Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers World Bank Technical Contribution to the 2019 G20 Finance Ministers’ and Central Bank Governors’ Meeting Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Disclaimer © 2019 International Bank for Reconstruction and Development / International Development Association or The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. 2 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers World Bank Technical Contribution to the 2019 G20 Finance Ministers’ and Central Bank Governors’ Meeting 1 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Acknowledgments Abbreviations This report has been prepared by the World ARC African Risk Capacity Bank as a technical contribution to the 2019 ASEAN Association of Southeast Asian Nations G20 Finance Ministers’ and Central Bank Governors’ Meeting. BMZ Federal Ministry of Economic Cooperation and Development (Germany) The World Bank team was led by Olivier Mahul and composed of Benedikt Lukas Signer, Hideaki CAT DDO Catastrophe Deferred Drawdown Option Hamada, Catherine Desiree Gamper, and Rui CCRIF Caribbean Catastrophe Risk Insurance Facility Xu, all from the Disaster Risk Financing and Insurance Program of the World Bank’s Finance, CCRIF SPC  Caribbean Catastrophe Risk Insurance Facility Competitiveness and Innovation Global Practice. Segregated Portfolio Company CCS Consorcio de Compensación de Seguros The report was greatly enhanced by guidance (Spain) from Alfonso Garcia-Mora and Zoubida Allaoua, as well as internal reviews and inputs from FONDEN Mexico’s Natural Disaster Fund Antoine Bavandi, Barry Patrick Maher, Cecile (Fondo de Desastres Naturales) Thioro Niang, Cigdem Aslan, Jack Campbell, Lewis Hawke, Naomi Cooney, Ralph Van Doorn, GDP gross domestic product Richard Andrew Poulter, Shoko Takemoto, and GRiF Global Risk Financing Facility Stephane Hallegatte. HSNP Hunger Safety Net Program (Kenya) The team gratefully acknowledges the contribu- IFI international financial institution tions and feedback provided by participants at the session on financial resilience against natural IMF International Monetary Fund disasters in the G20 Seminar on Innovation for KfW German Development Bank Inclusive Development held in Tokyo, Japan, on January 16, 2019. These included Yoshiki NDEF National Drought Emergency Fund (Kenya) Takeuchi (Ministry of Finance of Japan), Suahasil NDRRA Natural Disaster Relief and Recovery Nazara (Ministry of Finance of Indonesia), Tony Arrangements (Australia) Burdon (United Kingdom’s Department for International Development), Krishna Srinivasan NUSAF Northern Uganda Social Action Fund (Uganda) (International Monetary Fund), and Thomas Kessler (Asian Development Bank). PCRAFI Pacific Catastrophe Risk Assessment and Financing Initiative The report was edited by Anne Himmelfarb. PCRIC Pacific Catastrophe Risk Insurance Company Design and layout were by büro svenja. The report was prepared during the period September PEF Pandemic Emergency Financing Facility 2018–May 2019 and was sponsored by the PML probable maximum loss Government of Japan through the Japan–World Bank Program for Mainstreaming Disaster Risk PPP public-private partnership Management in Developing Countries. SEADRIF Southeast Asia Disaster Risk Insurance Facility   V20 Vulnerable Twenty Group 2 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Finance ministries have “ started integrating disaster risks in their wider macro- fiscal framework in order to better manage fiscal shocks from disasters.” 3 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Table of Contents Acknowledgments 2 Abbreviations 2 Executive Summary 6 1. Introduction 10 Financial Resilience as Part of a 2.  Country’s Macro-Fiscal Framework 14 2.1 National Strategy for Financial Resilience 15 2.2 Enhancing National Financial Resilience through Regional Collaboration 22 Disaster Risk Finance 2.0: 3.  What’s Next in Developing Countries? 26 3.1 Catastrophe Risk Pools: Sharing More than Catastrophe Risks 27 3.2 Targeted Financial Solutions to Address the Drivers of Contingent Liabilities 30 3.3 Technology and Innovation to Enhance Financial Resilience 32 3.4 Revisiting the Support of Development Partners to Financial Resilience 39 New Frontiers in Building 4.  Financial Resilience 42 4 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Reinforcing Roles of Governments, 5.  Development Partners, and the Private Sector 45 6. References and Background Sources 48 Boxes BOX 1: Summary of past G20 work on disaster risk finance 16 BOX 2: Good practice in the design of financial protection strategies against disasters 17 BOX 3: Good practices for domestic disaster risk finance policies 19 BOX 4: Overview of disaster risk financing instruments 21 BOX 5: Overview of three existing sovereign catastrophe risk pools 23 BOX 6: Lessons on bringing sovereign catastrophe risk pools to scale 24 BOX 7:  Joint catastrophe bond for the Pacific Alliance: Colombia, Chile, Mexico, and Peru 25 BOX 8: Southeast Asia Disaster Risk Insurance Facility 28 BOX 9:  Applications of big data for disaster risk finance before, during, and after a disaster 36 BOX 10: An end-to-end public asset financial risk management system? 37 BOX 11: The InsuResilience Global Partnership 39 BOX 12: Key guiding principles of GRiF support 41 Figures FIGURE 1: Three elements of disaster resilience 13 FIGURE 2:  Indicative structure of a joint catastrophe risk insurance program for ASEAN middle- income countries 29 FIGURE 3:  Indicative diversification benefits modeled for Indonesia, the Philippines, and Vietnam 29 Table TABLE 1: Disaster-related explicit and implicit contingent liabilities 18 5 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Executive Summary Governments face These losses can arise from rapid-onset shocks as well as long-term stresses. growing contingent Sources of government liabilities in the aftermath of a disaster vary. They liabilities from disasters include fiscal transfers to subnational governments, rehabilitation of damaged as they tend to shoulder assets, immediate relief and livelihood support, assistance to uninsured a significant share of households, assistance to small enterprises, and stabilization of the private disaster response and sector. Long-term stresses can come from disruptions to agriculture value recovery costs. chains and energy price shocks—for example from reduced hydropower generation during a drought. Disaster shocks tend to A recent assessment by the International Monetary Fund (IMF 2018a) reveals increase government that disasters’ macroeconomic impacts can create a vicious cycle that lowers expenditure and hamper growth and increases debt, especially in small and vulnerable states; some economic activities. countries, including the Dominican Republic, Samoa, and Vanuatu, have embedded macroeconomic assessment of disaster risk into debt sustainability analyses. Infrequent but severe disasters, such as earthquakes and tropical storms, can lower sovereign ratings, potentially increasing interest expenses (Standard & Poor’s 2015). An increasing number of This approach ensures timely and efficient access to funds; and by making countries are developing funding more predictable, it also improves the resilience of national and financial protection subnational governments, households, and businesses. Middle-income strategies—a suite of countries such as Indonesia are increasingly integrating these strategies in policies and financial their macro-fiscal assessment and planning by identifying and quantifying instruments—as part of their disaster-related contingent liabilities, with some countries starting to their macro-fiscal policy include the results in fiscal risk statements (OECD and World Bank 2018). to secure access to pre-arranged financing and protect the fiscal balance and budget when disasters strike. 6 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Investments in physical This is reflected in the Sendai Framework for Disaster Risk Reduction, which and social resilience calls on countries to invest in risk reduction and preparedness through complement and rein- structural and nonstructural measures. Risk-informed financial decisions can force financial resilience. strengthen physical and social resilience in a sustainable manner through targeted public investment in risk reduction and preparedness. By reducing damages and the subsequent reconstruction costs, resilient infrastructure reduces disaster-related contingent liabilities, in turn contributing to macro- fiscal sustainability. Nonstructural measures, such as early warning and business contingency planning, can reduce potential disaster impacts by helping people and firms manage their risks. Developing the capacity of people and businesses to manage risk reduces the need for public intervention. Pre-arranged risk Following a disaster, a government could rely on post-disaster financing financing can help instruments, including budget reallocation, borrowing, taxation, and interna- governments reduce the tional aid. However, it often takes a long time until these funds become fiscal cost of disasters. available, which can delay disaster recovery and reconstruction. Pre-arranged risk financing instruments provide governments with immediate access to funds and mitigate the negative impact of disasters on economic activities and future fiscal costs. Financing can be tied in advance to efficient and transparent disbursement channels to ensure that resources reach the targeted beneficiaries on time. Pre-arranged disaster risk financing can also promote preparedness and recovery by supporting the adoption of clear rules that support additional measures to strengthen resilience of damaged assets. Sovereign catastrophe The existing regional facilities in Africa, the Pacific, and the Caribbean have risk pools, established developed new financial products, responding to specific demands from the to help especially low- participating countries. The newly developed Southeast Asia Disaster Risk capacity countries better Insurance Facility (SEADRIF) has been designed since its inception to provide access financial markets, multiple products and services to Southeast Asian countries, including are evolving toward middle-income countries. Beyond the provision of financial instruments, multifunctional platforms SEADRIF also acts as a platform for regional collaboration, financial innovation, to strengthen financial and investment in public goods, with the aim of contributing to the resilience in their region. development agenda of the participating countries. 7 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Governments are This approach involves not only using more precisely targeted financial moving toward adopting instruments, but also putting in place domestic mechanisms to clarify and more sophisticated risk quantify disaster risks, and then connecting these risks directly to funding financing strategies that mechanisms, whether from the budget, international partners, or financial better match financial markets. Domestic pools can also help deepen market-based catastrophe instruments to their risk insurance solutions. These steps help governments manage their liabilities, especially for disaster-related continent liabilities more efficiently. Indonesia, for example, public assets (including launched the national disaster risk financing and insurance strategy, which infrastructure), national- includes the development of a pooling fund and insurance program for subnational cost sharing, public assets. and social safety nets. New technology and Countries are investing sizable technical resources in testing, developing, innovations such as and scaling up new programs to collect and analyze data for risk-informed Earth Observation Data, financial decisions. While technology can support the efficiency and Fintech, and big data effectiveness of those processes, it cannot replace the long-term underlying have the potential to reforms needed to improve financial risk management. significantly enhance and boost systems for financial resilience against disaster shocks. Development partners Countries may require additional incentives to develop pre-arranged financing continue to play a and plans that reduce reliance on ad hoc humanitarian aid and budget critical role in helping reallocation. The newly established Global Risk Financing Facility (GRiF) aims developing countries to provide such incentives under a set of principles, which help public inter- improve their financial ventions maximize the impact of disaster risk finance and insurance solutions. protection strategies. GRiF is a member of the InsuResilience Global Partnership, launched in 2017 as a joint initiative of a number of countries in G20 and the Vulnerable Twenty Group (V20), to strengthen the financial resilience of developing countries against the impacts of disasters. Recent experiences of First, governments are stronger when they integrate financial resilience to G20 countries and others shocks as a core component of macro-fiscal frameworks. For example, have led to three new financial resilience could be integrated in key fiscal planning tools such as frontiers on innovative macro-models, fiscal risk statements, debt sustainability analyses, public crisis and disaster expenditure reviews, public investment diagnostics, and poverty diagnostics. risk finance. Second, governments can expand the scope of financial protection strategies and instruments to a range of other crises—from public health shocks, cyber risks, and risks of conflict, to famine and displacement and migration. Finally, governments can develop financial protection policies and instruments against interconnected risks. The growing awareness and strengthened management of multiple sources of real-world risks by finance officials will likely lead to increased consideration of government-wide financial risk management. 