 01) In d o n esia (E Q 2 0 0 6) Ja p a n (E Q & Tsu n a m i 2 011) U.S. (E Q N orthrid g e 19 9 2) P akista n (E Q K ash m ir 2 0 0 5) In dia n O ce a n (Tsu m a ni 2 0 0 4) Turkey (E Q Iz m it 19 9 9) Source: World Bank Disaster Risk Financing and Insurance Program.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 77 78 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Annex V: Further Information on Disaster Risk Financing and Insurance Initiatives Discussed INITIATIVE FURTHER INFORMATION Index-based livestock insurance in Kenya and Ethiopia http://livestockinsurance.wordpress.com/index/ Turkish Catastrophe Insurance Pool http://www.gfdrr.org/gfdrr/sites/gfdrr/files/Chapter_14-Turkey-Disaster_Risk_Management_in_ Turkey.pdf India National Agricultural Insurance Scheme http://siteresources.worldbank.org/EXTDISASTER/Resources/India_mNAIS_Final.pdf India Weather-Based Crop Insurance Scheme http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-5985 Romanian Catastrophe Insurance Scheme http://www.wfcatprogrammes.com/c/document_library/get_ file?folderId=39377&name=DLFE-2517.pdf Mongolia Index-Based Livestock Insurance Program http://gfdrr.org/sites/gfdrr.org/files/ DRFI_Mongolia%20IBLIP_Final.pdf Pacific Catastrophe Risk Assessment and Financing Initiative http://pcrafi.sopac.org/ Ethiopia Horn of Africa Risk Transfer for Adaptation (HARITA) http://unfccc.int/files/adaptation/application/pdf/swiss_re.pdf Philippines CLIMBS micro-insurance product http://www.munichre.com/en/media-relations/publications/press-releases/2010/2010-10-11- press-release/index.html African Risk Capacity http://www.africanriskcapacity.org/ Malawi weather-based crop insurance http://siteresources.worldbank.org/EXTDISASTER/Resources/MalawiDerivative_Final.pdf MAIPARK http://www.maipark.com/content/display/background Malawi sovereign weather derivative http://siteresources.worldbank.org/EXTDISASTER/Resources/Malawi_WeatherInsurance_Final.pdf Munich Climate Insurance Initiative http://www.climate-insurance.org/front_content.php?idcat=858 Jakarta flood micro-insurance product https://www.gfdrr.org/sites/gfdrr.org/files/ DRFI_WRC_Paper_FINAL_April11.pdf Caribbean Catastrophe Risk Insurance Facility http://ccrif.org/ Alliance of Small Island
 States proposal of a multi-window insurance mechanism Government of Colombia disaster risk financing and insurance strategy policy note http://unfccc.int/files/kyoto_protocol/application/pdf/aosisinsurance061208.pdf http://siteresources.worldbank.org/EXTDISASTER/ Resources/8308420-1342531265657/8764015-1392600612835/FINAL_Colombia_Policy_ Strategy_for_Public_Financial_Management_of_Natural_Disaster_Risk.pdf Mexico Natural Disaster Fund (FONDEN) https://www.gfdrr.org/fondenmexicosnaturaldisasterfundareview Vietnam Agricultural Insurance Pilot http://cgd.swissre.com/features/Agricultural_reinsurance_in_Vietnam.html Southeast Europe and Caucasus Regional Catastrophe Risk http://www.worldbank.org/projects/P110910/south-east-europe-caucasus-catastrophe-risk- Insurance Facility insurance-facility?lang=en and http://www.europa-re.com/ Endnotes <sup>1</sup> All dollar amounts are U.S. dollars unless otherwise indicated.
<sup>2</sup> Direct loss refers to the financial cost of destruction directly attributable to a natural disaster, such as the value of damage to buildings, infrastructure, cars and other durable goods, and crops.

