A. Pre-Disaster Financing
Risk financing in this context defines an approach to financially plan for risk that cannot be reduced or avoided practically or cost-effectively. It involves the retention of risk combined with the adoption of a financing strategy to ensure that adequate funds are available to meet financial needs in the event of a weather-related disaster (Poole, 2014).
Pre-disaster financing contains the following steps
Failure to make adequate financial provisions against extreme weather events may bear heavy costs for the individual producer, agricultural enterprise and government, and have longer-term economic consequences. Countries can increase their financial resilience against extreme weather events by implementing sustainable and cost-effective financial protection strategies. The level of fiscal resilience to extreme weather events is a decision based on economic and social considerations and builds upon the risk assessment, impact assessment and DRM analysis.
Risk retention analysis is particularly relevant for governments, as they need sufficient funds for response and resilient recovery.
The Ministry of Finance will take the lead in cooperation with the Ministry of Agriculture and related ministries in charge of relief and recovery, infrastructure and social protection. Other ministries responsible for economic development and environment may be consulted.
Private sector involvement such as financial institutions and the insurance industry are key stakeholders. Civil society organizations (e.g. micro-finance institutions, producer cooperatives) know their members and could provide essential inputs when formulating a DRF strategy at the regional and local levels.
SYNERGIES: INSURANCE AND PRE-DISASTER FINANCING
Risk selection to be transferred to insurance industry
Risk retention analysis, by segmentation of weather risks according to frequency and severity, enables the government to define which weather risks should be transferred to a third party (e.g. (re)insurance industry).
Targeted mix of DRF and insurance (complementarity of mechanisms)
The “risk layering” approach shows how DRF and insurance complement each other with suitable products and enable the government to develop a DRF strategy with more affordable financial products, compared to ad hoc ex post financing.
(This applies also to individual producers and the private sector, which is better equipped to avoid negative coping strategies such as selling productive assets after a disaster).
Potentially better credit rating by credit rating agencies (if insured − macro level)
Local-level insurance could lead to easier access to credit for smallholder producers and small entrepreneurs.
At the regional level, by insuring the credit portfolio, rather than a farmer, the financial institutions could reduce their credit portfolio risk, potentially resulting in an easing of access to credit for smallholder producers and SMEs.