8 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Although significant Disaster-related contingent liabilities can never be fully identified and quanti- progress has been fied, as most of these liabilities are implicit, often based on a moral obligation achieved in disaster risk without legal commitments. Better financial protection requires continued finance, some limitations efforts by governments to enhance legal, institutional, and policy frameworks. and challenges remain. Governments may also need to strengthen the appropriate regulatory and governance frameworks to implement sustainable disaster risk financing and insurance solutions. All successful reforms Developing disaster risk finance policies and instruments is an important start with concrete first step toward improving macro-fiscal policy frameworks and public financial steps and an ongoing management. Even advanced risk financing reforms start with and depend focus on enhancing on getting the basic building blocks in place, such as risk assessment tools, fundamental systems public asset registries, and cash delivery systems. Ministries of finance can and institutions. begin with basic reforms while testing and adding more advanced instru- ments and mechanisms over time. Financial resilience Better management of contingent liabilities as part of broader fiscal risk requires the leadership management requires leadership by ministries of finance, in close collaboration of ministries of finance with line ministries and disaster management agencies, to develop financial in coordination with protection measures. For example, ministries of finance could ensure that other public agencies each line ministry is responsible for developing its financial protection strategy and the private sector. (e.g., using a standard contingent liability approval framework) and that the overall fiscal risks related to natural disasters are consolidated and properly managed. In some countries, development partners play an important role in helping governments develop and implement financial protection strategies. The private sector can bring risk capital, innovative financial solutions, and new technology, as well as enhanced mechanisms to target beneficiaries. At the request of G20 (i) take stock of the developments in fiscal management of disaster risks Finance Track members, within the broader macro-fiscal framework; (ii) highlight recent progress by this discussion note was individual countries and the international community; and (iii) present new prepared to frontiers in disaster risk finance. 9 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 1. Introduction Natural disasters can Major disasters have caused severe economic disruptions or even economic cause significant contractions. The cost of some disaster events has amounted to over 200 economic and fiscal percent of gross domestic product (GDP) in small island states (IMF 2018a) shocks to governments. and over 25 percent of GDP in middle-income countries—e.g., losses from the 2008–2011 drought in Kenya (Government of Kenya 2012). Even in advanced economies major disasters have caused damages worth up to 20 percent of GDP , such as the earthquakes in Chile and New Zealand in 2010 (OECD 2014). Damages to private assets such as buildings and factories directly impact households and businesses, interrupt economic activity, and ultimately reduce government revenue. Large multinational firms can suffer significant interruptions to production as just-in-time supply chains break down, causing potentially long-term economic impacts (Haraguchi and Lall 2015). These impacts affect the long-term growth and economic development of countries, and directly slow down efforts to reduce poverty and build shared prosperity. 10 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Governments face Sources of government liabilities in the aftermath of a disaster vary. They growing contingent include fiscal transfer to subnational governments, rehabilitation of damaged liabilities from disasters, assets, immediate relief and livelihood support, assistance to uninsured as they tend to shoulder households, assistance to small enterprises, and stabilization of the private a significant share sector, as well as long-term stresses such as disruptions to agriculture value of the costs for disaster chains and energy price shocks—due for example to reduced hydropower response and recovery. generation during a drought. Public assets are one of These assets include public buildings such as schools and hospitals, as well the largest contributors to as infrastructure such as roads; costs to the government are especially high in government expenditures countries where insurance coverage for such assets is low (OECD and World following disasters, Bank 2018). Sharp and unexpected increases in expenditures, coupled with a especially in middle- and decrease in government revenues as a consequence of economic disruptions, high-income countries. can lead to an increase in public debt. Recent work by the International Monetary Fund (IMF 2018b) highlights the significant and often unreported contribution of public assets to a country’s overall balance sheet. Often these assets are not well managed and accounted for, so that a country’s balance sheet likely underestimates the real impact of damage. Disaster shocks tend to A recent assessment by the IMF (2018a) reveals that disasters’ macroeco- increase government nomic impacts can create a vicious cycle that lowers growth and increases expenditure and hamper debt, especially in small and vulnerable states; some countries, including the economic activities. Dominican Republic, Samoa, and Vanuatu, have embedded macroeconomic assessment of disaster risk into debt sustainability analyses. Infrequent but severe disasters, such as earthquakes and tropical storms, can lower sovereign ratings, potentially increasing interest expenses (Standard & Poor’s 2015). Ministries of finance have An increasing number of countries are developing financial protection started integrating these strategies—a suite of policies and financial instruments—to secure access to risks into their wider financing in advance of shocks and protect the fiscal balance and budget macro-fiscal framework when disasters strike. This approach ensures timely and sufficient access to to better manage fiscal funds. By making funding more predictable, it also improves the resilience of shocks from disasters. national and subnational governments, households, and businesses. Large middle-income countries such as Indonesia are increasingly integrating these strategies in their macro-fiscal assessment and planning by identifying and quantifying their disaster-related contingent liabilities, with some countries starting to include the results in fiscal risk statements (OECD and World Bank 2018). 11 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Sustainable financial Investments in physical and social resilience complement and reinforce resilience requires financial resilience. By reducing damages and the subsequent reconstruction physical and cost, resilient infrastructure reduces disaster-related contingent liabilities. social resilience. This effect is reflected in the Sendai Framework for Disaster Risk Reduction, which calls on countries to invest in risk reduction and preparedness through structural and nonstructural measures. Structural measures, such as physical construction and enhanced engineering technology, and nonstructural measures, such as early warnings and business continuity planning, can reduce potential disaster costs by improving resilience. For example, damages to Caribbean countries from Hurricanes Irma and Maria in 2017 could have been US$16.5 billion less across all islands if buildings had been constructed by 2018 building codes (Centre for Global Disaster Protection and Lloyd’s 2018). Figure 1 shows three elements of resilience against disasters. FIGURE 1 Three elements of disaster resilience Physical Social resilience resilience Reduce risk and prevent Help households disasters through and society cope physical measures, with disaster shocks, including investments in through measures high-quality and resilient such as shock- infrastructure. responsive safety Financial nets that can scale up resilience following a disaster. Pre-arrange predictable funding for post-disaster activities to protect the fiscal balance, subnational governments, households, and businesses. This is a core mandate of ministries of finance. 12 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Risk-informed financial Financing can be tied in advance to efficient and transparent disbursement decisions can strengthen channels to ensure that resources reach the targeted beneficiaries at the right physical and social time. Pre-arranged disaster risk financing can also promote preparedness and resilience through recovery by supporting the adoption of clear rules that support additional targeted public invest- measures to strengthen resilience of damaged assets. Ultimately, developing ment in risk reduction the capacity of people and businesses to manage risk helps to reduce the and preparedness. need for public intervention. Financial resilience Countries can better manage disaster-related expenditures when they fully benefits from and in turn integrate disasters shocks in budget planning and risk management. Where helps build stable, public resources are scarce, stable financial markets help share the risk equitable, and efficient among public and private stakeholders. A strong private sector that provides markets, institutions, needed services can also increase the efficiency, transparency, and discipline and economies. of fund mobilization and execution; for example, the insurance industry, financial markets, and technology companies can develop and deploy innovative disaster risk assessment and financing instruments. Beyond risk transfer, strong payment systems help ensure that funding reaches the intended beneficiaries in an efficient manner. At the request of the The note (i) takes stock of the developments in fiscal management of 2019 G20 Finance Track disaster risks within countries’ macro-fiscal framework; (ii) highlights recent members, this discussion progress in actions taken by individual countries and the international note was prepared to community; and (iii) presents new frontiers in disaster risk finance and inform the discussions expected future developments.    under the G20 Finance Track on financial resilience against disaster risks. Even in advanced economies “ major disasters have caused damages worth up to 20 percent of GDP. This can be up to 200 percent in small island states” 13 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 2. Financial Resilience as Part of a Country’s Macro- Fiscal Framework Ministries of finance have This approach complements and supports long-term efforts to enhance started integrating disas- macro-fiscal policies and public financial management: strong fiscal buffers ter risks in their wider help countries absorb shocks and crises, including those arising from macro-fiscal framework disasters; and sound public financial management—which requires long-term to better manage fiscal commitment and reform efforts by governments—helps facilitate quick shocks from disasters. mobilization and effective delivery of financial resources after a disaster. Financial resilience An increasing number of countries are strengthening physical risk mitigation reinforces but also measures, including physical construction, regulation, and maintenance requires physical and of infrastructure assets as well as associated training of personnel. Social social resilience. resilience has also been enhanced—for example, through disaster risk insurance arrangements for homeowners and small enterprises. These actions can enhance financial resilience by decreasing the potential disaster costs. 14 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Financial resilience can Increasingly over the past decade, countries are successfully working together, be further strengthened complementing their national level efforts with regional disaster risk finance through regional vehicles and initiatives. collaboration. 