<sup>3</sup> Indirect loss refers to the wider economic or social consequences arising from direct damage, such as business interruptions, decreased tax revenue, loss of necessitated public support for reconstruction of private assets and social and economic recovery programs.
<sup>9</sup> Aggravating factors included an election and the incoming government’s efforts to honor its commitments, especially to universal free primary education (Benson and Clay 2004).

<sup>10</sup> In 2006, the expected benefits outweighed the costs of purchasing such insurance.

<sup>11</sup> See Hallegate 2014 for a more in-depth discussion of the welfare impact of indirect disaster costs.

employment, or rise in poverty levels.


<sup>12</sup> The authors define average typhoon wind speeds in the <sup>4</sup> A cumulative output loss or a permanent reduction of a country’s GDP from its pre-disaster predicted rate of growth.

<sup>5</sup>This analysis uses Munich Re’s natural disaster (NatCat) data on direct losses from natural disasters from 1960- Philippines based on a catalogue of typhoons affecting the Philippines from 1979-2008.
<sup>13</sup> For example, agriculture is a centerpiece of the Kenyan economy, generating approximately 24 percent of annual GDP and approximately 50 percent of revenue from exports.

It is also an important source of employment, with 2011.

The analysis considers as “major” natural disasters over 70 percent of the population living in rural locations; those above a threshold defined by a minimum of 100 14 million are farmers and herders.

fatalities or $250 million in losses in constant 2011 U.S. dollars.
Small countries are those with landmass at or below the median size of all countries (roughly that of Honduras).

<sup>6</sup>In this report the term “farmers” refers to all agricultural producers.

Using the definition of the World Development Report 2008 on Agriculture for Development, agriculture consists of crops, livestock, agroforestry, and aquaculture.
<sup>7</sup>Disaster-linked social safety nets and cash transfers are usually aimed at the poorest groups in society, who often do not own any assets or livestock, and who cannot afford insurance products.

For example, agricultural insurance very often is targeted at groups earning a very low income, yet this is still a distinctly higher segment of society than beneficiaries of social protection programs.
<sup>8</sup>Contingent liabilities involve spending obligations <sup>14</sup> Based on a survey including 30 cooperatives, 220 large farms, and 20 corporate farms.

<sup>15</sup> http://www.gfdrr.org/sites/gfdrr.org/files/Kenya_PDNA_ Final.pdf <sup>16</sup> http://www.fao.org/NEWSROOM/en/news/2005/89775/ index.html.

Jan 8, 2014.

<sup>17</sup> Note that disaster risk financing and insurance instruments do not, as a primary function, reduce liabilities.
They reduce contingent liabilities—that is uncertain liabilities—by transferring the volatility of the cost to third parties.

Risk is transferred, loss is not.

<sup>18</sup> The importance of sound fiscal risk analysis and management practices is underscored by the recently revised IMF Fiscal Transparency Code.

arising from past events that will be incurred in the future <sup>19</sup> For more detail on PEFA Assessments see www.pefa.org if uncertain discrete future events occur.
Contingent liabilities can be further separated into explicit and implicit <sup>20</sup> Aon Benfield, Reinsurance Market Outlook, 2014 contingent liabilities.

Explicit contingent liabilities are legal or contractual obligations, such as government guarantees.
Implicit contingent liabilities are moral or expected but not legally required public obligations arising from public expectations or pressures, such as the bailout of banks (Cebotari et al 2009; Schiavo-Campo and <sup>21</sup> Munich Re NatCat Service <sup>22</sup> An accumulation of risk occurs when a portfolio contains a concentration of risks that might give rise to exceptionally large losses from a single event.

Tommasi 1999).
Tommasi 1999).

