Disaster Risk Pooling - enabling mutual cross border resilience

On the 23 April, the RGS-IBG Disaster Risk Management Professional Practice Group held its second fireside chat. Designed as an informal and friendly conversation, the fireside chat allows audience members to ask experts questions around a common topic. If you missed the event, you can watch a recording of it here, or at the bottom of the page. Here we summarise the key themes discussed by our panellists.

This event’s topic was Disaster Risk Pooling - enabling mutual cross border resilience. Four panellists from different sectors of Disaster Risk Management and Development Financing joined Matt Foote in a one-hour conversation:

• Nicky Jenns - Disaster Risk Finance Adviser, Foreign, Commonwealth and Development Office 

• Lesley Ndlovu - CEO, African Risk Capacity Ltd

• Nicola Ranger - Deputy Director, Centre for Greening Finance and Investment, Sustainable Finance Programme, Smith School of Enterprise and the Environment, University of Oxford 

• Benedikt Signer - Program Coordinator, Crisis and Disaster Risk Finance, World Bank.

 

Watch the fireside chat recording

 

Disaster risk pooling in context

The session focused on the role of regional Disaster Risk Pooling as a tool for improving the ability of countries, especially but not exclusively in the developing world, to protect their economies and populations from the impacts of disasters through the provision of sovereign financial risk transfer mechanisms.

The global pandemic has shown in stark terms how vulnerable individual countries are from extreme events, particularly in respect to their economic, fiscal, and societal wellbeing. The World Bank has estimated that COVID-19 will push up to 115 million more people into poverty, reversing the progress made over decades within one year. But countries are also exposed to other extreme hazards, which can also have significant negative impacts, including those due to natural disasters. 

Risk Pooling describes the approach taken by a group of organisations to combine resources – whether a group of insurance companies who wish to maximise the level of combined protection against losses, local government agencies who cooperate on sharing risks from their operations, or at national levels, countries working together to transfer risks from large scale disasters. While financial protection is a key component, pooling arrangements also act to foster improved collective response to disasters, encourage mutual resilience, reduce costs, and enable deployment of key resources to benefit all partners.

Individual countries can and do, develop risk transfer mechanisms, which can include risk pooling to tackle materially risky hazard impacts, as part of a national strategic disaster risk management plan. From a UK perspective, Flood Re, the national scheme to ensure insurance cover for most households against flooding is an example of a pooling arrangement for the transfer of risk from insurers to other providers of capital, in this case under a legal statute.

The capacity of individual countries to respond to disasters can be significantly limited by the availability of domestic financial resources, limited infrastructural and organisational capacity, and social vulnerability.

National risk management and mitigation plans can be enhanced through mutual participation of countries within multi-national risk transfer programmes which enable leverage of international risk financing, while also encouraging increased capacity for proactive and anticipatory planning in advance of future disasters.

A number of regional disaster risk pools are in place (e.g. African Risk Capacity, South East Asia Disaster Risk Insurance Facility, Pacific Catastrophe Risk Assessment and Financing Initiative and Caribbean Catastrophe Risk Insurance Facility) which bring together countries across geographies, and hazards, to combine financial, organisational and analytical resources towards common resilience strategies.

In this way, pools can be a key instrument within a wider Disaster Risk Management strategy, combined with Disaster Risk Reduction approaches. When applied across different countries, risk pools can be highly effective ways to complement local and combined risk mitigation approaches, and encourage increased resilience, by also providing finance to cover impacts from events too large for effective mitigation. Risk Pools have been formed across several regions, tailored to specific risks and characteristics of the countries in each. There are opportunities to expand the number of risk pools, but also challenges, and risk pools are not a panacea for ensuring comprehensive risk protection.

 

Panel discussion

The conversation opened with Matt asking the panellists to give their personal views on the role of risk pooling in the context of wider DRM strategies, followed by directed questions and then questions from the audience. Panellists’ responses provided insight across the spectrum of donor, international finance organisations, academia and importantly, international Risk Pool manager.

