Financial instruments for resilient infrastructure: Technical report

Almost one and a half million people have died in natural disasters over the past 20 years. This is a waste of life; a waste of potential.  

Natural disasters also have a massive economic impact. The RMS model suggests that natural catastrophes cost the world’s poorest countries almost $30bn a year on average. Hard-won development gains are regularly wiped out – and it is the poor and the vulnerable who are most impacted. 

In case anyone had forgotten the crippling impacts of natural disasters, 2017 served a painful reminder. Somalia, Ethiopia and Kenya struggled with drought. Floods and landslides wrecked lives and livelihoods in Sri Lanka and Bangladesh. Several Caribbean islands were devastated by a very active hurricane season. Whenever and wherever catastrophe strikes, our thoughts are with those so profoundly affected.  

Last summer’s tropical cyclones were not needed to understand that something is not working. Hurricanes Irma and Maria were not needed to learn that investments in resilience reduce losses from natural disasters. And the events of 2017 were not required for to knowledge that incentives are too often insufficient to drive action in the most vulnerable regions.  

These truths are at the heart of the Centre for Global Disaster Protection. Innovation is required to solve such complex humanitarian, political and economic problems. The impacts of recent disasters – and the need to finance reconstruction – have heightened the innovation imperative. They provide an opportunity to deploy instruments which catalyse investments in resilience; which enable vulnerable communities to recover faster.

RMS too knows that it is possible to stop manufacturing natural disasters. And RMS knows that financial mechanisms could in theory securitise – and therefore incentivise – the potential ‘resilience dividends’ from investments in disaster risk reduction.  Yet equally well understood is the fact that financial structures which incentivise resilience are difficult to implement in practice – in developed and in developing countries.

To move from theory to practice; to redirect capital at the required scale, ideas need to be fleshed out, structures need to be robustly designed and cashflows need to be tested. Any new financial mechanisms must pass muster with all stakeholders, lest the intended benefits evaporate.  Since 1988, RMS’ mission has remained constant: to make communities and economies more resilient to shocks through a deeper understanding of catastrophes. Now, with the Centre’s help, experts from the finance, humanitarian and development communities have for the first time come together to refine financial instruments, address practical challenges and provide the interdisciplinary buy-in which mobilises action.  In this collaborative environment, innovation has happened.

This report is a product of that innovation.  The four new financial mechanisms examined in the report can help monetise the resilience dividend, thereby incentivising both resilient building practices and risk financing. The outcome: less physical damage, fewer lives lost and faster economic recovery whenever nature proves too much. More is needed, of course. Policymakers and donors have a crucial role to play, not least in sponsoring pilots, funding the quantification of resilience, promoting risk-based pricing, supporting risk finance and advocating duties of care around life, livelihood and shelter.