Purpose-built financing for disaster-risk management

Asia and the Pacific have emerged as the most disaster-prone regions in the world.

From typhoons in the Philippines and heat waves blanketing South Asia to deadly earthquakes in Indonesia and drought in the Pacific islands of Kiribati and Tuvalu, 2022 delivered a stark warning of the growing scale and the evolving nature of disasters in Asia and the Pacific. Rising global temperatures, combined with the persistent disruptions to Pacific weather patterns known as La Niña, have amplified extreme weather events. The World Bank estimates the cost of natural disasters to Asia and the Pacific at more than US$100 billion every year.

Mitigating disasters in the face of economic vulnerabilities

Socioeconomic inequities and economic vulnerabilities compound the impact of disasters on lives and livelihoods. While higher-income countries suffer the greatest economic losses from natural disasters in absolute terms, low- and middle-income countries suffer disproportionately relative to the size of their economies. And while the World Bank estimates that the region needs to spend an additional US$3.3 billion annually to implement effective risk-management systems, several low- and middle-income countries currently lack the financial resources and technical capacity to meet these targets.

These countries are pressing to keep climate change and disaster-risk reduction financing at the top of the international agenda. A recent win was the establishment of the Loss and Damage Fund at the United Nations Climate Conference 27th Conference of the Parties (COP 27) last November. The fund will provide financial assistance to the nations most vulnerable to climate change.

But more can be done to bridge the finance gap.

India’s presidency of the G20 represents a significant opportunity to prioritize disaster-risk financing in the region and beyond. A new working group on disaster-risk reduction will focus on the policies and financial commitments of countries and institutions that have tended to focus on disaster response rather than preparedness, in order to direct more funds towards disaster-risk reduction.

Disaster-risk financing holds promise

The growing incidence of natural disasters and their increasingly serious economic impacts have raised the priority of natural disaster risk financing. Public and private actors are developing new solutions for risk financing, from increasing support from lending institutions and multilateral funding agencies to national financing frameworks.

One specialized disaster-risk financing tool is parametric insurance, which pays out quickly because it’s based on modeled losses rather than time-consuming damage assessments. In another example, risk pooling has emerged as an important disaster-risk transfer mechanism. Insurers, national governments, and private actors aggregate risks into a larger, more diversified portfolio, making premiums more affordable and international capital markets more accessible for countries that may otherwise be excluded. This helps mobilize funds to respond to natural catastrophes by reducing the funding gap for countries susceptible to financial shocks from natural disasters. Aggregating the resources of these actors can also help garner additional technical and financial support and reduce transaction costs.

Drawing on the experience of Central America and the Caribbean islands with the Caribbean Catastrophe Risk Insurance Facility (CCRIF), Pacific Island nations have developed similar risk-pooling facilities. The Pacific Catastrophe Risk Insurance Pilot (PCRIP), for example, covers island nations for up to US$100 million in damages from earthquakes, tsunamis, and tropical cyclones. Meanwhile, countries including India, Thailand, the Philippines, Indonesia, and Japan are using catastrophe risk pools to provide cost-effective financial protection against natural disasters.

In India, the 15th Finance Commission Report has recommended a new methodology for allocating resources to manage disasters. This new and improved methodology will ensure that finances are allocated among Indian states based on the prevalence of hazards, the area and population exposed, their vulnerability, and their capacity to manage disasters.

Several local governments in Indonesia are protecting public assets against disaster through a jointly owned insurance company.

Thailand is providing “top-up” insurance to help cover climate change disasters in the agricultural sector. The Rice Disaster Relief Top-up Crop Insurance Scheme is offered to farmers in addition to the compensation provided by the Thai government’s Disaster Relief Program.

China has implemented several financing mechanisms to protect against financial losses from natural disasters. The China Earthquake Insurance Pool covers losses caused by earthquakes with a magnitude greater than five, while the China Earthquake Catastrophe Reinsurance Scheme provides coverage to insurers exposed to large losses from earthquakes.

Similarly, the Asian Development Bank’s Disaster-Risk Financing and Insurance Program (DRFIP) has helped governments access prearranged funds to respond to disasters and protect their budgets. The DRFIP has provided over US$1 billion in disaster-risk financing to eighteen countries in Asia and the Pacific since its inception in 2014.

A call to action

These examples show that governments in Asia and the Pacific have begun to acknowledge the importance of purpose-built financing mechanisms in their disaster-risk management strategies. Implemented proactively, these policies and investments can mitigate the cascade of catastrophic physical and economic consequences of recurrent natural disasters.

The G20 Disaster-Risk Reduction Working Group continues to deliberate on the need for national systems of disaster-risk financing. By ensuring public funding, such integrated, national-level frameworks can increase access to funds by local governments, but they also point to the need for more international development cooperation and assistance to mitigate and prevent disasters. The private sector also has a greater role to play in disaster-risk financing, through solutions like green bonds and other forms of public-private partnership.

As the world grapples with extreme weather events and the growing impact of climate change, international development financial flows must make the shift to disaster-risk reduction and preparedness.