Nicola highlighted that risk pools are fundamentally a type of insurance and there needs to be more of these pools to help manage the scale and increasing complexities of disaster risk. This would benefit smaller developing countries (due to economies of scale). She also highlighted that most risk pools are quite small (premiums around $50mn per year, providing less than $1bn of coverage, against over $200bn losses last year) and there is a need to scale them up to realise their potential as a means to protect vulnerable countries. 

Nicola noted that the need for risk pools, as well as the challenge that evolving trends in hazard and risk pose in their design, particularly in respect to climate change. She cited two key reports:

• A recent WMO report – which highlighted that last year was record-breaking in terms of temperatures, greenhouse gasses and natural disaster severity and frequency.

• A report by Swiss Re – The economics of climate change (April 2021) which highlighted that even with 2 degrees increase in temperature worldwide  there would be 11% reduction in GDP by 2050.

 

There is a need to see risk pools within a package of measures and they are only one financial protection strategy within a whole package.

Nicola Ranger

 

Benedikt noted that pools can be difficult to set up and that there are key lessons around political commitment and ownership, international support, and appropriate and sustainable financing.

Once designed and set up however, risk pools can be very powerful components of wider DRM strategies, with other benefits include building and strengthening regional collaboration, planning for disasters and investing in public good.

The role of external partners, such as development banks, is a key advantage to countries within Risk Pools, particularly:

• Connecting with other external partners who can provide risk platforms 

• Convening between government and private sector partners, including capital providers

• Provide technical advice and capacity building in key technical, analytical and management activities

• Help with financing (capital and premium financing) 

Risk pools are an important way for national governments to collectively plan for dealing with impacts from a financial perspective, but finance needs to reach the right beneficiaries at the right time. The primary aim is to ensure payments are disbursed as efficiently as possible at the point of need and this means that the whole risk transfer chain, from capital provider to local beneficiaries, needs to be properly designed and for the correct enabling mechanisms (including legislative and accounting) are in place.

 

In a pool, countries work together, and show solidarity and common purpose, providing the means to sharing knowledge and growing collective capacity.

Benedikt Signer

 

Lesley explained that risk pools, such as the African Risk Capacity (ARC), are designed to provide affordable and effective financial support to its members, through lowering the cost of insurance for enabling secure access to capital, enabling the participation of countries to harness capital on appropriate terms, and to spread both costs and benefits across a wider group of recipients through mutual organisation and support. Engagement and collaboration with humanitarian and development agencies, such as WFP and START Network, ensures that risk financing programmes can be most effectively designed and delivered to meet the needs of member countries.

For example, in Africa, agriculture contributes approximately 1/3 of GDP and includes 2/3 of the workforce, so it is important that the risk pool is able to deliver financial protection works with farmers organisations and the private sector, to ensure delivery of a holistic solution that reaches the vulnerable agricultural communities.

 

Risk Pool Case Study: African Risk Capacity

African Risk Capacity (ARC) is a Specialized Agency of the African Union established to help African governments improve their capacities to better plan, prepare, and respond to extreme weather events and natural disasters. It includes 34 countries in Africa, out of 54 countries. 24 have Memoranda of Understanding to commit to a programme of work, including capacity-building, risk assessments. Of these, 14 are committed to having insurance to support them in the event of a disaster. Since 2014, ARC has paid out over $65mn to countries affected by drought.

The African Risk Capacity is comprised of two entities: the African Risk Capacity Agency and ARC Limited (Ltd). Together, they provide ARC Member States with capacity building services and access to state-of-the-art early warning technology, contingency planning, and risk pooling and transfer facilities.

Through collaboration and innovative finance, ARC enables countries to strengthen their disaster risk management systems and access rapid and predictable financing when disaster strikes to protect the food security and livelihoods of their vulnerable populations. ARC risk pools aggregate risk from across the continent each season to take advantage of the natural diversity of weather systems across Africa. The risk pool then takes on the risk profile of the group, rather than the risk profile of each individual country, combining the uncertainty of individual risks into a calculable risk for the group.

 

How can risk pools best encourage resilience to natural disasters?

