Innovative finance forresilient infrastructure
Preliminary findings
Centre for Global Disaster Protection& Lloyd’s of London

Partners:

The Centre for Global Disaster Protection, in partnershipwith Lloyd’s of London, convened experts from acrossthe financial services, development, humanitarian andengineering communities to catalyse new thinking on
how innovative financial instruments can help respond to
the global resilience challenge.
The importance of meeting this challenge was once
again highlighted during the 2017 hurricane season
which vividly illustrated the tremendous human andeconomic cost of natural disasters.
Globally, more than 11,000 lost their lives as a result ofdisasters (Swiss Re, 2018) and preliminary estimatessuggest total economic losses could be $300-330bn(Swiss Re, 2018 and Munich Re, 2018).
The North Atlantic hurricane season was notably active.
Hurricanes Irma and Maria demonstrated the devastating
impacts that extreme weather can cause on the lives andlivelihoods of vulnerable people, and the disruption it cancause to critical economic and social sectors. Maria, forinstance, resulted in damages and losses equivalent to226% of Dominica’s annual GDP, and large parts of thecountry remained without power several months on(Government of the Commonwealth of Dominica, 2017).

The economic and societal impacts of disasters aregrowing.
The average annual cost of damages has increased
almost 10 times since the 1970s (Swiss Re, 2018). This
growth is driven primarily by development in high risk
areas and, for some events, further exacerbated by theimpacts of climate change.
Looking forward, climate change is expected to increase
the frequency and severity of severe weather events(IPCC, 2014; IPCC, 2012). Rising sea levels further
amplify the risk in low-lying coastal areas.
Small Island Developing States in the Caribbean andPacific are particularly vulnerable to these changes.
More can be done to strengthen resilience and speed-up
recovery from disasters.
The magnitude and extent of impact across theCaribbean was vast, with some islands experiencing near
total damage (see Figure 1, below). Risk Management
Solutions (RMS) modelled estimates suggest that total
direct economic losses in the Caribbean from hurricanes
Irma and Maria were between $55 and 105 billion (RMS,2018). Indirect impacts, including disruption of criticalservices and business, further amplify the scale ofdisaster.

Poorly constructed & maintained infrastructure,including schools, hospitals, housing, roads andpower infrastructure are particularly vulnerable todisasters. Analysis by RMS suggests that Caribbean
damage costs from hurricanes Irma and Maria could
have been of the order of $16.5 billion less had
impacted buildings across all islands been
constructed according to 2018 design codes ($1.7billion reduction for subset of countries specified inFigure 2, see overleaf).
Making infrastructure, and the services it provides,
more resilient, would mean less damage, lower repair
costs, reduced injury and loss of life, less downtime,and, ultimately, better served communities. It would
get children back to school, people in their jobs, andkeep critical services like power and water online.
With the right design, it can deliver a host of cobenefits. This allows economies to reduce the impactof disaster and to recover more quickly.

Figure 1: Total damage percentages (economic loss/total exposure) by country for hurricanes Irma and Maria(RMS)

Collectively, these economic benefits from resilient
investments provide a long-term ‘resilience dividend’
which may exceed the additional costs of resilienceby a ratio of at least 4:1 (OECD, 2015; UK
Government Office for Science, 2012; FEMA, 2011).
For some poor countries, there may be soundeconomic reasons for underinvestment in resilient
infrastructure; for example, high discount rates or
scarce resources required elsewhere.
But there can also be other barriers such as: a lack offinance to meet resilience demands; uncertainties as
to how valuable the investment will be; difficulties inimplementing and enforcing building codes; orpolitical economy constraints.


Innovative finance for resilient infrastructure

Delays in recovery and reconstruction, mean thatthe short-term impacts of a disaster can havepersistent long-term consequences. Such delays
can result from a lack of timely finance, materials,preparedness, regulatory and contractual issues, or
capacity constraints.

01For example, more than half a million homes were
badly damaged or destroyed by the 2015
earthquakes in Nepal, but most people whose
houses were severely damaged continued to live in
temporary and improvised shelters more than 18
months later. Reconstruction was hampered by anumber of local factors (Kumar, 2016).

However, the most extreme events still risk acutedamage and disruption to service. For instance, RMS
analysis indicates that wind speeds from hurricanes Irma
and Maria were so ferocious that direct economic losses
across all islands would still have been ~80% of what
was experienced, even if damaged buildings had been
constructed to 2018 building codes.

