Profit from Preparation: Innovations and Opportunities in Disaster Risk Financing in Developing Countries

A combination of extreme weather impacts and cuts to aid budgets may mean the next few years will be ripe for the rapid development and further scaling up of anticipatory action measures and prearranged finance approaches to better manage mounting disaster risk. Overall, the global constellation of traditional aid programs, often numerically represented as official development assistance (ODA), is experiencing a decline—spurred in significant part by the U.S. government’s retrenchment, but not exclusively so; other donor countries are also reducing their spending. Cuts to budgets and programs for long-standing development and humanitarian aid efforts are rippling across developing country communities and governments, as well as bilateral and multilateral donor agencies. As a result, policymakers in donor institutions will face pressure to use remaining and future funds differently and in ways that resonate with the crescendo of reform recommendations of the past few decades focused on cost effectiveness, partnership with the private sector, and leverage of capital markets.

These policy developments are occurring as businesses and communities across many developing countries are increasingly feeling the bite of their vulnerability to extreme weather events worsened by climate change, such as extreme heat, drought, floods, and cyclones. In recent years, a wide array of stakeholders have pioneered innovative efforts that seek to better anticipate crises and arrange for methodical liquidity and financing measures to respond to disasters more rapidly and effectively. These stakeholders have included multilateral financial institutions, affected governments, donor government agencies, and international nongovernmental organizations (INGOs). They have also included private sector businesses across the insurance industry that are actively seeking to expand their markets while modernizing their products. Advanced technology and data-driven approaches are making certain types of risks easier to model, and many firms with business lines across insurance, reinsurance, insurtech, and actuarial analysis have been refining their methods.  

Considering the confluence of these trends, this report examines the landscape for prearranged, trigger-contingent programs for disaster risk finance, anticipation, and response that are relevant to developing countries and associated communities and businesses. It offers recommendations for developing-country governments, donor governments, multilateral institutions, the private sector, INGOs, and philanthropic foundations.

For deeper analysis on efforts that the government of Ghana has taken to bolster its disaster risk financing portfolio, read the long-form case study “Disaster Risk Financing in Real Time: Ghana Case Study.”

For deeper analysis on efforts that the World Food Programme has taken to bolster its disaster response to extreme weather events in fragile contexts through parametric insurance, read the long-form case study “Disaster Risk Financing in Fragile Contexts: Syria Case Study.”

This report is made possible through the generous support of the Trafigura Foundation.