2.1 National Strategy for Financial Resilience National financial Such strategies include the plan for pre-arranging or quickly mobilizing the protection strategies set required resources, as well as for effectively executing these funds. Ultimately, out the policies and these strategies mitigate long-term financial impacts on the public budget as financial instruments well as on households and businesses. Efficient risk management by countries to increase countries’ starts with efforts to strengthen management of budgetary resources through financial resilience to strong public financial management processes. These can be complemented disaster shocks. with support from international partners and financial instruments such as insurance. Ministries of finance This is due to their dual role as financiers (ministries of finance must ultimately play a leading role in fund the response to shocks) and as conveners across the government implementing effective (given that risk management is an inherently cross-cutting agenda). Beyond disaster risk finance their role in raising and allocating public funds, ministries of finance also policies, in close consolidate the government’s spending programs, determine adequate collaboration with allocation of funds across sectors, and manage transfers across levels of line ministries and governments. They are uniquely positioned to align incentives for line disaster risk ministries to invest in risk reduction and adequate financial protection. Given management agencies. their expertise in raising funds from markets and managing public debts, ministries of finance are also well placed to introduce new financial mechanisms that utilize financial markets to develop innovative risk transfer and financing instruments. Countries can mitigate the long-term “ fiscal impact of disaster shocks by developing a strategy that supports policy objectives at the national, subnational, and individual levels.” 15 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Appropriate quantitative Such information is found in advanced risk assessments, which can provide financial information governments with data on historical hazard impacts and the probable future is essential to design cost of disasters. Under Mexico’s leadership, the 2012 G20 policy dialogue a national financial focused on the importance of linking disaster risk assessment to disaster protection strategy that risk financing mechanisms. A comprehensive stocktaking of lessons across includes an optimal mix G20 nations informed a policy framework to guide ministries of finance in of financial instruments conducting a comprehensive risk assessment, building on the past G20 and policies. studies on disaster risk finance (see box 1). BOX 1 SUMMARY OF PAST G20 WORK ON DISASTER RISK FINANCE G20 members have previously highlighted disaster shocks as key external risks. In 2012, the G20 Finance Ministers welcomed efforts by the World Bank and Organisation for Economic Co-operation and Development (OECD) to inform discussions on, and support the development of, a voluntary framework for disaster risk assessment and risk financing. In 2017, a number of G20 leaders stressed the need to increase resilience against climate risks, launching the InsuResilience Global Partnership as a joint initiative with V20, which built on the World Bank’s technical contribution to the G20 on sovereign disaster risk pooling. The relevant reports are summarized below. A special joint publication by the World A G20/OECD voluntary methodological The 2017 World Bank technical Bank and the Government of Mexico in framework was developed to contribution to the G20 focused 2012 highlighted the importance provide a tool for ministries of on sovereign catastrophe of integrated disaster risk finance and other stakeholders in risk pools as instruments to financing strategies and developing effective disaster risk enhance financial protection innovative financial solutions management strategies based on against natural hazards. It in strengthening resilience. It country practices and existing discussed the efficiency, revealed that policy makers need international frameworks. It effectiveness, and sustainability better information on risks and offered a series of concrete steps of existing pools from a political, associated economic, fiscal, for promoting these strategies, operational, and financial and social impacts in order to with risk analysis as the key first perspective. It also recommended arrive at informed decisions; and step, followed by risk communi- a set of priority action areas for it called for increased global cation, strategy development, and G20 countries and developing efforts to improve the exchange design of risk financing and risk countries to strengthen climate of risk data and risk assessment transfer tools. and disaster risk finance and methodologies. insurance solutions, including Source: OECD 2012. risk pooling. Source: Government of Mexico and World Bank 2012. Source: World Bank 2017b. 16 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Over the past decade, These are summarized in box 2. four core principles for effective disaster risk financing policies have emerged from international experience. BOX 2 GOOD PRACTICE IN THE DESIGN OF FINANCIAL PROTECTION STRATEGIES AGAINST DISASTERS The following four core principles guide good practice in designing financial protection strategies against disasters: $ Recovery Reconstruction Relief 1. Data and analytics 2. Timeliness of funding To make sound financial decisions, governments Speed matters, but not all resources are needed at need the right information. Appropriate risk infor- once. While rapid mobilization of funds is crucial mation allows public and private decision makers to support relief efforts and early recovery, the to assess the costs of disasters and make informed government has more time to mobilize resources investment decisions in allocating public resources. for reconstruction. $ Market Based Instruments Contingent Financing Budgetary Instruments 3. Risk layering 4. Disbursement of funds No single financial instrument can meet funding How money reaches beneficiaries is as important needs for all risks. The combination of financial as where it comes from. Governments require instruments making up the government’s dedicated mechanisms and expertise to effectively financial protection strategy should match the allocate, disburse, and monitor recovery and frequency and severity of expected disaster reconstruction funds. events along with associated funding needs. Source: World Bank 2018a. 17 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers A growing number of The experience of developing a strategic approach to financial resilience countries develop finan- differs across countries. High-income economies such as Australia, Japan, cial protection strategies New Zealand, and the United Kingdom are more likely to incorporate disaster as part of their broader risk finance planning in their broader fiscal or disaster risk management macro-fiscal policies. policies. In a growing number of middle-income countries, such as Colombia, Indonesia, Kenya, Peru, the Philippines, and Serbia, the ministries of finance have developed dedicated financial protection strategies against disasters. Disaster risks create Contingent liabilities are government obligations that are triggered when a contingent liabilities on potential but uncertain future event such as a natural disaster occurs. They countries’ balance sheets, are categorized as explicit or implicit liabilities. Explicit liabilities are those but often these liabilities underpinned by legal obligations, such as guarantees and pre-arranged cannot be fully captured. insurance agreements. Implicit liabilities, on the other hand, are expenditures the government is expected to make due to a perceived moral obligation, without formal legal commitment; in some cases, these liabilities include support for public-private partnerships (PPPs) or state-owned enterprises. Many disaster-related contingent liabilities are implicit and difficult to quantify. Table 1 gives examples of explicit and implicit contingent liabilities from natural disasters. TABLE 1 Disaster-related explicit and implicit contingent liabilities TYPE EXAMPLES Explicit contingent Cost-sharing arrangement with subnational governments liabilities Recovery and reconstruction of damaged public assets Government guarantees for public corporations or PPPs  egal commitments for government compensation of losses L to private assets, farmers, or companies Implicit contingent Moral obligation to fiscally support ministries, agencies, liabilities private firms, and citizens in the aftermath of disasters Expanding ex ante commitments Tax reductions or economic support for small businesses 18 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Identifying, disclosing, Ministries of finance in some countries have advanced their contingent liability and mitigating disaster- management systems. For instance, HM Treasury in the United Kingdom has related contingent liabili- introduced a contingent liability approval regime, where line ministries are ties enables governments required to go through an approval process with the Treasury to take on new to integrate disaster- contingent liabilities. Such a supervising system for contingent liabilities related fiscal risks into could enable ministries of finance to actively monitor, manage, and mitigate macro-fiscal planning contingent liabilities across the government (HM Treasury 2017). and the formulation of national budgets. Governments generally Financial protection strategies usually aim to mitigate the long-term fiscal seek to protect their impact of disaster shocks on national and subnational governments, to country at multiple support businesses and households in better managing their risk, and to levels. reduce the impact of disasters on the poor and vulnerable. Countries can achieve these goals by developing strategies that support policy objectives at the national, subnational, and individual levels. At the individual/household level, for example, domestic disaster risk insurance schemes for homeowners are now in place in some G20 countries and beyond, including Japan, Switzerland, Turkey, the United Kingdom, and the United States. Box 3 sets out examples from Mexico, Australia, Japan, and Spain for the various levels. BOX 3 GOOD PRACTICES FOR DOMESTIC DISASTER RISK FINANCE POLICIES Mexico: Protecting the federal budget (to cover public buildings and infrastructure) and through catastrophe bonds; it has also purchased Mexico’s Natural Disaster Fund risk transfer instruments to cover exposure that (FONDEN) adopts a layered exceeds the budget allocation by issuing catastro- financial risk management phe bonds through the Word Bank. FONDEN was strategy. It receives a mandatory designed based on insurance principles to support annual budget allocation, the rapid and targeted disbursement of funds for which it complements with innovative financial disaster response and for rehabilitation of public instruments to smooth government expenditure on infrastructure. It relies on a transparent damage disasters. More specifically, FONDEN transfers reporting system and clear rules of disbursement. disaster risk through indemnity-based reinsurance Source: World Bank 2012a. 19 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Australia: Enhancing the financial system allowed claims to be settled quickly after resilience of subnational governments the Great East Japan Earthquake, which caused US$300 billion in losses in 2011 and resulted in total To enhance the financial payouts of around ¥1.27 trillion (US$11.4 billion).a resilience of subnational govern- Satellite images were used to identify total losses for ments against disaster risk, the buildings. As a result, 60 percent of claims were paid Australian government both provides subnational within two months and 90 percent within five months. governments with financial assistance and encourages them to reduce their disaster risk. Cooperative mutual insurers also independently provide Through the Natural Disaster Relief and Recovery earthquake insurance coverage, accessing international Arrangements (NDRRA), the Commonwealth reinsurance and capital markets for reinsurance formalizes conditions of financial assistance to protection. An estimated 39 percent of households are subnational entities. State governments develop covered against earthquake risks by the existing insurance funds to provide standardized insurance programs. The insurance case in Japan illustrates that coverage for public assets and access to international public-private partnerships and fully private insurance reinsurance capacity. State governments are also programs can coexist successfully to provide rapid and required to undertake independent assessments of effective financial compensation to homeowners. their insurance arrangements every three years and Source: World Bank and GFDRR 2012. Tsuda 2019. submit the results to the Commonwealth for review. Most states have developed a self-insurance system, such as government-owned captive insurers and Spain: Insurance for individuals mutual insurance pools for critical state-owned and businesses against assets. According to an assessment conducted by “extraordinary risks” Australia’s Department of Finance and Deregulation Spain’s Consorcio de (2011), most states have abundant and cost- Compensación de Seguros (CCS), a effective insurance arrangements for nonroad assets, state-owned enterprise, provides additional coverage which meet the NDRRA’s obligations. A number of for “extraordinary risks” that are not covered by private local governments insure non-road assets through a insurance policies for individual and business proper- mutual pool arrangement or commercial insurance. ties (e.g., residential assets, personal properties, cars, Source: Commonwealth of Australia, Department of Finance and railway vehicles) and personal injury. In Spain, it is Deregulation 2011. mandatory to cover “extraordinary risks,” including natural disasters (e.g., flood, earthquake, tsunami, volcanic eruption, and wind storm) and violent events Japan: Protecting homeowners (e.g., terrorism). To avoid adverse selection, the CCS’s against earthquakes surcharge is applied to all the relevant insurance Japan’s Ministry of Finance policies regardless of CCS’s actual coverage, and is has developed a public-private calculated based on specific rates determined for the earthquake insurance program type of insurance policies and covered assets, no for residential assets based on risk sharing between matter the location or risk profile of the properties or the private insurance sector and the government- individuals. The surcharge is collected through the backed Japan Earthquake Reinsurance Co. (JER). insurers that provide the main insurance policy. The Payouts are not proportionate to damage, but total amount of surcharge for the property insurance instead rely on a four-step system of total, large, policies was US$690 millionb in 2015, and the small, and partial losses, corresponding to 100 aggregated insurance payout between 1971 and percent, 60 percent, 30 percent, and 5 percent of 2015 was US$10.4 billion. the earthquake insurance policy limit. This simple Source: CCS 2016. a. The Japanese yen is converted to U.S. dollars at the rate of ¥112 per US$1. b. The euro is converted to U.S. dollars at the rate of 0.9 per US$1. 