If the benefits of building resilient infrastructure could bequantified and captured, this could help to finance theadditional costs and boost investments in resilience.

In such cases, the imperative is to design infrastructure
and critical services that can bounce back quickly,
prepare in advance and put in place capabilities andsystems that are able to deliver rapid finance to kick-start
recovery and reconstruction.

Resilience investments generate a quantifiable resilience
dividend. If some of this dividend could be captured using
innovative financial instruments, it would help finance thecosts of more resilient construction and building backsmarter.
Resilience investments often need to be complemented
by risk transfer solutions.
Resilient construction can play a crucial role in limiting
the damages from smaller, more frequent events.

In these cases, risk transfer solutions have a proventrack record: payouts from such schemes can happen indays or weeks. This compares to the 4-9 months
sometimes needed for multilateral financing or
humanitarian aid for reconstruction and recovery (WorldBank, 2017). Furthermore, setting out ex ante plans on
how payouts will be spent can help ensure thesepredictable payouts are put to best use.

Figure 2: Hurricanes Irma and Maria, RMS HWind 1-min sustained wind speed footprints, with modeled direct economic
loss estimates, and loss as a function of GDP proportionally displayed as circles for a subset of Caribbean countries

Innovative finance for resilient infrastructure02

Innovative finance for resilient infrastructure03What role for innovative finance?
The first Innovation Lab of the Centre in partnership with Lloyd’s, focussed on developing new financial
instruments that combine incentives for resilience with risk transfer. The Centre for Global Disaster Protection
is a partnership beween the UK Government and World Bank and works with governments and humanitarian agencies
to strengthen pre-disaster planning, catalyse innovative finance for resilience and use risk financing tools like insurance
to protect people and speed-up response and recovery. Lloyd’s continues to support this topic, and sees the Lab as apathway to building developing countries’ understanding of and access to the insurance products, in alignment with theInsuResilience and Insurance Development Forum goals. As part of these efforts a group of businesses at Lloyd’s havelaunched a Disaster Risk Facility, which pools $400m capacity along with the expertise to develop reinsurance solutions
for natural catastrophe risks in emerging economies.
The Innovation Lab brought together experts from the public and private sector, in an open format, to generate andincubate new solutions to meet identified problems. The first Lab of the Centre was held in January 2018 to investigate
financial products and structures that incentivize risk reduction and resilient rebuilding by bringing together elements ofproject financing and risk transfer.
The Lab was a dynamic working session with more than 50 participants working together from across the insurance,investor, engineering, humanitarian and development communities. Participants worked from real-world use cases
prepared in a pre-lab session, identifying, developing and stress testing possible solutions. It was supported by a teamof experts from Risk Management Solutions, Vivid Economics and re:focus partners, providing technical analyses.
Figure 3: The Innovation Lab process

Pre-lab

Early January

End of January

Innovation lab

Analytical team preparesframeworks and draft cases

Cases refined, key challenges
identified, use cases created

Real-world use cases
developed from pre-lab
sessionCreative process of building on
use cases, introducing newideas, looking at
implementation challenges

Developing initial productconcepts with quantitative
analyses

Feedback to refine productconcepts

Ideas taken forward bypartners, including
multilaterals, private sector or
the Centre

Socialise early results andinvite comment on the outputs

Post-lab

Early March

April

CHOGM

Innovation Lab Products
Four broad ideas emerged from the Innovation Lab. These range from ideas that have already been developed but
which can be re-purposed for these challenges which could be brought to market relatively quickly, through to ideas that,
although further from current practice, hold significant potential, as shown in the graphic on the next page.
Figure 4: Product concepts

Insurance-linked
Loan Package

Resilience
Impact BondResilience
BondResilience
Service Company

Incremental Innovation

Innovative finance for resilient infrastructure04

Insurance-linked Loan Packages
Concessional loans with integrated resilience conditions
This approach, requiring only small modifications from current practice, would explicitly integrate risk transfer
solutions into the (concessional) loans provided by international financial institutions. It would specify that the loans
should only be spent on infrastructure where resilience has been explicitly considered and built into the design. Resiliencewould be further incentivised by reduced upfront costs of insurance and/or offering more favourable lending terms (orequivalently, a grant element) upon demonstration that identified measures had been delivered. Continued availability of
those terms would be conditional on evidence of adequate maintenance.


