FINANCIAL PROTECTION AGAINST NATURAL DISASTERS

Tying together the experience and collected knowledge from partners in the public and private sector, this section creates a practical operational framework for governments looking to establish or improve disaster risk financing and insurance programs. As a framework for the development and implementation of cost-effective and sustainable solutions it aims to provide a practical approach and a comprehensive overview of policies for the public financial management of disasters by governments.

This operational disaster risk financing and insurance framework provides decision makers with a practical guide for beginning relevant discussions with all stakeholders—from government agencies and taxpayers to donors and private insurance companies—and to gain an understanding of how the work might evolve over time. As a second step, it helps governments to identify and prioritize policy options and the necessary actions to implement these choices, depending on the particular situation and timeframe.

The Operational is presented in three components:

an overview of the core technical steps in developing and implementing financial protection solutions
a decision process for governments engaging in the disaster risk financing and insurance process, which brings together the technical steps with the guiding policy questions; and,
an overview of actions governments can consider for each of these steps to increase the financial resilience of the four main groups of beneficiaries and illustrative examples from international experience.

Operational Disaster Risk Financing and Insurance Framework: Core technical steps

Assess Risks: Risk assessments for financial protection quantify potential disaster impacts based on historical and simulated data. This often requires investments in the necessary underlying hazard, exposure, and vulnerability data. This also includes building an effective interface between the policy maker and underlying technical models.

Reduce Underlying Risk: Sustainable financial protection requires reducing underlying drivers of this risk.

It complements risk reduction by managing residual risk which is not feasible or not cost eff ective to mitigate. It also creates incentives to invest in risk reduction and prevention by putting a price on risk and clarifying risk ownership.

Deliver Funds to Beneficiaries: Resources should reach beneficiaries in a timely, transparent, and accountable fashion. This requires effective administrative and legal systems for the appropriation and execution of funds for the government budget, insurance distribution and settlement (oft en through private channels), as well as social protection programs.

Arrange Financial Solutions: Effective post disaster response and recovery relies on access to sufficient and timely resources following a disaster.

This includes:

Arranging the required financial resources for the government to meet its contingent liabilities
Developing catastrophe risk and agricultural insurance markets, building on Public-Private Partnerships
Develop rules and arrange financing instruments for scalable social protection

Decide on Policy Priorities Read more

The second component lays out a decision process for a government interested in financial protection, with decisions to be made on both the policy and the technical side. This process seeks to first identify and prioritize the key policy objectives of the government and subsequently develop the required actions to achieve them. This decision process guides policy makers through a set of fundamental questions that determine the shape and direction of the country’s disaster risk financing and insurance engagement, embedded within an overall disaster risk management strategy

As the first step in implementing disaster risk financing and insurance solutions, policy makers should clarify the overall development goals and identify the intended beneficiary of their risk financing policy. As discussed earlier, most often this is one or multiple of four main groups of beneficiaries of financial protection policies: the (national or subnational) government, homeowners and small and medium-sized enterprises, farmers, and the poorest and most vulnerable in society.
Second, historical information and risk assessments help identify the financial impact on these groups and the underlying causes driving these effects, for example recurring budget volatility caused by emergency spending following hurricanes and reconstruction of uninsured public assets.
Following this, officials will have to consider possible solutions. These include mechanisms to manage financial risk and mobilize the required resources, such as risk transfer to international markets or deciding to rely on post-disaster budget reallocations.
Decision makers must also determine how these funds will reach the intended beneficiaries.

Government of Colombia's Policy Strategy for Public Financial Management of Disaster Risk Read more

The government of Colombia, followed by Panama and the Philippines, was among the first governments to develop and publish a comprehensive disaster risk financing strategy. Engaged in identifying and managing the fiscal risk posed by natural disasters since the mid-2000s, the Risk Management Unit of the Ministry of Finance led the strategy’s preparation.

Overarching Goal:

The Ministry of Finance seeks to assess, to manage, and to reduce its contingent liability related to natural disasters to support achievement of macroeconomic stability and fiscal balance.

Policy Objectives:

Improve identification and understanding of fiscal risk due to natural disasters;
Strengthen financial management of disaster risk, including the implementation of innovative financial instruments; and
Enhance catastrophe risk insurance for public assets.

Example of longer-term actions to achieve Policy Objective 3:

To achieve its objective of enhancing catastrophe risk insurance for public assets over the next five to ten years, the Ministry of Finance will:

Build an information system on public buildings, including information on physical characteristics of buildings and insurance policies already in effect;
Partner with other public agencies and authorities to establish a centralized system for purchasing and managing insurance for government buildings, starting with the health and education sectors;
Improve insurance requirements for buildings and road infrastructure concessions, that align with international reinsurance market technical standards; and
Share the Ministry of Finance’s experience by providing best practice insurance guidelines to subnational governments, in collaboration with the country’s disaster risk management agency.

The Government of Philippines' National Strategy for Disaster Risk Financing and Insurance Read more

In the Philippines, the National Treasury within the Department of Finance finalized a national financial protection strategy in 2014.

Once a strategy has been developed, the government can formulate an action plan outlining specific steps it will take to implement its policy goals over the next two to three years. While the government’s longer-term strategy is likely to remain in place for five to ten years, the action plan should be a living document; the government may want to regularly review and update it, reflecting changes and developments in implementation.

Monitoring and evaluation is crucial during the strategy’s implementation to identify what works, what doesn’t work, and why, and subsequently refine the policy goals and actions. This includes both monitoring progress as well as evaluating the impact thereof and results achieved. Continuous feedback from monitoring and evaluation enables an iterative process with regular refinement and adjustments to both the strategy and action plan.

Overarching Goal:

To maintain sound fiscal health at the national government level, necessary to support long-term rehabilitation and reconstruction needs;
To develop sustainable financing mechanisms for local government units, necessary to provide immediate liquidity at the onset of a disaster; and
To reduce the impact on the poorest and most vulnerable and prevent them from falling into a cycle of poverty, while also shielding the near-poor from slipping back into poverty.

Policy Objectives:

National Level: Improve the financing of post-disaster emergency response, recovery, and reconstruction needs.
Local Level: Provide local governments with funds for post-disaster recovery and reconstruction efforts.
Individual Level: Empower poor and vulnerable households and owners of small and medium-sized enterprises to quickly restore their livelihoods after a disaster.

Example of longer-term actions to achieve Policy Objective 1:

To achieve its objective of improving the financing of post-disaster funding needs at the national level, the Department of Finance will:

Quantifying and clarifying the contingent liabilities faced by the government
Acquiring contingent credit lines to protect against moderate disasters.
Using risk transfer to access international private reinsurance and capital markets

Identify financial impacts, such as direct impact on government’s budget; impact on poor, etc

Am I aware of the underlying factors causing this impact?

Conduct preliminary diagnostic of financial impact

Does diagnostic reveal any financial impact that concern me?

Determine and prioritize specific problems to address in the short-* and long-term

Do I have sufficient financial risk and other information to identify solutions to these problems?

Conduct in-depth diagnostic of risk financing needs

Does diagnostic reveal sufficient information on underlying factors to identify financial problems and solutions?

Define a set of long term policy objectives (next 5-10 years) and a strategy to achieve them

Do I understand the short-term actions required to implement this strategy?

Define short-to-medium-term action plan for next 2-3 years to implement policy objectives as set out in strategy

Do I have human, technical, and financial resources as well as partnerships in place to implement the action plan?

Benefits of seeking more information outweigh costs?

Begin Implementation

Seek additional support

Maintain Status Quo