20 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Pre-arranged risk Disaster shocks tend to increase government expenditure and hamper financing can help economic activities—for example, by damaging critical infrastructure assets. governments reduce the Following a disaster, a government could rely on post-disaster financing fiscal cost of disasters. instruments, including budget reallocation, borrowing, taxation, and interna- tional aid. However, it often takes a long time until these funds become available, which can delay disaster recovery and reconstruction and cause long-lasting negative impacts on economic activities, raising public debt and lowering sovereign ratings, and in turn potentially increasing interest expenses. Pre-arranged risk financing instruments provide governments with immediate access to funds and mitigate the negative impact of disasters on economic activities and future fiscal costs (box 4). BOX 4 OVERVIEW OF DISASTER RISK FINANCING INSTRUMENTS There are multiple financing instruments that allow governments to finance the cost of disasters. These instruments can be categorized as those arranged before a disaster (ex ante) versus those mobilized after a disaster (ex post). The list below offers examples of financial instruments that have been used to finance post-disaster activities. Ex ante financing instruments Ex post financing instruments 1. Disaster reserve fund: A dedicated disaster 5. Budget reallocation: Redistribution of funds response fund, where undisbursed funds from other programs to cover emergency can be rolled over. response and recovery needs. 2. Contingency budget: A separate budget line 6. Borrowing: Raising of funds by issuing that is drawn down in the event of a bonds or contracting loans for recovery disaster shock. and reconstruction. 3. Contingent credit: A loan arranged in 7. Tax increase: Temporary or permanent advance that provides immediate liquidity tax increase as a last resort to finance once a predetermined trigger is met. post-disaster activities. 4. (Sovereign) risk transfer instruments: 8. International aid: External development Instruments such as insurance and partners’ assistance, which is often catastrophe bonds that allow governments unpredictable. to transfer disaster risks to the markets and rapidly access payouts in the event of a major disaster. Source: World Bank 2017a. 21 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Governments also need A sound legislative basis enables governments to develop and implement to ensure that their long-term disaster risk financing and insurance arrangements even through regulatory and gover- changing administrations. Institutional arrangements—including the nance frameworks are establishment of dedicated fiscal risk management units or a cross-ministerial appropriate to implement risk managing board—can also enhance comprehensive financial sustainable financial management against disaster risks in the long run. protection strategies. Financial instruments can For example, in countries with weak public financial management systems, a serve as both short-term private sector insurance scheme can help the government build fast, transpar- measures to support ent, and accountable disbursement schemes while it undertakes longer-term evolving systems and reforms to improve the transparency and speed of its budgetary processes. On long-term risk manage- the other hand, financial instruments can also enhance already advanced and ment mechanisms. efficient budget processes through more cost-effective financial solutions. 2.2 Enhancing National Financial Resilience through Regional Collaboration Regional collaboration Sovereign or supranational catastrophe risk pools, for example, have has proven an effective provided governments with financial instruments (such as parametric way for countries to insurance) that enable rapid, cost-efficient access to liquidity for emergency improve their national relief. First-generation sovereign catastrophe risk pools have aggregated financial protection country-specific catastrophe risks into a single, more diversified portfolio, strategies. retained some aggregate risk through joint reserves, and transferred excess risk to reinsurance and capital markets when this approach is the most cost-effective choice. Catastrophe risk pools Consider the Pacific Catastrophe Risk Insurance Company (PCRIC), which help reduce insurance pools catastrophe risks of five Pacific island states: the 1-in-250-year return premiums through lower period loss for the pool’s combined portfolio is 65 percent lower than the capital requirements and sum of country-specific 1-in-250-year return period losses. The result is a lower operating costs. premium reduction in excess of 40 percent. Similar benefits arise from regional catastrophe risk pools in Africa and the Caribbean; the average total premium income of the existing three pools is US$45.5 million (World Bank 2017b). Beyond the financial solutions, such pools also promote political cooperation and public goods. 22 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Three sovereign catastro- the Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC), the phe risk pools have been African Risk Capacity (ARC), and the PCRIC. All three risk pools relied on established to date, development partners’ support for their establishment, and they continue to covering 26 countries in benefit from development partners’ technical and financial assistance. the world’s most disaster- More information on the risk pools is in box 5. vulnerable regions: BOX 5 OVERVIEW OF THREE EXISTING SOVEREIGN CATASTROPHE RISK POOLS The Caribbean Catastrophe Risk African Risk Capacity (ARC) was The Pacific Catastrophe Risk Insurance Facility (CCRIF) has been launched by the African Union Assessment and Financing Initiative in existence since 2007 and was in 2012, and ARC Insurance (PCRAFI) launched a pilot the first sovereign catastrophe Company Ltd. was established insurance program in 2013 risk pool established. CCRIF is in 2014 as a mutual insurance and in 2016 set up the Pacific a segregated portfolio company company owned and overseen Catastrophe Risk Insurance Company (CCRIF SPC) owned by the by its members—the African (PCRIC), owned by a foundation CCRIF special purpose trust Union member states and whose governing body consists whose beneficiaries are CCRIF development partners. ARC of the participating counties and members. As of 2017, 14 issued its first insurance development partners. As of Caribbean countries participated contracts in 2014. As of 2017, 2017, five Pacific island states— in the pool. As part of the six west African countries had namely the Cook Islands, the ongoing expansion of the CCRIF policies in ARC (Burkina Faso, Marshall Islands, Samoa, Tonga, into Central America, Nicaragua The Gambia, Mali, Mauritania, and Vanuatu—participated. purchased a policy in 2018. As Niger, and Senegal). A total of A total of US$6.7 million has of 2018, CCRIF had made total US$34.4 million has been paid been paid out to countries to payouts of US$136.3 million, out since its inception, including date, including US$3.5 million including more than $50 million more than US$26.3 million to to Tonga in response to Cyclone during the 2017 hurricane Niger, Mauritania, and Senegal Gita in 2018. season. The latest payout, in 2015 in response to drought. US$5.8 million to Barbados, was triggered by excess rainfall in October 2018. Source: World Bank 2017b. 23 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers In over a decade of Under Germany’s leadership, the 2017 G20 included discussions on experience with risk sovereign catastrophe risk pools as a mechanism to help strengthen pools, important financial resilience. lessons have emerged on bringing such facilities to scale. (see box 6) BOX 6 LESSONS ON BRINGING SOVEREIGN CATASTROPHE RISK POOLS TO SCALE A decade of experience has shown that political commitment, sound operational design, and financial sustainability are essential for successful catastrophe risk pools. Political commitment is both a Sound operational design maximizes Financial sustainability allows precondition for successful impact and generates public catastrophe risk pools to provide catastrophe risk pools and a goods. Pools can encourage the access to cost-effective insurance byproduct of collaboration. Pools participating countries to develop as part of a strategic approach to require strong political commit- pre-agreed disaster response financial protection. Pools can ment from the participating plans to ensure timely, transpar- offer cost-effective insurance countries as well as development ent, and efficient use of funds solutions in various ways, includ- partners’ support, especially following disasters. The creation ing through risk diversification, during the design and preparation of risk pools has also driven the joint reserves, and facilitated stage. The development and development of public goods access to international markets. implementation of the pools also such as data infrastructure, The benefits of pools can be facilitate regional policy dialogue risk models, and improved enhanced by combining different and improve collaboration institutional capacity. financial instruments to address between participating countries different needs. The participating and development partners. countries are encouraged to shift toward proactive risk management by up-front premium payment. Source: World Bank 2017b. 24 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Joint catastrophe bonds In 2018, with support from the World Bank, Colombia, Chile, Mexico, (cat bonds) are another and Peru issued the first joint cat bond under the Pacific Alliance financial instrument that framework (see box 7). has been successfully executed for the first time through regional collaboration. BOX 7 JOINT CATASTROPHE BOND FOR THE PACIFIC ALLIANCE: Colombia, Chile, Mexico, and Peru In 2018, the World Bank issued a joint cat bond for the four Pacific Alliance countries— Colombia, Chile, Mexico, and Peru—that provided total earthquake coverage of US$1.36 billion. The issuance consists of five classes of bonds to cover earthquake risks: one each for Chile, Colombia, and Peru, and two classes for Mexico. The bond enables Chile, Colombia, and Peru to access international capital markets for the first time to receive insurance coverage against natural disasters. The insurance coverage of the cat bond is US$500 million for Chile, US$400 million for Colombia, US$260 million for Mexico, and US$200 million for Peru. Earthquakes exceeding a pre-agreed severity will trigger the cat bond, releasing an insurance payout to the countries, and the investor will lose part or all of the capital. The joint cat bond has contributed to risk diversification for investors, achieved economies of scale, and secured better premium rates for the four participating countries. Source: World Bank 2018f. Regional collaboration has proven “ an effective way for countries to improve their national financial resilience strategies.” 25 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 3. Disaster Risk Finance 2.0: What’s Next in Developing Countries? Much progress has Instruments and vehicles for financial resilience have seen rapid development been achieved in over the past decade, and they continue to evolve in response to clients’ disaster risk finance, but diverse needs and as countries seek to strengthen macro-financial stability policies and instruments against external shocks. New policies and tools will contribute to instruments keep evolving. and vehicles that are more flexible and that make better use of technology, helping countries better manage disaster risk as part of their overall fiscal and risk management framework. It is important for While looking to see where innovation is possible and perhaps leapfrog some governments to start steps taken by their peers, governments should not lose sight of the funda- with fundamentals mentals. Officials who are just beginning the effort to increase their country’s even while looking to financial resilience to disasters should not be discouraged by advanced new developments. mechanisms that look too complex. It is important to progress step by step and focus on getting the fundamentals right. It is equally important to rapidly show initial results that help sustain momentum. 