The variation in governments’ contingent <sup>23</sup> For an additional discussion of the potential for disaster liability to natural disasters across countries is driven in risk financing to support discipline in public financial great part by legally required or socially and politically management, also see Dana and von Dahnen, 2014.
F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 79 80 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S <sup>24</sup> Innovations in disaster risk financing and insurance in <sup>35</sup> http://www.wfcatprogrammes.com/c/document_ developed countries are not discussed for the purposes library/get_file?folderId=39377&name=DLFE-2517.pdf Feb of this paper.
For disaster risk financing and insurance 7, 2014. products and schemes in ASEAN countries, see WB/ GFDRR 2012 report “Advancing Disaster Risk Financing and Insurance in ASEAN Member States: Framework and Options for Implementation.” See also the 2013 OECD report “Disaster Risk Financing in APEC Economies: Practices and Challenges.” <sup>25</sup> This period was also marked by private sector innovation in risk financing instruments for large corporations, insurers, and governments of industrialized countries, instruments that eventually became accessible to governments of developing countries (such as insurance-linked securities).
<sup>26</sup> When Mongolia first created its Index-based Livestock Insurance Program the World Bank classified Mongolia as a low-income country.

In 2008, its classification changed to lower-middle-income.

<sup>27</sup> This timeline is not intended to be an exhaustive list.

Rather, based on discussions between the authors and international experts and practitioners, the products and <sup>36</sup> http://go.worldbank.org/Y8QYKWYBA0 Feb 7, 2014.
<sup>37</sup> The six participating countries are Cook Islands, the Marshall Islands, Samoa, the Solomon Islands, Tonga, and Vanuatu.

<sup>38</sup> http://www.oxfamamerica.org/static/media/files/ R4_Rep_Jul_Sept2013_WEB.pdf.

Feb 7, 2014.

<sup>39</sup> http://www.swissre.com/about_us/global_ partnerships/Swiss_Re_provides_Haitis_micro_ entrepreneurs_wproceeds.html.

Feb 7, 2014.

<sup>40</sup> http://www.artemis.bm/blog/2013/08/30/personal- parametric-weather-insurance-trialled-in-caribbean-by- ccrif/.
Feb 7, 2014.

<sup>41</sup> From an insurance perspective, data is high quality if it is reliable (so that it properly reflects the actual loss), timely (so that claims can be paid quickly), relevant (so the product offers reliable protection), audited to international reinsurance standards, and cost-effective.
programs on the timeline show key milestones that paved <sup>42</sup> Farm-level multiple peril crop insurance is generally the way for new developments and innovations in disaster not feasible for small farmers and herders as the low risk financing and insurance.

sums insured and high cost of auditing data make the schemes uneconomic.
Index insurance, on the other hand, <sup>28</sup> Countries have previously issued catastrophe (cat) has the advantage of being typically cheaper to deliver, bonds to protect property insurance pools, such as a 2001 but the quality of the index insurance product depends cat bond issued by the California Earthquake Authority significantly on the quality of the index, which in turn and the 2003 cat bond issued to protect the Taiwanese depends on the quality of the underlying data.
<sup>43</sup> Data auditing is the process of controlling data quality and assessing how the data is fit for the given purpose.

<sup>44</sup> Moral hazard means that an insured party is less likely to invest in risk reduction because loss will be borne by the insurance company.

Adverse selection means that only people at with the highest risk will buy insurance products, eventually rendering the market unsustainable.
<sup>45</sup> Whether or not it is cost effective for a country to purchase this level of coverage depends on the frequency of disasters and the cost of insurance.

Residential Earthquake Insurance Pool.

<sup>29</sup> A parametric trigger makes a payment upon the occurrence of a predetermined event.

<sup>30</sup> http://www.tcip.gov.tr/zorunlu-deprem-sigortasi- istatistikler.html.

Feb 7, 2014.

<sup>31</sup> http://unfccc.int/files/adaptation/application/pdf/ swiss_re.pdf.

Feb 7, 2014.
Feb 7, 2014.

<sup>32</sup> https://www.gfdrr.org/sites/gfdrr.org/files/ I_WRC_ Paper_FINAL_April11.pdf.

Feb 7, 2014.