Nicky responded that risk pools provide the ability to benefit from economies of scale and provide financial efficiency for countries, as part of a wider DRM strategy where risk mitigation is also used to deal with shocks (such as large natural disaster events). Insurance is not a resilience method itself but can support integrated resilience plans – it is a safety net to be used to manage residual risks after other adaptation and mitigation measures have been applied. Essentially risk pools should be seen as part of a risk management package, empowering countries to take ownership of their risks through collective adaptation and mitigation strategies. There is a mutually beneficial arrangement between Disaster Risk Reduction and risk financing, because as risk is reduced, insurance should be cheaper, thus creating a virtuous circle of benefits from payouts to member countries. However, the signal can be slow to filter through (hence the rationale for donor support where needed) and there is an opportunity to develop proactive dialogues between countries to encourage ‘resilience first’, backed up by risk financing. The risk pools work best where there is a contingency plan in place to act, and systems ready to scale up (like shock responsive social protection) to get support quickly to those in need.

 

Risk pools help make insurance affordable for countries, but need to be implemented alongside risk reduction, preparedness plans and shock-responsive delivery systems so that money can reach those in need after a disaster quickly.

Nicky Jenns

 

Benedikt added that that by providing a financial perspective to risk, pooling and risk financing can encourage governments to recognize the value of an integrated risk management strategy which combines risk reduction and transfer strategies.

One of the largest changes over the last decade has been that national Ministries of Finance are now becoming the primary counterparty departments in Pool structures, recognizing that the links between development and fiscal policy are increasingly important and have a direct role in preparing for physical climate risks.

An optimal distribution or geographical spread that can spread the risk (assuming most natural disasters will not affect the whole of the region within the Pool) is a key aim of mature Risk Pools, but it is important to ensure that Pools can be started, by working with countries which are in a position to work together as starting point, and then working to expand as other countries are able to join.

 

Financing must reach the right beneficiaries at the right time, through social protection and other systems. If the money sits in a bank account it does not do much good. Financial planning within countries is critical.

Benedikt Signer

 

Lesley noted that going through a risk pooling framework helps countries understand and plan for disasters. For example, involvement in a regional risk pool will require countries to consider the roles and responsibilities of key government, national agency and external partners across risk reduction, mitigation and risk transfer, for example: 

• Ministry of Interior – emergency response, disaster management

• Ministry of Finance – insurance programme management, accounting, governance

• National insurance industry – local risk capacity, claims management, analytics

The types and severities of each peril can determine how individual countries, and their respective agencies, will organise and mobilise within a risk pool, and how they can integrate. The creation of a managing entity is a key action within the Risk pool, to act on behalf of each member, and to centralise the resources and methodologies applied.

 

What are the main challenges in ensuring risk pools are effective? How may this change going forwards?

Lesley noted that the initial challenge is very often in countries being able to assess the position of financing within a clear disaster risk framework. In Africa most countries do not yet have a framework for disaster response, so there is a need to go through this process. It important to identify the accountable government departments and agencies, and to ensure there is an appropriate political mandate from the heads of state and ministers to enable the countries’ engagement. Managing the political engagement is extremely complicated. The affiliation of ARC with the African Union provides a means to engage countries at the appropriate political levels.

There is often a challenge of premium affordability and premium payments are often competing against other national priorities, including health, education and social development. Costs are also related to the size of the risk pool. If you have a limited number of countries as members, premiums can be more costly and the share of the fixed costs will be greater per member. Equally the benefits of diversification may be reduced with a smaller spread of risk. Expanding the number of participants will act to reduce risk and operational costs.

 

Risk Pools such as ARC can help countries identify and own their risks, and to develop appropriate risk management strategies, including financial risk transfer.

Lesley Ndvolu

 

There is also a political challenge with a need to help politicians and ministers understand the benefits which requires efforts to determine the costs and benefits of the pooling arrangement, based on best assessments of the likely frequency and severity of future losses, and likely costs against payouts. Both Lesley and Benedikt highlighted the importance of engaging with key stakeholders throughout the development of a risk pool, in particular to ensure that there is clarity on the expected benefits, and socio-economic value, of the risk pool, associated capacity building and risk reduction strategies.

