Financial services and disaster risk finance: Examples from the community level

Abstract

Increased attention has recently been given to the possible role of financial services in the management of natural disaster risk. Local communities have been at the forefront of developing innovative disaster risk finance strategies and implementing risk-oriented incentive programs. In view of increasing risks, including the impacts of climate change, such programs will become more important. This paper examines four models and some recent experiences in using financial services at the community level. The paper offers an overview of advantages and limitations of each model to manage disaster risk in communities. Examples include a federal government initiated scheme of social protection funds, a local government risk reduction scheme, an insurance product provided by a non-governmental organization , and a micro-insurance scheme. Finally, the paper offers some directions about specific ways that the public and private sectors, in collaboration with other partners can improve finance alternatives for disaster management at the community level. It appears that a range of follow-up studies and further dialogue is needed, in order to expand the knowledge on what types of risk finance models can help manage and reduce the financial impacts of natural disasters. r

Confronting Disaster Losses

“…Previously uninsured flood risks in Belgium and the Netherlands are to be covered through publicprivate insurance constructions. Existing development financing within local communities, for example, investment funds for small infrastructure improvement in El Salvador, support risk reduction (9), and community groups in India have developed deficit rainfall insurance (9). In Colombia, microentrepreneurs offer affordable and easy to understand life and property microinsurance to the most vulnerable.…”

Insurance Portfolio Diversification Through Bundling for Competing Agents Exposed to Uncorrelated Drought and Flood Risks

“…Strategies to preserve the affordability and viability of weather-related insurance are the adoption of adaptation and risk reduction measures and the diversification of the insurer's (or reinsurer's) risk portfolio. Traditionally, a primary insurer can decide to hedge its risk through reinsurance or the capital market (i.e., via catastrophe bonds) (Cummins & Mahul, 2009); in other cases, innovative public-private insurance constructions, microinsurance schemes, or government-supported financial covers can help share and spread financial risk from weather events (Warner et al, 2007). The ability to spread the risk makes perfect assessment of the hazard less critical where the use of climate model projections provide insurers with a range of possible future patterns.…”

Disaster Financing and Poverty Traps for Poor Households: Realities in Northern India

“…However, regarding Question 1 in the introduction, poor countries generally lack insurance markets or affordable premiums (Linnerooth-Bayer et al 2005). Hence, poor households are often primarily dependent on informal recovery financing strategies, such as geographical diversification through family networks and migration, some limited savings and/or informal insurance arrangements with neighbours (Benson and Clay 2000;Warner, Bouwer and Ammann 2007). While such strategies are useful for more frequent events, they tend to fail in the face of larger-scale disasters as spatial diversification and informal arrangements are often overwhelmed (Benson and Clay 2004).…”