<sup>33</sup> For more detailed discussion see http:// siteresources.worldbank.org/EXTDISASTER/ Resources/8308420-1339601356604/AIDP-Strategy-Note- 6May13.pdf.

March 30, 2014.

<sup>34</sup> http://www.gfdrr.org/sites/gfdrr.org/files/documents/ DRFI_Malawi_WeatherInsurance_Jan11.pdf.

Feb 7, 2014.

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F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S 83 84 F I N A N C I A L P R OT E C T I O N A G A I N S T N AT U R A L D I S A S T E R S Photo Credits If not indicated otherwise, photos used in this publication have been sourced from the following locations with full rights: World Bank Flickr Website United Nations Flickr Website All images in this publication require permission for reuse.
Abbreviations ADB ARC Asian Development Bank African Risk Capacity CARD MBA Center for Agriculture and Rural Development Mutual Benefit Association CAT DDO World Bank Loan with Catastrophe Deferred Drawdown Option CatMex CCRIF CLIMBS DFID Mexico sovereign parametric catastrophe bond (2006) Caribbean Catastrophe Risk Insurance Facility Philippines micro-insurance product U.K. Department for International Development FONDEN Mexico Natural Disaster Fund GFDRR HARITA IDB JICA MiCRO OECD PCRAFI PEFA PSNP Global Facility for Disaster Reduction and Recovery Ethiopia Horn of Africa Risk Transfer for Adaptation Inter-American Development Bank Japan International Cooperation Agency Microinsurance Catastrophe Risk Organization Organisation for Economic Co-operation and Development Pacific Catastrophe Risk Assessment and Financing Initiative Public Expenditure and Financial Accountability Ethiopia Productive Safety Net Program SECURE JICA Stand-by Emergency Credit for Urgent Recovery SME SOE TREIF UNFCCC UNISDR Small and Medium Enterprise State Owned Enterprise Taiwan Residential Earthquake Insurance Fund United Nations Framework Convention on Climate Change United Nations Office for Disaster Risk Reduction Disaster Risk Finance helps countries improve financial resilience against natural disasters by implementing sustainable and cost-effective financial protection policies and operations.
It supports governments, businesses, and households to manage the financial impacts of disaster and climate risks without compromising sustainable development, fiscal stability, or wellbeing.

Financial protection complements investments in risk reduction, prevention, and building resilience.

It addresses residual risk, which is either not feasible or not cost effective to reduce or prevent.
Only by looking at the financial impact of disasters comprehensively can governments build the financial resilience of society as a whole.

This publication proposes an operational framework to guide countries in developing and implementing such comprehensive financial protection policies.

It also takes stock of the progress in the field to date.
The Disaster Risk Financing and Insurance Program is a joint program of the World Bank’s Finance & Markets Global Practice and the Global Facility for Disaster Reduction and Recovery (GDFRR).

DRFIP has provided advisory services on disaster risk financing and insurance to more than 40 countries worldwide.

The program works along four priority areas to support four main beneficiary groups governments, farmers, homeowners and SMEs, and the poorest and most vulnerable.
With support from the Swiss State Secretariat for Economic Affairs (SECO), the DRFIP is working with selected middle-income countries to strengthen financial resilience and protect their fiscal balance.

This is one component of the broader Swiss-World Bank Group partnership on fiscal risk management for middle income-countries, which also includes a component on government debt and risk management.
ABOUT GFDRR The Global Facility for Disaster Reduction and Recovery (GFDRR) helps high-risk, low-income developing counties better understand and reduce their vulnerabilities to natural hazards, and adapt to climate change.
Working with over 300 national, community level, and international partners GFDRR provides grant financing, on-the-ground technical assistance helping mainstream disaster mitigation policies into country level strategies, and thought leadership on disaster and climate resilience issues through a range of knowledge sharing activities.

GFDRR is managed by the World Bank and funded by 21 donor partners.

WWW.GFDRR.ORG