Resilience Incentive: Prior actions in lending agreements, upfront saving on insurance premiums reinvested inresilience and/or more favourable lending terms offered once resilience actions have been completed
Insurance Element: Earmarking portion of the loan for insurance or making insurance provision a loan condition.
Insurance element could contain a multiyear commitment. Pricing would assume the resilience measures are in place
but with options to review efficacy of resilience measures over time. With resilience, the premium would be lower,providing an upfront dividend that can at least partially offset any cost of implementing resilience
Potential Use Case: Suitable for financing large critical infrastructure such as roads, bridges, power, water andwastewater facilities, where ongoing maintenance and resilience to disaster are crucial

Resilience Impact Bond
A bond with outcome-based repayments that are focused on resilience and social goals
The RIB concept would explicitly transfer the risk of providing resilient services to private investors. Investors would
provide upfront financing to ensure that critical services requiring infrastructure (e.g. education, health, power) are more
resilient. Returns would come through payments made by the donor (or ‘outcomes funder’), but with returns varying
according to either the ongoing provision of resilient services, or other conditions stipulated by the funder that aim to proxythis. One such condition might include adequate natural catastrophe risk insurance coverage. This idea builds on theemerging practice of development impact bonds (DIBs) which DfID is already exploring as an innovative way to leverage
private sector investment and delivery expertise in pursuit of development goals.
Resilience Incentive: Investors provide upfront financing to be used for providing resilient services. Added incentive
for investors as returns will be greater if the project delivers greater resilience against shocks
Insurance Element: Risk management and insurance plans could be preconditions for outcome-based payment
and/or would be encouraged by the prospect of higher returns if the services provided are demonstrably more resilient
Potential Use Case: Suitable for financing resilience of critical services that include an infrastructure element, including
education, healthcare, social, and emergency services

Resilience Bond
A catastrophe bond where bond coupon payments are reduced when resilience measures are implemented
A catastrophe bond (cat bond) which takes account of the impact of resilience measures. In the event of an eligible
disaster, investors lose all or a portion of the capital value of the bond, which is transferred to the bond sponsors. Resilience
Bonds also account for the impact of resilience measures through reducing bond interest payments once these measures
are implemented. This reflects the lower risk bond investors bear. This idea has been identified in previous work (re:focus,2017), but more work is required to bring the product concept to market.
Resilience Incentive: The difference in bond coupon payments is captured as a “rebate”, which can be used tosupport project implementation
Insurance Element: Catastrophe bond features transfer risk to investors through insurance intermediaries
Potential Use Case: Suitable for financing risk reduction initiatives, which provide a range of resilience dividends
across various beneficiaries. For example, to finance storm surge defences at ports.

Resilience Service Company
An agent who pays for and implements resilience measures upfront in return for a share of future insurance
premium savings
A ReSCO would pay for and implement resilience measures upfront, recouping its investment from the risk based
insurance premiums by reducing volatility. Based on Energy Service Companies who design, finance and take theperformance risk of energy efficiency investments, sharing the energy cost savings they generate between themselves andthe asset owner. ReSCOs would overcome the unwillingness of asset owners to incur the upfront costs from resiliencemeasures. In the first instance, proof of concept may need to be delivered by a development partner or a Public Private
Partnership. Donor support would be required in scenarios where insurance uptake is very low. Further work is needed todevelop and test this idea.
Resilience Incentive: Future savings from resilience measures incentivise the ReSCO to pay for those measures
upfront
Insurance Element: Risk-based priced insurance is integral for resilience savings to exist
Potential Use Case: Suitable for financing simple retrofit measures across multiple smaller structures. For example
roof anchors and opening protection to increase resilience to hurricane wind damage

Recommendations
Policy makers

Invitation to continue to the dialogue

These ideas will be developed further in the coming
months and we welcome your engagement.

Understand the risks and invest in good risk data.
Risk information is the basis for planning anddecision making in many areas of disaster risk
management, including resilient infrastructure, predisaster planning and purchasing insurance.

Prioritise resilience as a key part of development andeconomic growth. Build institutional capabilities andmainstream resilience into planning, policymaking
and investments.

Invest in strengthening preparedness and planning,particularly in critical economic and social sectors.

Develop incentives, systems, practices andinnovative financing instruments that encourage bothresilient construction and, critically, ongoing
maintenance

Develop disaster risk financing strategies that areintegrated with disaster preparedness plans andwhich use risk financing tools, including insurance, tofinance more rapid and more cost-effective response
and recovery from disasters.

