Basis risk in disaster risk financing for humanitarian action: Potential approaches to measuring, monitoring, and managing it

This paper offers a number of potential technical solutions to assessing, managing, and reducing basis risk. It acknowledges that, in order to be effective, these need to be accompanied by political and coordination efforts, and a wider look at DRF operational systems that are fit for crisis settings.

In finance, ‘basis risk’ is the systematic or inherent risk accepted in hedging. In disaster risk financing (DRF), where statistical risk models are used to try and predict the outcome of a likely or current event—and can trigger the release of financing—basis risk lies in the combination of inherent model error, context outcome uncertainties, and miscommunication or misinterpretation of a model’s capabilities. Clearly, as this paper sets out, in the context of humanitarian or crisis action, the ability of DRF systems to identify, calculate, reduce, and manage these risks is key to protecting lives, livelihoods, and assets.