Case study

Disaster Resilience Framework

Resilience Framework

A financial response for climate-vulnerable countries

Reimagining Resilience

John Neal, Lloyd’s Chief Executive Officer talked to us about how the insurance industry has developed a framework which blends public and private investment with insurance, to drastically improve disaster and climate resilience in low- to middle-income countries.   

The direct impact of climate change is not always felt equally around the world. As the planet’s climate changes and extreme weather events become more frequent – evidenced by flooding, wildfires, droughts and windstorms – it’s made clearer that climate risk is disproportionately concentrated in developing nations.   

The countries most at risk are often the ones most vulnerable. The Insurance industry has an important role to play in improving global resilience and reimagining the financial response when natural catastrophe strikes. This is a challenge which must be met with urgency, as unlike industrialised countries, in developing and emerging nations the share of economic losses from natural catastrophes that are not covered by financial risk-transfer solutions remains well above 90%. While foreign aid can help societies recover following major disasters, developing economies need more reliable and sustainable financial mechanisms in place.  

The Disaster Resilience Framework, launched at COP26 and developed by the Sustainable Markets Initiative Insurance Task Force aims to provide central authorities with a framework to proactively manage the impact of climate perils, enabling direct access to risk financing and disaster mitigation support in order to offer effective and sustainable protection to those in greatest need. 

Creating a Resilience Framework

Preventative measures prior to an event are equally important as insurance, as every $1 spent in risk reduction saves $4.50 in ex-post recovery. The challenge is to build the confidence and incentives necessary to unlock the forecasted investment, as well as pass on residual risk to those who are set up to bear it.

The Task Force has developed an adaptable, scalable framework showing how insurers and investors can provide a blended finance solution. 

  1. Pre-disaster risk reduction – the insurance sector’s highly developed probabilistic modelling approach, applied in the context of future warming scenarios, provides climate risk insight, identifies the risk of doing nothing and incentivise investment in risk mitigation.
  2. Building resilience with contingent risk finance –  by pooling risk, through government contingency funds or insurers, high probability, low impact events can be mutualised. Parametric insurance instruments are set up to pay claims in the most time efficient way possible, which helps low resilience countries to recover faster. Increasing the availability of indemnity insurance for less vulnerable business enables governments to concentrate funding for the most vulnerable people.
  3. Post-disaster response and resilience – through public-private partnership, insurers can empower investors, asset managers and other risk owners with the tools and knowledge to develop their own view of risk, for disaster risk response as well as financial instruments.

Taking Action

In an effort to demonstrate the framework’s potential and drive action at pace, the Sustainable Markets Initiative Insurance Task Force is actively working across two pilot projects focused on specific perils faced in Kenya and Fiji. 

Together with agencies in Kenya, they are developing a novel approach to bring private sector resources to bear in support of more resilient agriculture across the drought and flood prone country. The initiatives being explored include a crop or livestock insurance mechanism tied to an impact investment bond, in which the government uses the principal to finance resilience initiatives among small holders. 

The Task Force has also created a parametric cyclone solution, based on wind speed, which is designed to provide livelihood protection for low-income households in Fiji, whose assets are currently uninsurable or uninsured. Parametric insurance products, which offer a pre-determined amount of coverage based on a pre-determined trigger event, can provide a mechanism to increase insurance coverage and speed-up claims pay-out after the catastrophe. 

These two projects demonstrate the adaptability of the disaster resilience framework, highlighting the opportunity that exists to blend public and private investment with insurance to reengineer and drastically improve disaster resilience in low- to middle- income countries most at risk from climate-exacerbated extreme weather events.

Collaboration Makes a Difference

The insurance industry has been engaged in disaster risk finance for many decades, and are passionate and committed to collaborating with governments to protect communities across the world. Building societal resilience to climate risk is at the heart of the Disaster Resilience Framework’s strategy, the time for collaboration is now.

As a convener of risk expertise and finance, the Insurance industry has a unique opportunity to enable climate-vulnerable countries to flourish through sustainable financing, relevant insurance products and effective risk management. 

Insurance providers look forward to working with their stakeholders on this important mission. 

 

This case study was prepared by Lloyds.