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Disaster Risk Financing and Insurance at USAID

Thursday, February 1, 2024

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Disaster Risk Management

Individuals, households, communities, countries and systems are able to identify their risk exposure and plan and prepare for how to manage risks, thus lessening negative impacts and improving resilient outcomes.

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*Examples are illustrative, not exhaustive.

Disaster Risk Management offers an approach for understanding risk probability and exposure, and provides a set of tools for managing risks. Planning, coordinating and securing financing in anticipation of disasters can significantly improve the speed and effectiveness of responses when a disaster strikes. Early, predictable and well-coordinated responses to shocks and stresses can also mitigate affected communities’ negative coping mechanisms, such as reducing food consumption, losing livestock to premature death, and selling productive asset sales at a loss, as well as build their resilience to manage future crises.

A comprehensive social protection system is the foundational layer to any strong disaster risk management approach. When these systems are adaptive and responsive to shocks, they provide key mechanisms for delivering disaster relief when it is needed most.

DRrisks and strengthening resilience capacities are essential for achieving resilient outcomes.

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Disaster Risk Financing

Ex-ante - or preplanned, pre-arranged– financial tools to manage risk. Examples: Insurance, Emergency Loans, Contingent Credit, Social Protection Payments

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Sovereign Risk Insurance

Country level risk insurance - typically for catastrophic drought, cyclones, floods, heat waves, and earthquakes. Examples included the Africa Risk Capacity System - the public private partnership set up by the African Union, ARC LTD, the African Development Bank, partner countries and the World Food Programme in Africa.

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DRF improves climate and disaster risk management through the use of financial instruments, like insurance, to finance pre-agreed response activities so that support can reach vulnerable people more timely than through traditional response channels.
Every USD $1 spent on the safety net and resilience programming in Ethiopia, Kenya, and Somalia results in net benefits of between USD $2.30 and USD $3.30 (Cabot Venton, 2018).
Early response and resilience for 15 million people in Kenya, Ethiopia, and Somalia (including social protection) could have saved USD $4.3 billion over the previous 15 years, or an average of USD $287 million per year (Cabot Venton, 2018).

Disaster Risk Financing (DRF) as a Valuable Risk Management Tool

Outcome: Strengthen the ability of host country governments to �prepare for and fund ex-ante disaster relief.

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Parametric Insurance for Individual Farmers and Pastoralists

Parametric insurance payout amounts are Fixed and specified in advance;

· Tied to local weather or hydrological station data (triggers); and

· Vary with different levels of the triggers

Since parametric insurance does not require any claims adjustment process, the administrative costs are lower and payments can be made quickly.

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Relevant USAID Partnerships:

Current USAID/REFS Investments:

ARC Replica; ADRiFi; (Sovereign insurance) WFP and AfDB
Financial Resilience Program (Sovereign Insurance) World Bank
FTF Innovation Lab: Markets, Risk and Resilience at UC Davis (Micro insurance and other Financial Tools)

USAID Partnerships and Investments

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Parametric insurance offers an affordable and quick way to reimburse farmers and livestock herders for a portion of their losses.
International and local partnerships offer mechanisms to leverage USAID investments with private sector and civil society engagement.
USAID supports mainstreaming disaster and climate risk management into national and local development planning, & identifying appropriate disaster risk financing mechanisms.

Key Takeaways