26 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 3.1 Catastrophe Risk Pools: Sharing More than Catastrophe Risks Sovereign catastrophe They are becoming an effective channel by which public sector risk can more risk pools are evolving efficiently reach financial markets, market failure can be overcome, and toward full-service investments can be made in public goods and political coordination. Initially regional platforms to all three existing catastrophe risk pools were set up to offer specific (paramet- support the development ric) catastrophe risk insurance products to participating countries. Over the agenda of their members. years they have started to offer new financial products. For example, CCRIF now offers excess rainfall insurance products and is exploring fisheries insur- ance. PCRIC is establishing a dedicated private sector window to provide domestic insurers with reinsurance capacity that will enable them to under- write tropical cyclone insurance for homes with lower building quality, which would not otherwise be acceptable to markets. In late 2018, ARC launched the first “replica” coverage, through a policy that pays out to the Start Network (a network of humanitarian NGOs) if a drought hits Senegal. The newest regional facility to be established—the Southeast Asia Disaster Risk Insurance Facility (SEADRIF)—was set up from inception as a platform to offer different products and services to countries in Southeast Asia, a very diverse region in terms of exposure, hazards, and economic development. From insurance to disaster risk finance services. Catastrophe risk pools are moving beyond insurance as their primary value proposition and expanding their additional services to include broader risk financing trainings and public goods. ARC and PCRIC are helping participating countries develop standard- ized contingency plans to enhance post-disaster delivery mechanisms and accountability. All regional platforms have invested extensively in developing customized regional probabilistic catastrophe risk models, giving many participating countries first-time access to state-of-the-art risk assessment and financing tools. These are useful not only for insurance solutions but also for broader financial and risk management decision making. From product providers to centers of expertise. Risk pools build specialized expertise in risk management and finance that is often scarce in the countries they support. Recognizing this, countries are increasingly looking to regional facilities for extended hands-on technical support and training. Offering the benefit of economies of scale and the support of external partners, regional facilities can develop into regional centers of expertise to provide crucial capacity for risk management in vulnerable countries. Given that expertise in risk financing is both highly specialized and scarce, it is easier to establish such capacity in regional centers rather than individual countries. This arrangement is also easier for international partners to support, and 27 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers risk pools can then act as mechanisms to disseminate expertise to participating countries. Growth through diversity. The shift toward disaster risk financing platforms will likely lead to new solutions, including for larger and more developed countries, and will offer more customized financial instruments. Risk pools may also develop further to better link financial products to risk reduction and prevention, by helping to quantify risk and drive limited investment in risk reduction to projects with the highest impact and cost-benefit ratio. For example, SEADRIF is developing a flood risk pool for its low-income members. The pool has been designed from the beginning to also help large middle-income countries manage and transfer risk to markets more efficiently (see box 8). BOX 8 SOUTHEAST ASIA DISASTER RISK INSURANCE FACILITY The Southeast Asia Disaster Risk Insurance Facility was agreed in December 2018 to launch as an ASEAN+3 initiative, with the goal SEADRIF SOUTH EAST ASIA SEADRIF of helping member countries in ASEAN (Association of Southeast Asian Nations) enhance SOUTHtheir financial resilience against disasters. EAST ASIA DISASTER RISK INSURANCE FACILITY DISASTER RISK INSURANCE FACILITY Supported by the technical assistance of the World Bank and the financial and political support of Japan and Singapore, SEADRIF is designed as a platform that offers members customized financial solutions to disaster shocks as well as knowledge sharing and technical assistance, including for insurance market development. The first financial program developed under SEADRIF is a regional catastrophe risk pool for the Lao People’s Democratic Republic, Myanmar, and possibly Cambodia. SEADRIF is also starting to work with middle-income countries in ASEAN. While discussions with ASEAN middle-income countries such as Indonesia, the Philippines, and Vietnam are just starting, indicative analysis can illustrate the potential benefits of developing a joint catastrophe risk program under SEADRIF. (Figure 2 sets out an indicative structure for such a program). Based on a SEADRIF SEADRIF set of realistic assumptions, figure 3 shows that a hypothetical combined portfolio generates a 38 percent reduction in the RISK INSURANCE FACILITY probable maximum 1-in-200-year SOUTH EAST ASIA DISASTER loss DISASTER (PML) SOUTH EAST ASIA RISK INSURANCE compared to the sum of country-specific FACILITY values. If countries pooled their risk and purchased insurance jointly under SEADRIF, the reduced capital requirement, combined with potential reduction in operating and transaction costs, could result in significant premium savings. Such analysis could be refined and applied to various potential schemes, including a joint risk pool for public assets. 28 SEADRIF SEADRIF Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers FIGURE 2 International Financial Market Indicative structure of a joint catastrophe risk insurance program for ASEAN middle- income countries Reinsurance Reinsurance payouts premium International Financial Market Reinsurance Reinsurance payouts premium Development partners Cat risk program for middle income countries (e.g. for public assets) Capital or premium co-financing Development Insurance Insurance partners payouts Cat risk program for middle income premium Technical countries (e.g. for public assets) Assistance Capital or premium co-financing income countries Insurance ASEAN middle Insurance Technical payouts premium Assistance ASEAN middle income countries FIGURE 3 Indicative diversification benefits modeled for Indonesia, the Philippines, and Vietnam US$ millions 1600 Note: The indicative analysis assumes that each country 1400 will aim to insure 10 percent Vietnam of its total public contingent liability related to earthquakes 1200 and windstorm (typhoon) 1600 events. Should additional 1000 perils such as flood be 1400 considered, the expected Philippines diversification benefit could 800 1200 be even higher due to additional diversification 600 of risk. 1000 Pool 400 800Indonesia 200 600 0 400 Sum of 1-in-200 year PMLs 1-in-200 year PML for pool 200 Source: Estimates based on country catastrophe risk profiles in World Bank 2012b. 0 29 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 3.2 Targeted Financial Solutions to Address the Drivers of Contingent Liabilities Many disaster risk This support gives recipient governments the flexibility to manage shock financing instruments response and allows them to meet national priorities. But such instruments have provided budget do not support countries in managing their portfolio of assets and liabilities support to recipient in the most efficient way. governments. Governments are moving This latter approach involves not only using more precisely targeted financial from a fairly basic instruments, but also putting in place domestic mechanisms to clarify and liability management quantify contingent liabilities, and then connecting these directly to funding approach toward a more mechanisms, whether from the budget, international partners, or financial sophisticated strategy markets. Domestic specialized pools can also help make previously uninsur- that better matches able risks insurable and more manageable. These steps help governments financing instruments manage their disaster-related continent liabilities more efficiently. Experience to liabilities. suggests that three areas have significant potential to be directly linked with risk financing instruments: public assets, national-subnational cost sharing, and social safety nets. Public assets and infrastructure. Damage to public assets and infrastructure is one of the largest drivers of disaster losses (OECD and World Bank 2018). The Asian Development Bank estimates that in Asia alone, developing countries will need to invest US$26 trillion in new infrastructure by 2030 if the region is to maintain its economic growth and pace in poverty reduction (ADB 2017). To avoid a continued increase in disaster-related contingent liabilities from public assets and to protect their critical services, governments must continue investing in high-quality infrastructure, continue developing financial risk management mechanisms, and ensure sufficient investment in operations and maintenance throughout the life of the assets. A growing number of countries, including G20 countries such as Indonesia, are developing insurance, self-insurance, and other financial schemes to protect the provision of public services, help smooth government expenditures on asset rehabilita- tion and reconstruction, and increase transparency and discipline in govern- ment spending. Mexico’s FONDEN (box 3) is an early example of such an approach, under which the government finances infrastructure reconstruction in line with very clear rules. It then protects itself through an excess-of-loss indemnity insurance policy (which starts covering losses once the fund’s expenditures exceed a threshold) and through parametric risk transfer for especially severe events. Insurance companies can also contribute to 30 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers investment in physical resilience of infrastructure through financing structural and non-structural measures. In Switzerland, approximately 25 percent of the revenues from the insurance premium paid to public insurance agencies for the mandatory coverage of private and subnational governments’ buildings against natural hazards is spent on disaster prevention measures including for infrastructure (Swiss Federal Department of Finance 2019). National-subnational cost sharing. Especially in larger economies, financial support to subnational governments is often a large driver of post-disaster costs. Local governments, including cities and municipalities, bear a large share of disaster costs—partly because they act as first responders and partly because they are responsible for maintaining a significant share of affected assets and public services. As the case of Australia (box 3) demonstrates, clear rules on the post-disaster fiscal responsibility of national and subnational governments can help national governments plan ahead, and can encourage subnational governments to invest in fiscal, physical, and social resilience. As fiscal transfers continue to play a crucial role in funding disaster-related expenditures, countries can set up additional schemes to better manage this liability through pre-arranged fiscal mechanisms or financial instruments. For example, in 2017 the Philippines established the world’s first subnational risk insurance pools, bundling together the typhoon risk of 25 provinces and transferring it to reinsurance markets, intermediated through the World Bank in local currency for the Philippines. Schemes that similarly aim to increase the predictability and efficiency of post-disaster co-financing are being ex- plored in many other countries. Setting up pre-arranged financing rules also allows countries to utilize additional international financial instruments to meet this liability. Such arrangements could also be increasingly relevant for large cities and municipalities, which could establish mechanisms to better manage the costs of shocks—for example, by pre-arranging national government support or by working together to pool their risks. Safety net programs. Clear pre-arranged disbursement channels for delivering funds directly to the most affected households are also a growing priority for many countries, especially the least-developed countries, including in Africa. This approach includes adaptive social protection programs, where safety net systems such as conditional cash transfer programs are enhanced with clear and predetermined rules and build on disaster risk finance principles to serve as immediate disaster response mechanisms. The rules indicate in advance when a safety net will scale up, along with the triggers, the beneficiaries, and the response plans to be financed. Once the government explicitly agrees to directly provide support to vulnerable households through such a program, and once the trigger and coverage are determined, the ministry of finance can start quantifying the risks and contingent liabilities. The rules for scaling up can then be directly linked to payouts from financial instruments, so that payouts directly match the costs of emergency transfers. For instance, Kenya has set up the National Drought Emergency Fund (NDEF) and is linking this to its existing Hunger Safety Net Program (HSNP) to enable immediate financing for scale-up of drought response interventions. It is further enhancing this system with risk transfer for more severe events. 