Nicola added that there is a problem of perception of the performance of risk pools once in place. The ability of pools to make disbursements at the point of need is the ultimate determinant of their success. Assessment of impact and social value are often difficult to monitor, and the value of insurance is not always easily determined, particularly where insurance is not already well established as a common means of financial risk transfer.

 

How do you develop something that is both politically and financially sustainable, that also builds resilience?

Nicola Ranger

 

Perception of effectiveness is a real problem. Risk Pools do work well, but the problem is whether they are perceived to be successful. The value of the scheme will need to be clear to the countries, particularly when they may not see a financial benefit in periods of few or no payouts.

This needs a careful approach to determining the optimal type and level of coverage. The challenge will be to set the level of losses to be covered by the insurance (often termed the ‘attachment point’) to a level which will provide payouts for more regular events, but this will in turn result in larger premium costs due to the higher likelihood of losses occurring. Detailed assessment of expected losses, and the use of a range of innovative approaches that can provide the option to pay out against more frequent, but smaller, losses; as well as protection against the largest potential disasters.

Benedikt agreed and noted that managing expectations is also critical. Expectations can become misaligned, particularly after countries have invested considerable resources and time into the development of a pooling risk transfer product. There is a perception that there will be financial protection from future events, but if there is no payout, due to the particular conditions of coverage not being met, it can result in erosion of confidence in the programme, and potential withdrawal. Flexibility in the design of the risk transfer structure can work to reduce issues of expectation misalignment.

 

In response to the audience question on how pools can work to deliver development impact, and constantly improve the ability to deliver to the key objectives, Lesley replied that risk pools are important in terms of meeting objectives, not just impact on people, but also in the way they influence government policies, in taking stock of the risks they are exposed to, with a plan to address them. Most people in Africa are vulnerable, so plans are critical.

Claims payout is critical. There is a detailed contingency plan for ARC members in how they will use the funds from ARC payout.  This encourages key strategic questions of how benefits will be made available at the point of need and in good time. ARC can pay out initially within 10 days of the event and this can reduce the negative development impacts of shocks.

 

Risk pools require governments to have a detailed plan on how the funds will be used - where will grain be imported from, who will it go to?

Lesley Ndvolu

 

Nicky added that the development impact (how payouts support quicker recovery and reduce negative impacts on people) can assess the value of risk pools, and help make the case for these to be aid-funded. An example of good development impact reporting can be seen in the reporting of the START network’s drought response in Senegal in 2020, funded by ARC, alongside a Government of Senegal-led response.

In answer to the question of how risk pools can be designed to be flexible to changing risks and conditions, Nicola made the point that risk pools are very flexible arrangements and can cope with changing risks. One consideration will be how to manage the challenge of potentially increasing premiums due to changing levels of emerging risks, for example potentially covering pandemic risk coverage, which again highlights the need for risk pools to deal with increasing complexity.

Benedikt added that pools can be set up as needed, ensuring the governance and institutional arrangements are appropriate to enable flexibility. Pools do evolve to add more products and coverage as they develop.

 

COVID-19 has shown that we need to think about the changing nature of risk, when they may not have been included in the original risks covered by the pool.

Nicola Ranger

 

What role can geography and geographers have on developing risk pools, for example to ensure that financing most effectively reaches beneficiaries?

Nicky emphasised that geographers can make key contributions to the development of risk and resilience pools, particularly in contributions to the development and validation of the models and data essential to building the view of risk, as well as the frequencies and severities of future events, particularly where there is a complex spatial and temporal interdependency between natural events. Geographers can provide a key role, working in-country with NGOs and national governments to improve the ‘ground truthing’ of the models and data, which is critical to successful delivery.

 

Geographers are really important for the process, both from the technical perspective – there needs to be ‘ground-truthing’ of some of the models used, and in understanding and making the case for these kinds of risk financing arrangements.

Nicky Jenns

 

More resources

World Resources Institute - The future of disaster risk pooling for developing countries: where do we go from here?

World Bank Group - Sovereign climate and disaster risk pooling

 

Watch the session recording