STEP 1: Analysing and Determining the Risk Retention Capacity
Financial protection can be established internally through the accumulation of funds set aside for future use or obtained externally through pre-arranged credit facilities. In addition, the banking sector, capital markets and international lending institutions are sources of risk financing.
For assessing the financial demand, consideration must be given to how much funding will be needed to match the capacity to disburse required funds:
- Analyse and determine the risk retention capacity of individual producers and SMEs: Informal mechanisms such as borrowing are usually used by individuals and SMEs, although covariant shocks pose challenges to the lenders, who are equally affected by the disaster impact. In addition, SMEs need financial services for recovery of their businesses according to BBB standards.
- Analyse the financing capacity of aggregators, particularly financial institutions: Financial institutions’ capital and capacity should be assessed in terms of their ability to offer support and respond after an extreme weather event. Prior to disasters, financial institutions are important actors for stimulating SME investments and securing the livelihoods of producers. This vital role for (rural) financing should be considered when designing a sustainable financial strategy.
- Analyse and determine the risk retention capacity of the government: The risk and impact analyses of extreme weather events provide data pertaining to the required amounts for response and resilient recovery. This needs to be set in relation to the current and projected budgets of the government to identify the financial gaps that need to be closed by developing a financial strategy plan.
- Develop a disaster risk financing plan: All results of the risk retention assessments are to be incorporated into the DRF plan. This includes a gap analysis, financing options for developing and implementing an inclusive finance policy that benefits individual smallholder farmers and SMEs, as well as regulatory issues.
Tools and Guiding Questions
How to conduct a risk assessment (hazard, exposure, vulnerability)?
KfW/M. Souvignet (2016): Economics of Climate Adaptation (ECA) − Guidebook for Practitioners
World Bank/F. Ghesquiere/O. Mahul (2010): Financial Protection of the State Against Natural Disasters: A Primer. World Bank Policy Research Working Papers #5429
WB-GFDRR-EU (2017): South West Indian Ocean Risk Assessment and Financing Initiative (SWIO-RAFI)
What is the financial gap for covering potential damages and losses of extreme weather events that cannot be managed by preventive measures and preparedness programmes?
What is the main focus (e.g. low frequency − high impact events, high frequency − low impact events, or medium frequency events of medium magnitude)?
If the government has ex ante DRF mechanisms in place, are they risk-based? Do they include risk-relevant data, clear triggers, actions and responsible institutions to implement those actions?
WB/GFDRR/UKaid (2016): Disaster risk finance as a tool for development
World Bank/J.D. Cummins/O. Mahul (2009): Catastrophe Risk Financing in Developing Countries: Principles for Public Intervention
Does the government know the financial impact for the agricultural private sector businesses and individual producers? How are they assessed?
Semi-structured interviews with members of business associations relevant for the agricultural sector, cooperatives and representatives of individual producers.
Financial statistics and interviews with financial institutions.
Post-disaster impact assessments and post-disaster needs assessments (PDNAs) of the affected country, especially sector analysis as a part of the PDNA process.
Does the government know the financial requirements for financial institutions after an extreme weather event when demand for (emergency) loans is high? How are they assessed?
Financial statements of banks and microfinance institutions.
Fund disbursement statistics for emergency loans via local financial institutions (after disasters).
Semi-structured interviews with the private sector, including members from business associations, cooperatives and individual producers.
Is there an inclusive disaster risk financing strategy available, including a DRF plan?
Does the strategy/DRF plan specify the time dimension of funding for 1) immediate relief and 2) later resilient reconstruction?
Does the government have any policies and laws regarding disaster finance in place? (e.g. the Philippines has to invest five per cent of budget into DRR)
Standard and Poor’s (2015): RatingsDirect, Storm Alert: Natural disasters can damage creditworthiness − Sovereign Ratings Criteria for Natural Catastrophe-Related Rating Actions