Disaster risk finance as a tool for development: a summary of findings from the disaster risk finance impact analytics project

Generating the evidence to better-guide investments in sovereign disaster risk finance programs, to maximize their expected humanitarian and development impacts, and to ensure that public investments deliver value for money requires robust methodologies—ones that rigorously monitor and evaluate existing schemes and new products

Since 2013 The World Bank Group has partnered with the Global Facility for Disaster Reduction and Recovery and the U.K. Department for International Development to address some of these gaps in evidence and methodologies. The Disaster Risk Finance Impact Analytics Project has made significant contributions to the understanding of how to monitor and evaluate existing or potential investments in disaster risk finance from a development perspective, and to the evidence base for where such investments have development impact.

This note summarizes the findings of this project, presenting the key messages of a book, a technical report, and 14 research papers, categorized into four themes.

Part 1 presents insurance and insurance-like institutions—both public and private—as potential solutions to this commitment problem. Clarke and Dercon present the overarching argument in their book Dull Disasters; Clarke and Wren-Lewis provide a more theoretical economic analysis of the commitment problem and the range of potential insurance-like solutions; and Boudreau presents evidence from Mexico suggesting that disaster risk finance programs can indeed work as a commitment device for governments.

Part 2 explores the economic gains from speed and reliability through two papers. Hallegatte’s rule of thumb estimates the total economic cost of a disaster, beyond the direct loss of assets. De Janvry, del Valle, and Sadoulet report on an impact evaluation of Mexico’s fund for natural disasters, FONDEN: the faster reconstruction of infrastructure assets made possible by FONDEN’s disaster risk finance strategy contributes, on average, to an increase in post-disaster local economic activity of 2–4 percent.

Part 3 investigates the gains to household welfare from speed and reliability and partitions this large body of research into empirical evidence and methodologies. Porter and White show that a rural safety net program in Ethiopia lessens a drought’s impact by 25 percent. The speed with which this safety net makes transfers, Berhane, Abey, and Hoddinott demonstrate, affects the benefits realized by individuals.

Part 4 considers the cost of providing timely financing for ex ante response and lays out how well-structured risk finance strategies can reduce the economic costs of managing fiscal volatility. Three papers—Clarke, Mahul, Poulter, and Teh; Clarke, Cooney, Edwards, and Jinks; and Clarke, Coll-Black, Cooney, and Edwards—develop and then apply a methodology to quantify the costs of different combinations of budgetary and financial instruments that can be used to finance a disaster response. The approach results in a simple formula to capture the opportunity cost of risk finance strategies and to help decision makers choose the least-cost approach.