STEP 2: Developing Disaster Risk Financing Products at All Levels
While the DRF analysis includes all types of disaster financing instruments, the following section focuses on those that are considered to be most effective:
- Developing micro level DRF products for farming households and agricultural SMEs: In practice, frequent risks do not imply large losses and are typically managed by the producers and SMEs. Although it is essential for farmers and SMEs to have suitable financial strategies for their needs, it is governments’ responsibility to support financial inclusion for poor and vulnerable persons and SMEs (see Box 3, below). This includes governments’ investment in safety nets to help protect against risks that exceed people’s coping capacities, which is essential for the vulnerable and particularly poor.
Box 3: Examples of Financial Services for Individuals and SMEs
Financial inclusion is particularly important for poor and vulnerable households. It promotes “a state in which all working-age adults have effective access to credit, savings, payments, (and insurance) from formal providers (CGAP 2011)”.
This includes financial instruments e.g. designed savings products, credit and emergency loans, or remittances that help to smooth household consumption. Financial inclusion could be improved by identity cards or mobile money (e.g. M-Pesa, Kenya).
Financial support for SMEs includes loan restructuring and refinancing guarantees for SMEs through cooperatives and (micro) finance institutions.
Government support is essential, especially after natural disasters (e.g. Home Emergency Loan Program [HELP], time-bound Enterprise Rehabilitation Financing Program [ERFP] to support the recovery of Micro Small and Medium Enterprises [MSMEs] in the Philippines).
Box 4: Product Options on the Macro Level
Reserve funds or calamity funds
The national government appropriates an annually defined reserve for risk management, though it takes years to attain the critical size and needs strict monitoring so it is not used for other purposes.
Contingent credit lines are pre-negotiated credit arrangements that can provide rapid access to funding at sometimes preferential interest rates to governments in the event of crises.
Debt restructuring for catastrophe-prone countries (e.g. $21.6 million debt redirecting for climate resilient ocean conservation programmes ‘debt for nature’ swap, Seychelles [Damanaki, 2016]).
Complex DRF products
Alternative Risk Transfer (ART): Catastrophe bonds are a mechanism for transferring insurance risk to capital markets. Investors receive a return on their investment, with the understanding that in the occurrence of a pre-defined event, part or all of their investment will be transferred to the insurance company to meet the cost of disaster losses. Payments may be calibrated against parametric triggers (e.g. MultiCat catastrophe bond programme, Mexico; Disaster Risk Management Development Policy Loan − CAT-DDO 2, Philippines). (World Bank, 2012; OECD, 2014)
Temporary tax relief: In the interest of reducing personal and enterprise debt, and to reduce the uncertainty of locally-generated revenues, the national government could provide time-bound resource transfers to local governments. This would enable them to provide temporary tax holidays to affected households and enterprises, while simultaneously providing certainty of income to the local governments (e.g. Philippines after Typhoon Yolanda, 2014).
DRF restructuring combined with DRR: The Seychelles Government has set up a public-private trust, the Seychelles Conservation and Climate Adaptation Trust (SeyCCAT), which purchases and restructures debt for e.g. advancing marine and coastal conservation, including strategies for ecosystem-based climate adaptation and DRR.
- Developing meso level DRF products for aggregators: The current risk financing policies do not yet systematically target meso level
stakeholders, instead targeting mechanisms that benefit individuals and states (Poole, 2014). This gap has to be addressed as financial institutions require liquidity for emergencies (e.g. index insurance, government portfolio guarantees and emergency programmes), provided by the government for affected households and SMEs.
- Developing macro level DRF products for the government: As post-disaster funding is unpredictable in terms of time or sufficiency, in order to meet relief and reconstruction needs the government has to establish risk-financing strategies in advance to increase financial capacity to respond (see Box 4, above). This also contributes to the protection of long-term fiscal balances and stimulates economic recovery.
Tools and Guiding Questions
Guiding Questions
How to develop the most suitable financing products for the selected extreme weather events, considering their frequency and severity?
How can the government design DRF products that incentivize prevention?
Guidelines
World Bank/A. De Janvry (2015): Quantifying Through Ex-post Assessments the Micro level Impacts of Sovereign Disaster Risk Financing and Insurance Programs
Source of
information
Networks that provide tools
Making Finance Work for Africa (MFW4A)
Consultative Group to Assist the Poor (CGAP)
Guiding Questions
At what level does the government target its product development (e.g. based on demands and requirements of vulnerable populations, agricultural sector)?
Are financial products available to cover the poor and vulnerable groups in the agricultural sector? If not, what are suitable measures for reducing their financial vulnerability?
Guidelines
World Bank/GFDRR guideline (2016): Fiscal Disaster Risk Assessment and Risk Financing Options (Sri Lanka)
https://www.gfdrr.org/sites/default/files/publication/fiscal-disaster-risk-assessment-financing-options.pdf
GIZ/DFID (2013): Promoting women’s financial inclusion − A toolkit