31 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 3.3 Technology and Innovation to Enhance Financial Resilience New technology and They can help make risks more understandable, improve the efficiency of innovations have the existing solutions and new mechanisms being developed, and open up potential to significantly entirely new areas of engagement. For example, technology can improve the enhance and boost real-time availability of hazard information, the accuracy of disaster risk systems for financial assessments, and the targeting of funds to affected communities. The three resilience against fields of innovation discussed in this section all contribute to a shift from disaster shocks. data that are complex, scarce, and partially available to global indicators that are highly detailed, continuously produced, and used to track change and process response in near real time. These are all enabling technologies for enhanced risk-informed financial decision making and fiscal risk management. But countries should Technology has the potential to radically transform many areas of work, but it proceed with caution is important to test and deploy new approaches cautiously. While technology when adopting new can support reforms to enhance the efficiency and effectiveness of many technologies. processes, it cannot simply replace the required but often slow reforms needed to improve the functioning of fundamental systems. New technology should be carefully tested to ensure it is the right solution for the problem and not a quick fix for a symptom. Similarly, officials should be careful to ensure that new approaches actually deliver better results than existing and well-tested tools. 3.3.1 Earth Observation Data The remote measurement From exposure mapping to post-disaster damage estimation and near- or monitoring made real-time monitoring for emergency response coordination, the range of possible by the latest applications is broad and the added value significant. Europe’s Copernicus satellite technology is program is providing unprecedented volumes of free satellite data, in a com- enabling powerful new prehensive, accurate, repeatable, and timely manner. Rapid-onset flooding, applications that support landslides, and large-scale drought events can now be tracked and monitored, more accurate and timely enabling greater understanding of risk in territories that had previously been financial decisions in largely unmodeled. The quantity and timeliness of information provided response to shocks. also contribute to improved forecasts, early warnings, and post-event loss estimates. These advances are of particular importance for the most complex 32 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers crises and pave the way to manage new risk, forecast-based financing appli- cations for disasters, and crises that are interrelated such as famine, drought, and political conflict. Often it is the combination of satellite data with ground measurements that proves to be especially valuable, providing governments with access to the most accurate and timely information available on the potential occurrence and impact of disasters in near real time. For example, SEADRIF It combines radar and optical satellite data for monitoring water surfaces by is supported by a flood using the latest space technologies and imagery-processing capabilities along risk assessment tool with hydrological models to determine the likely extent of any flood in near that leverages the latest real time. As ground measurements are scarce across the region, remote sens- satellite technology to ing observations are an important source of complementary data to estimate improve availability of the extent of large-scale floods and provide reliable near-real-time data in risk information for crises. Data generated by this tool will be processed into estimations of governments. disaster response needs and emergency costs, while also serving as triggers for the parametric insurance offered by SEADRIF. By making risk data readily available, this tool allows for quick damage assessment and analysis, which in turn lowers the related fiscal risks. Other examples are Kenya uses satellite data to calculate an index-based livestock insurance offered by African trigger that enables rapid insurance payouts. In Uganda, an index of countries, where satellite-based observations of ground vegetation serves as an indicator of satellite data have drought conditions and as the trigger for implementing a scale-up of the been used to monitor Northern Uganda Social Action Fund (NUSAF), a targeted social safety drought conditions net program. and to calculate insurance triggers. Unprecedented volumes of free “ satellite data enable greater understanding of risk in previously largely nonmodeled territories” 33 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 3.3.2 Financial Technologies (Fintech and InsurTech) Fintech and InsurTech Technology in this space has many potential applications that could funda- are transforming the mentally transform and digitize disaster risk finance, but further engagement financial sector, yet their is needed to build a better understanding between innovators and public application in disaster sector officials. This step is especially important to ensure that any technology risk finance in the solutions are not product driven, but instead respond to a carefully defined public sector is still and identified problem. In addition, innovations need to be carefully evaluated only incipient. together with more traditional solutions to identify the most appropriate and best-fit solution for the problem at hand. Innovations in digital Many social protection or social assistance programs have tapped into payment systems have digital innovations to make financial assistance to households more accessi- transformed access to ble and effective, especially in countries where poor communities may be finance and enabled hard to reach through physical cash transfers or traditional bank transfers. new ways to provide The rapidly growing penetration of cell phones has enabled new ways of financial assistance to accurately targeting social assistance and speeding up its delivery. In Kenya, poor communities. for example, mobile money services along with traditional banking services enabled insurance companies to make payouts directly to beneficiaries less than a month after a severe drought triggered a US$2.1 million payout from a national livestock insurance program in February 2017. Technologies such as These technologies could be especially powerful when combined with other blockchain, digital data collection and data analytics technologies such as satellite data and big payment systems, and data. For example, the integration of technology and finance/insurance could digitization of insurance enable much more dynamic risk management, including automated under- hold significant potential writing and risk transfer in near real time; moreover, it could increasingly to improve financial break up insurance transactions into smaller and more customized coverage instruments in disaster instead of large standardized policies that are adjusted and negotiated only risk finance. once a year. Blockchain is a new This technology has seen a rapid rise in popularity and may hold significant technology that promises potential to be adopted by both government assistance programs and disaster to further increase the risk insurance providers. But as with any new and untested technology, flexibility, traceability, officials and solution providers should proceed with caution, making sure to and speed of financial test blockchain and identify applications where it makes significant gains. services, but it has not been fully tested. 34 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Technology has the potential to “ radically transform many areas of work. But it cannot simply replace the required reforms to improve systems and institutions.” 3.3.3 Big Data, Machine Learning, and Artificial Intelligence The application of big Data play an integral part in risk financing; they enable quantitative financial data and machine and economic analysis and risk-informed decision making. Data are also at learning can enhance the heart of designing financial instruments. But while data sets have disaster risk financing tremendous value, understanding them requires significant analysis, specific before, during, and skill sets, and novel ways to process them. Breakthroughs in artificial after an event. intelligence, computer vision, crowdsourcing, and other sophisticated analytical approaches are converging to allow the detection of patterns in data that would otherwise elude even the most expert risk modeler. Examples include classifying damage from an earthquake, predicting smallholder crop yields, identifying flood risks (e.g., through the SEADRIF risk platform), and addressing the most complex crisis risks (e.g., famine and political conflict). Businesses and governments can use big data for decision making, and can use machine learning to inform policy design and decisions in many sectors. Innovations that leverage big data can make disaster risk finance instruments quicker, more effective, more accessible, more engaging, and better able to visualize data to support decision making and financing solutions (box 9). At the same time, increased reliance on computer-driven decision making introduces new risks, including errors in data processing and misinterpreta- tions of data inputs. Equally, the decisions generated by computers are only as good as the data provided by humans; thus, for example, any systemic bias or exclusion in data inputs will also lead to biased outputs. It will be particularly important to pay attention to design of robust grievance address mechanisms and feedback loops. 35 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers BOX 9 APPLICATIONS OF BIG DATA FOR DISASTER RISK FINANCE BEFORE, DURING, AND AFTER A DISASTER Before a disaster During a disaster After a disaster Asset data collection. Collect and Damage and impact forecasting. Insurance claims settlement. Automate monitor information about Collect and process data as an loss adjustment and claims (public and private) assets, e.g., event is unfolding (months, settlement to accelerate payouts through data collected from weeks, or days before the event, of indemnity insurance. Internet of Things—enabled depending on perils)—for monitoring sensors, technology example, by combining climate, Damage and loss estimation. Analyze in vehicles, mobile phones, or commodity, market, and political data sets for damage estimation— satellites, to inform risk assess- information to predict an event’s for example, through change ments and financial decisions impact on food security, or using detection in satellite imagery, or such as insurance pricing. cell phone data to understand by combining physical observa- population movements. tions with user-generated data. Financial risk assessments. Aggregate and process large volumes of Automated triggers for financial Monitoring of impact and targeting of historical information to instruments. Design more sophi- interventions. Calibrate crisis identify and visualize long-term sticated triggers for parametric response mechanisms—for disaster-related spending financial instruments—for example, through tracking patterns and trends. example, by combining and movement of refugees in rural analyzing live data feeds and locations and inferring levels of Financial product design. Set existing data sets in real time welfare using machine learning specifications for financial to determine threshold values. based on satellite metrics (e.g., mechanisms—for example, type of dwelling, night light through algorithms that can Response coordination. Help data), and identifying hot spots reduce basis risk in parametric decision makers understand an for possible conflict. triggers by building and unfolding situation by processing calibrating many trigger points and combining a large number (e.g., grid cells). of data feeds—for example, by ground-truthing data. Visualization of risk information. Collect and process large data Targeting of financial mechanisms. sets in real time to help visualize Combine forecasting and triggers risk in increasingly user-friendly to target financial assistance ways to inform financial to the most affected areas and decisions by policy makers. population—for example, by automatically adjusting Direct risk mitigation and prevention. adaptive safety nets. Improve understanding of exposure and risk to help govern- ments invest more efficiently in risk mitigation and prevention. 