Retention and Transfer

Step 3: Establishing Integrated Approaches − Linkages to Insurance

Establishing a risk financing plan implies residual risks are segmented according to their potential frequency and severity while considering different stakeholders and their roles to finance the potential losses. This implies developing a combination of DRF and insurance products (see Figure 2).

Figure 2: Risk layering approach. Source: World Bank Agricultural Risk Assessment Guideline, 2016

LAYER 1: Risks that are frequent but less severe are usually managed by the producers and SMEs, or at the government level through regular annual budget allocations. However, the paramount objective should be to prioritize preventing human and economic losses through various DRM measures.

LAYERS 2 and 3: Risks of low-to-moderate frequency and moderate-to-high severity that can be managed:

  • At the national level, by the government via pre-disaster financial plans and indemnity and/or index insurance solutions that enable the government to better manage extreme weather events.
  • At the regional level, by aggregators (e.g. financial institutions) via own capital and/or insurance (index products and/or indemnity products).
  • At the local level, by producers and SMEs through a mix of DRM strategies including suitable insurance solutions (particularly index products).

LAYER 4: Risks of low frequency but high severity causing large damages should be transferred to third parties (insurance and reinsurance, catastrophe bonds and pan-national insurance pools), which complement various coping strategies, including international assistance and social protection programmes (see examples in Box 5, below).

Box 5: Examples of Integrated Approaches

Combination of catastrophe bonds with insurance and post-disaster transfer payments, such as the Disaster Risk Management Development Policy Loan − CAT-DDO 2, Philippines

A three-level approach combining catastrophe bonds with insurance and post-disaster transfer payments (e.g. Disaster Risk Management Development Policy Loan − CAT-DDO 2, Philippines) and

Tools and Guiding Questions

Guiding Questions

Are the financial products appropriately divided according to their potential hazard frequency and severity? Do the products consider the different stakeholders and their roles to finance the potential losses?

Do DRF products complement insurance products? If so, in which way?

(+ platform)

World Bank /GFDRR Disaster Risk Financing and Insurance Program (DRFIP): Supports governments in designing financial protection strategies and instruments to respond to natural disasters (including sovereign disaster risk financing, agricultural insurance, property catastrophe risk insurance, social protection programmes)


World Bank/D. J. Clarke/O. Mahul, and others (2016): Evaluating Sovereign Disaster Risk Finance Strategies: A Framework

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?


World Bank/GFDRR guideline (2016): Fiscal Disaster Risk Assessment and Risk Financing Options (Sri Lanka)

OECD/L. Poole (2014): A Calculated Risk − How Donors Should Engage with Risk Financing and Transfer Mechanisms

World Bank 2012: Advancing Disaster Risk Financing and Iinsurance in ASEAN Member States − Framework and Options for Implementation

PCRAFI (2015): Pacific Disaster Risk Finance and Insurance in Vanuatu − Post-disaster budget execution guidelines, Secretariat of the Pacific Community. ACP-EU Natural Disaster Risk Reduction Programme, World Bank Group/GFDRR.

Expected Outputs When Using the Tools

  • An effective combination of DRF tools ensures the availability of funds for post-disaster response and resilient recovery, related to the scale and frequency of anticipated risks.
  • Ex ante DRF reduces governments’ liquidity gaps after extreme weather events and relaxes ad hoc budget reallocation that could have a distortive effect on the development plans of the state.
  • DRF increases financial resilience of the agricultural sector value chain against extreme weather events and disaster impacts in the future.
  • Insurance-related outputs (see ’Synergies: Insurance and Pre-Disaster Financing’).