Looking beyond insurance: the UK’s new disaster protection centre

15 July 2017
Articles and blogs

At the G20 summit in Hamburg last week, Prime Minister Theresa May announced the creation of a new Centre for Global Disaster Protection to be located in London.

The UK’s media reacted strongly to the announcement, with the Mail claiming that £228 million would be used to pay for developing country premiums while UK citizens go uninsured, and the Mirror arguing that the initiative would pump money into UK ‘insurance fatcats’, instead of helping poor people abroad (DFID issued a statement correcting these claims).

But, while insurance – presented as a way to transfer risks and provide rapid pay-outs for disaster response – played a key role in May’s announcement of the Centre, much of the coverage missed the point. Insurance is part of a much larger toolkit of financial mechanisms; the media – and the Centre – need to look beyond just insurance if the aim is truly to improve protections for the most vulnerable.

Good for some risks, less so for others

Adaptation and disaster risk reduction are at the core of protecting people from the impacts of climate change and disasters, but where risks cannot be avoided, we need financial mechanisms to help deal with them. Some early experiences with risk pooling at the regional level – such as policies offered by the Caribbean Catastrophe Risk Insurance Facility (CCRIF) – have shown the potential of insurance mechanisms to deliver swift pay-outs and support recovery after a disaster.

But while insurance can cover uncertain, low-frequency risks, it is not well-suited to addressing frequent or certain extreme weather and slow-onset events, like sea-level rise – risks we will experience more and more with climate change.

And risks are rarely isolated. Countries are exposed to multiple hazards, but existing sovereign insurance facilities usually only cover one or a few of these. In other instances, disaster risk reduction and adaptation, or alternative financing options such as budget reallocation or credit can be more cost-effective and sustainable in the long run. For drought events, for instance, budget allocations and reserve funds may be the most cost-effective mechanisms to finance frequent and lower impact losses. But this will always also depend on country context and the risk preferences of policy-makers.

The need for integration

ODI research is pointing to a number of ways in which sovereign-level insurance may contribute to post-disaster recovery, help mitigate disaster impacts and facilitate risk reduction. But it also highlights the need for the purposeful integration of insurance into more comprehensive approaches to climate, disaster risk management and economic development.

And alongside integration, there are also political and structural considerations – for instance, related to the existence of effective social protection systems – that are needed to make sure disaster risk financing mechanisms complement other interventions. This is especially relevant for sovereign risk pools aiming to scale up existing channels through insurance pay-outs in case of emergency, such as the one operating under African Risk Capacity (ARC).

Potential for innovation

There is exciting potential for the new Centre for Disaster Risk Protection to play a key role in boosting innovation around instruments and sources. Recent technical advancements, for instance, have increased the capacity to anticipate possible impacts before a disaster actually happens, but financing for forecast-based early-action is often far behind.

Providing funds in advance would help countries prepare and give them a head start for reducing disaster impacts. New sources of funding – through carbon taxes for example – could further support financing mechanisms through the Centre and more equitably balance risks associated with climate change.

Tailoring to need

The Centre for Global Disaster Protection needs to engage with a broader range of innovative climate and disaster risk financing options, and work with other development institutions and initiatives to ensure a sustainable, equitable and tailored approach. The media’s focus on insurance is narrow-sighted and doesn’t get to the real challenges – and opportunities.

The discussion must not only focus on insurance, but should seek to develop a portfolio of planning and financing options to developing countries and adjust these, according to context and need in order to enhance protection. The Centre should help countries to evaluate the relevance and use of different financing options and how to combine these to address the diversity of risks they face. And including developing country governments and their populations early on in the conversation will ensure the Centre serves them, and not just the insurers.

Lena Weingartner