36 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers These three areas of In most cases, several of these technologies will work hand in hand, as they innovation—big data, are closely related. Box 10 provides a sample vision for such a system. The machine learning, and application to public asset management it outlines is just one example, and artificial intelligence— similar systems could be designed for other sectors. For instance, an end-to-end can inform a country’s agricultural insurance system could rapidly deliver payouts directly to farmers’ approach to strengthen- or herders’ bank accounts. Such payouts could be triggered based on an index ing risk financing. (satellite, yield, weather) continuously monitored by a computer, which would automatically notify insurance companies of a triggering event and transfer funds from the insurance company to the bank/mobile money operator, and on to the beneficiaries. BOX 10 AN END -TO-END PUBLIC ASSET FINANCIAL RISK MANAGEMENT SYSTEM? The financial risk management of public assets could benefit enormously from new technologies. An effective system begins with systematically understanding liabilities from public assets, investing in the underlying data to quantify the potential impact, and developing policies and systems to mitigate and manage the associated risk. Comprehensive asset registries bring together information such as asset location, vulnerability, and value, and thus help integrate the disaster risk financing strategy under the wider macro-fiscal framework. Technology could facilitate a shift from piecemeal approaches to comprehensive financial risk management of public assets. Today few developing countries have well-maintained, digital, and comprehensive asset registries or management systems. In most countries, assets are managed in silos across government departments; data are often outdated, incomplete, and stored on systems that do not communicate with each other. Methods for financial risk management are limited. Drawing on the technologies described above, we can envision an end-to-end system that goes from data collection to asset management to financial risk management. An integrated and largely automated technology system could innovate in all steps of the financial risk management process: Data collection. Asset exposure mapping from satellite data or other remote sensing mechanisms, •  crowdsourced data, or scraping of online data could close data gaps and collect asset information at unprecedented speed, directly feeding into an asset registry with automatic updates. Data storage and analytics. A fully digital asset registry, leveraging data analytics, could combine •  basic asset information with functionalities such as real-time integration with other government information systems; analysis of drivers of data uncertainty and validation to ensure data accuracy; automatic asset valuation through artificial intelligence; scenario analysis to plan for future investment, asset acquisition and disposal, operations and maintenance spending, and risk reduction; and highly visual decision support tools. Risk view. Real-time integration with a probabilistic catastrophe risk model could provide a near-real- •  time view of the risk faced by assets to inform decision making on risk reduction, maintenance and new investment planning, and financial risk management. 37 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Data fit for insurance. The format, accessibility, and transparency of the risk information provided would •  ensure it is fit for supporting insurance product development, effective risk pricing, and attractive risk transfer coverage. This could easily highlight key drivers of premium (regions, assets, peril types) to optimize insurance product design against risk appetite, or coverage against premium. Financial risk management. Financial analysis to provide a quick comparison of financial risk •  management options with pre-arranged integration in a self-insurance fund and commercial insurance providers could allow adjustments to the portfolio risk management strategy with the click of a button. This includes decisions on how much risk to retain and how much to transfer. Increasingly, digitized insurance and integration with risk carriers could enable near-real-time risk transfer, in incremental parts of the whole portfolio or individual assets, with smart contracts for automatic settlement of insurance payouts. A self-insurance fund directly linked to a regional platform could automatically transfer any excess risk to an internationally diversified portfolio, which would automatically acquire reinsurance if needed on a real-time basis. Damage assessment and recording. Data from satellites or drones could provide quick damage esti- •  mates following a shock and feed directly into the asset registry, complemented with on-the-ground data for granular yet still rapid damage data. The results could inform rehabilitation and reconstruction, efficiently allocating limited post-disaster funds to the most critical and high-impact assets and targeting future maintenance. Compensation and claims handling. Digital damage records, attached to the asset information, could •  submit claims to the self-insurance fund or to commercial insurance providers. This would allow tracking of payouts and expenditures all the way to the agency or contractor reconstructing an asset, and would record information on the restored asset in the database while increasing transparency in public spending. A growing number of countries, including Indonesia, the Philippines, and Vietnam, are upgrading their public asset management database systems. Technology, together with strong institutional leadership and governance frameworks, can help these countries upgrade and transform the way they collect and manage public asset data so that data feed into risk management policies and reduce the government’s fiscal exposure. 38 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 3.4 Revisiting the Support of Development Partners to Financial Resilience The support of develop- Development partners’ support has been invaluable in improving the basis of ment partners continues disaster risk information in developing countries through technical assistance to play a critical role in and investment in public goods such as collection of exposure data and helping developing development of catastrophe risk models. It has been equally critical in testing countries design and new approaches and experimenting with financial instruments where no implement financial market existed previously. Grant financing is also important in providing protection strategies. vulnerable countries with extensive and highly technical implementation support for building new and untested risk management systems. Last, development partners’ assistance is critical for capacity building in developing countries. Through such assistance, development partners have facilitated the adoption of financial protection instruments such as disaster risk insurance. The Program Alliance of the InsuResilience Global Partnership is one forum established to bring together development partners and implementing pro- grams and scale up coordinated efforts to strengthen developing countries’ financial capacity to cope with disasters (Box 11). BOX 11 THE INSURESILIENCE GLOBAL PARTNERSHIP The InsuResilience Global Partnership promotes and enables the adoption of disaster risk financing and insurance solutions by poor and vulnerable countries. The Partnership was officially launched in 2017 at the 23rd annual Conference of the Parties to the 1992 United Nations Framework Convention on Climate Change (COP23) as a collaborative initiative of a number of G20 and V20 countries. A diverse group of stakehold- ers engaged in the field of disaster and climate resilience— multilateral institutions, the private sector, civil society organizations, and academia. The Partnership aims to promote and enable a substantial scale-up in the use of climate and disaster risk finance and insurance solutions by developing countries. It ultimately contributes to strengthened resilience by enabling faster, more reliable, and cost-effective responses to disasters. In its vision and activities, the Partnership contributes to the implementation of the post-2015 frameworks that widely recognize the importance of strengthening wider resilience. ... 39 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers The Program Alliance, the Partnership’s alliance of implementing programs, brings together organizations working across a broad spectrum of solutions to address the different resilience needs of vulnerable countries, taking into account different country risk profiles and corresponding gaps in financial protection mechanisms. As of April 2019, the Partnership supports 25 programs, including GRiF, in 78 countries. The Partnership also facilitates collaboration between the public and private sector. For example, the InsuResilience Solutions Fund was launched in 2017 by the German Development Bank (KfW) on behalf of the Federal Ministry of Economic Cooperation and Development (BMZ) to catalyze joint initiatives by national public entities and the private insurance sector. The InsuResilience Investment Fund has also been set up as a PPP by KfW on behalf of BMZ, combining private debt and private equity investments, to connect the value chain and provide technical assistance and funding for the development of markets in climate insurance. Source: InsuResilience Global Partnership 2018. The newly established  GRiF is a new mechanism established within the World Bank with initial GRiF pilots and scales up support by Germany and the United Kingdom. It will not offer any risk financ- pre-arranged risk financ- ing instruments directly, but rather provide grant funding for country-owned ing instruments, includ- systems and instruments in line with the vision and principles of the InsuRe- ing insurance, to boost silience Global Partnership; the aim is to promote sustainable financial financial resilience to protection and investment in disaster risk reduction measures, including shocks and promote the high-quality and resilient infrastructure. GRiF seeks to strengthen countries’ role of countries as financial resilience to disasters by supporting more timely and reliable disaster effective risk managers response through pre-arranged financing as well as recovery systems linked to (World Bank 2018c). it. GRiF represents a significant step beyond existing support programs focused on technical work; it focuses instead on providing the financing needed to reduce the barriers to scale-up of innovative mechanisms and instruments under the guiding principles and appraisal criteria (box 12). The facility will specifically invest in taking many of the forward-looking trends discussed in this paper to scale. 40 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers BOX 12 KEY GUIDING PRINCIPLES OF GRIF SUPPORT GRiF has established a set of guiding principles for its grant financing to help developing countries maximize the impacts of risk financing instruments and mechanisms. The principles include both strategic allocation and technical appraisal that can be applied to any relevant financial supports. Following are examples of these principles. Country ownership and readiness. The country should High-quality, open, and accessible data and risk modeling. demonstrate readiness to work on disaster risk The data and model underpinning an instrument financing and insurance solutions—for example, must be open, assessed against minimum an existing or requested disaster risk financing standards, and fully transparent to avoid strategy, an adequate legal and regulatory information asymmetries between risk carriers, framework, and/or political commitment. clients, and development partners. Participatory process. The process to design, Value for money and suitability of the product. Products implement, and evaluate the instrument and should be priced based on sound actuarial systems should strive for the inclusive, meaningful principles that adequately account for risks and participation of all relevant stakeholders who can operating expenses and should provide value for inform and champion these solutions, especially money relative to alternatives. communities, civil society, and the private sector. Improvements in preparedness and resilience. GRiF Competitive procurement process and non-preferential should create incentives for disaster prevention, treatment. Providers of subsidized financial instru- preparedness, and resilient reconstruction. Even in ments should be selected following a competitive, countries with a strong disaster preparedness robust, and transparent procurement process with system in place, the use of grants as subsidies the aim of leveraging the private sector in a way should lead to clear improvements to the existing that provides most value for money. system. All projects supported by the GRiF should demonstrate clear additionality. 