Lloyd’s, the Centre for Global Disaster Protection and ourpartners will be refining these ideas, ahead of thepublication of a final report in June 2018. We would value
your scrutiny and feedback on these emerging ideas –what might work, what will not work and how they can beimproved.
For more information on how to engage in the process,please contact:
Trevor Maynard, Head of Innovation at Lloyd’s
innovation@lloyds.com

Nicola Ranger, Interim Director of the Centre forGlobal Disaster Protection
n-ranger@dfid.gov.uk

Insurance industryTake part in resilience discussions with policymakers,
offering expertise to help facilitate risk understanding
including which insurance products are available andhow they can be used to transfer risk off government
balance sheets.

Stand ready to assess the impact of resiliencemeasures on risk levels and price this into insurance
policies. Insurers have expertise in risk modelling andassessment that could be beneficial for policymakers.

Make allowances for reduced risk levels in insurance
premiums. This already takes place in theunderwriting process, but further work is needed tocapture resilience dividends.

Innovative finance for resilient infrastructure06

References

Acknowledgements

FEMA. 2011. Building Community Resilience byIntegrating Hazard Mitigation: Social and EconomicBenefits. Washington D.C.

Government of the Commonwealth of Dominca.
2017. Post-Disaster Needs Assessment Hurricane
Maria, September 18th 2017.

We would like to thank our partners, Risk ManagementSolutions, Vivid Economics and re:focus partners and theinstitutions that attended and contributed to the first
Innovation Lab.

IPCC. 2014. Summary for Policy Makers In Climate
Change 2014: Impacts, Adaptation and Vulnerability
Part A Global and Sectoral Aspects Contribution ofWorking Group II to the Fifth Assessment Report ofthe Intergovernmental Panel on Climate Change.

IPCC. 2012. Summary for Policymakers In:
Managing the risks of extreme events and disasters
to advance climate change adaptation. Cambridge
University Press.

Kumar, N. 2016. Why Nepal Is Still in Rubble a Year
After a Devastating Quake Time. Apr.

Munich Re. 2018. Natural Catastrophe Review:
Series of Hurricanes Makes 2017 Year of Highest
Insured Losses Ever

OECD. 2015. Economic Aspects of DRR. Sendai,Japan.



Ranger, N. and Surminski, S. 2013. DisasterResilience and Post-2015 Development Goals: TheOptions for Economics Targets and Indicators.
London, UK.

re:focus. 2017. A Guide for Public-Sector Resilience
Bond Sponsorship. San Diego, California, US.

Swiss Re. 2018. Sigma Explorer



UK Government Office for Science. 2012. Foresight:
Reducing Risks of Future Disasters – Priorities forDecision Makers. London, UK.

World Bank 2017. Sovereign Climate and Disaster
Risk Pooling”. Washington D.C., U.S.

The Centre for Global Disaster Protection waslaunched by UK Prime Minister Theresa May in July 2017with the goal of working with governments to strengthen
pre-disaster planning, catalyse innovative finance forresilience and use risk financing tools like insurance toprotect people and speed response and recovery. TheCentre brings together partners including the UK
Government, the World Bank, civil society and the private
sector with the shared goal of enhancing the financial
resilience of developing countries to climate anddisasters. The Centre is funded by the UK Department
for International Development (DfID).
Disclaimer
This report has been co-produced by Lloyd's and theCentre for Global Disaster Protection (“the Centre”) for
general information purposes only. This does not reflect
the views of the UK Department for International
Development or the World Bank Group and additionally
does not necessarily reflect the views of any of ourpartners. While care has been taken in gathering the dataand preparing the report and the information herein,
Lloyd's, the Centre and RMS do not make any
representations or warranties as to its accuracy orcompleteness and expressly excludes to the maximum
extent permitted by law all those that might otherwise beimplied.
Lloyd's, the Centre, DFID, RMS and the World Bank
Group accept no responsibility or liability for any loss ordamage of any nature occasioned to any person as aresult of acting or refraining from acting as a result of, orin reliance on, any statement, fact, figure or expression of
opinion or belief contained in this report. This report does
not constitute advice of any kind. RMS results areincluded in this report for general information purposes
only and none of the content is intended to constitute risk
management advice or a recommendation to make (orrefrain from making) any kind of risk management
decision and may not be relied on as such. Any results ofRMS’ contained in this report are RMS’ proprietary andconfidential information and may not be used by any
recipient of this report without RMS’ prior written consent.
© 2018All rights reserved

Innovative finance for resilient infrastructure07