41 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 4. New Frontiers in Building Financial Resilience Disaster risk finance The experience and good practices of G20 countries and beyond provide an policies and instruments opportunity for looking ahead at future risk financing developments that are increasingly used by may take place as countries seek to enhance overall macro-fiscal resilience ministries of finance to to shocks. improve countries’ financial resilience to 1. Increasing integration of financial resilience to shocks as a core disaster shocks. component of macro-fiscal frameworks. Given increasing disaster risks, governments are likely to further integrate natural disasters, and the financial impact of other physical shocks, into their wider fiscal planning and risk management framework. This may lead to further integration of these issues in key planning tools such as macro-models, fiscal plans, fiscal risk statements, debt sustainability analyses, public expenditure reviews, public investment diagnostics, and poverty diagnostics. 42 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 2. Building financial resilience through integrated financial solutions  Various financial instruments are offered by multiple providers, such as contingent credit by (development) banks and risk transfer instruments by catastrophe risk pools. Consolidated financial solutions could be offered as a financial package to allow governments to be protected against shocks of different frequency and severity, where the structuring of the financial packages is based on the cost-efficient combination of the financial products. 3. Expanding financial protection strategies to cover other crises and complex risks. Governments, international organizations, and develop- ment partners are starting to apply disaster risk finance policies and tools to other crisis risks. In 2017, with intermediation by the World Bank, the Pandemic Emergency Financing Facility (PEF) structured for the first time a market-based financial product for better pandemic preparedness. This can be compared to the first catastrophe bonds in the 1990s. There is growing interest in exploring financing solutions for new crisis risks, both to more efficiently retain risk and to transfer risk. Moreover, just as financial mechanisms have evolved for natural disaster risk, the financing of other risks will likely mature to be more efficient and to utilize more complex financial structures, triggers, and targeted contingency plans. This development may lead to financial protection strategies against risks from health shocks and pandemics, cyber risks, and risks of conflict, famine, and displacement and migration. Development of financing for such risks will entail experimentation and innovation in data collection, risk modeling, structuring of financial mechanisms and market-based instruments, trigger testing, feedback loops, and disbursement channels. 4. Growing financial protection policies and instruments against intercon- nected risks. Multiple risks may interact in unexpected ways and create compound risks to governments (WEF 2018). Finance officials’ growing awareness and strengthened management of multiple sources of real- world risks may lead to development of government-wide financial risk management tools or institutions. Several countries have established dedicated fiscal risk management units, which also account for traditional sources of fiscal risk. Improved financial management of complex risk, combined with the strengthened leadership of ministries of finance, may lead to the further development of comprehensive risk financing policies, strategies, and plans. It may lead as well to institutional changes in designating risk management functions, to operational and technical reforms for implementing these plans, and to portfolio approaches to risk financing in countries. 43 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 5. Shifting financial protection of infrastructure from assets to critical services. Strengthening the resilience of critical infrastructure is a key step for countries to better manage the short-term budgetary and long- term development costs. Ministries of finance increasingly recognize that the continuity of critical public services following disasters is key to economic, fiscal and social resilience. This is one of the components of quality infrastructure investment discussed through the G20 process. Optimal investment in financial and physical resilience of infrastructure relies on the systemic nature of infrastructure and individual assets’ roles for the network. This may require a shift from conventional risk management of individual assets and their potential damages to comprehensive financial risk management for maintaining a level of critical public service delivery and network over the life-cycle of infrastructure even during and after disasters. All successful reforms Developing disaster risk finance policies and instruments is an important step start by taking basic first toward improving macro-fiscal policy frameworks and public financial steps and enhancing management. These policies and instruments include many of the tools and fundamental systems frameworks discussed in this paper, such as risk assessment tools, public and institutions. asset registries, and cash delivery systems. But even advanced risk financing reforms start with and depend on getting the basic building blocks in place. Ministries of finance can begin with basic reforms while testing and adding more advanced instruments and mechanisms over time.   44 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 5. Reinforcing Roles ➯ of Governments, ➳ Development Partners, and the ➾ Private Sector ➽ Financial resilience Ministries of finance can collaborate with line ministries and disaster risk requires leadership by management agencies to ensure that the overall fiscal risks related to natural ministries of finance in disasters are consolidated and properly managed. Ministries of finance are coordination with other responsible for integrating contingent liabilities, including disaster risks, into public agencies, deve- wider macro-fiscal frameworks. This requires managing the consolidated fiscal lopment partners, and risks related to natural disasters and coordinating with line ministries and private sector actors. disaster risk management agencies to develop their own financial protection strategies, such as standard contingent liability approval frameworks. Carrying out this responsibility may require extra capacity in ministries of finance, which could potentially be added by establishing a specialized unit or inter- ministerial risk board to undertake the central fiscal risk management role. 45 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers Line ministries and disaster risk management agencies are responsible for developing and implementing disaster risk management policies and devising disaster prevention strategies, including enhancing regulations. While ministries of finance often play the leading role in the disaster risk finance agenda, coordination with other agencies and stakeholders is crucial to ensure effective planning and implementation of recovery and reconstruction activities. Disaster risk assessment, mitigation, and preparation should be conducted, as appropriate, by line ministries and disaster risk management agencies throughout the government. Given growing investments in infrastructure in developing countries, close collaboration between line ministries and ministries of finance could be further explored to develop resilient infrastructure and help ensure the delivery of lifeline services through rapid disaster recovery and reconstruction of critical infrastructure. Development partners play a critical role in helping developing countries devise and implement financial protection strategies. Getting countries to devise pre-planned approaches, and so reduce reliance on ad hoc humanitarian aid and budget reallocation, may require additional incentives in some cases. Development partners could provide countries with incentives to implement a comprehensive financial package for early action on disaster shocks and to scale up risk financing mechanisms for other crises. The newly established GRiF has set out guiding principles to maximize the impact of disaster risk finance and insurance solutions, which can be applied to any public interventions to build financial resilience and help the governments ensure value for money in risk financing instruments, including insurance and other private sector solutions. International financial institutions (IFIs) can continue to provide advisory, financial, and convening services to boost financial resilience. To support countries in developing and implementing financial protection strategies, IFIs provide technical assistance and, where appropriate, promote efficient and practical use of innovative approaches and tools such as Earth Observation Data and digital payments. IFIs also provide countries with financial and technical support to develop regional sovereign catastrophe risk insurance pools or platforms. IFIs can also provide dedicated financial services; examples include the contingent lines of credit (Catastrophe Deferred Drawdown Option, or CAT DDO) provided by the World Bank, and various market-based catastrophe risk transactions such as issuance of cat bonds. New financial solutions could be developed by IFIs to enable countries to further explore new frontiers of financial resilience such as the guarantee of a level of critical public service delivery, including rapid reinstatement of infrastructure at a required level when faced with disasters. IFIs are working together on the financial resilience agenda through joint studies and programs, further integrating disaster risk assessment into macro- economic analysis. 46 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers The private sector is an important source of finance and innovation in building resilience. Specialized risk carriers from financial markets can take risk from the government. The insurance, finance, and technology industries can also provide services to increase the efficiency, transparency, and discipline of fund mobilization—for example, by developing and deploying innovative disaster risk assessment and financing instruments. Beyond risk transfer, technology can enhance payment systems to enable efficient disbursement of funds to beneficiaries. Design and pricing for these services need to offer value for money, and development partners can help facilitate private sector contributions. Coordinated financial The experience of many countries seeking to establish macro-prudential protection across a committees after a financial crisis suggests that a dedicated national government requires committee—comprised of ministry of finance, line ministries, central bank, strong commitment by state governments, and other stakeholders—could enable a key reform to and collaboration among strategically manage disaster-related financial risks across the government. multiple stakeholders. Financial resilience requires “ leadership by ministries of finance in coordination with other public agencies, development partners, and private sector actors.” 47 Boosting Financial Resilience to Disaster Shocks: Good Practices and New Frontiers 6. References and Background Sources ADB (Asian Development Bank). 2017. “Meeting Asia’s Infrastructure Needs.” Asian Development Bank, Manila. https://www.adb.org/sites/default/files/publication/ 227496/special-report-infrastructure.pdf. 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World Bank and GFDRR (Global Facility for Disaster Reduction and Recovery). 2012. “Earthquake Risk Insurance. Knowledge Note 6-2. Cluster 6: The Economics of Disaster Risk, Risk Management, and Risk Financing.” https://www.gfdrr.org/sites/default/files/ publication/knowledge-note-japan-earthquake-6-2.pdf. ———. 2018. “The Last Mile: Delivery Mechanisms for Post-Disaster Finance.” Prepared by the World Bank for the G7 Environment, Energy, and Oceans Ministers. http://documents.worldbank.org/curated/en/813701537285938605/pdf/ 129987-WP-Last-Mile-Delivery-Mechanism.pdf. 52 The World Bank’s Disaster Risk Financing and Insurance Program (DRFIP) helps developing countries manage the potentially high cost from disasters and climate shocks. DRFIP provides analytical and advisory services, convening services, and financial services to over 60 countries worldwide to support the development and implementation of comprehensive financial protection strategies against climate and disaster risks. For more information about DRFIP: www.worldbank.org/drfi For information and publications on disaster risk finance: www.financialprotectionforum.org The Japan–World Bank Program for Mainstreaming Disaster Risk Management in Developing Countries was launched by the Government of Japan and the World Bank in 2014. The program supports technical assistance for preparation of the World Bank funded projects to mainstream disaster risk management and to promote resilient infrastructure investments in developing countries. It connects Japanese and global expertise with developing countries. It also supports capacity building along the four pillars of the DRM framework described in the Sendai Report. The program is managed by the Global Facility for Disaster Reduction and Recovery (GFDRR) and implemented by the Tokyo Disaster Risk Management Hub (Tokyo DRM Hub).