Instruments

Explore the latest CDRFI instruments

Instruments and projects tailored to the risks

The InsuResilience Global Partnership supports a number of projects and programmes related to climate and disaster risk finance and insurance. These are implemented by our members and partners across the globe, with the ambitious goal of providing financial protection against climate and disaster risk for 500 million people annually by 2025.

Integrated into comprehensive climate and disaster risk management, CDRFI can help countries, businesses, and people recover quicker and better when disasters occur. A wide range of tailored risk instruments and projects exists in different regions, built on different actors’ expertise and institutional capabilities, including that of the private sector.

Comprehensive Climate and Disaster Risk Management

The key value of risk financing and insurance is to absorb residual risks that cannot be mitigated cost-effectively through other measures. In addition, having pre-arranged risk financing on standby supports an earlier and more reliable response to disasters. Governments avoid reallocating scarce resources within the national budget or borrowing on poor financing terms directly after a disaster.

Within a comprehensive risk management approach, risk modelling helps to identify cost-effective risk prevention and reduction options and their trade-offs up to a point at which they become prohibitively expensive, and risk financing proves feasible. On that basis, risk-finance instruments can then be identified and combined following a risk layering approach. This ultimately helps to identify those combinations of risk-management measures that come with the lowest overall costs while maximizing resilience.

A Holistic Risk Management Approach

Risk Layering

Extreme events and disasters occur at different frequencies and severities. In theory, events with higher expected economic losses occur with longer return periods (lower probability). A so-called 1-in-100-year flood has a 1% likelihood to occur per year and is expected to have high losses, while a 1-in-5-year drought has a 20% likelihood to occur per year and is expected to have a moderate impact.

Different financial instruments and risk management strategies are suitable for different types of events. In a risk-layered disaster risk financing strategy, adequate instruments are arranged across the respective layers of risk. In the graph, three simplified layers are depicted. In the lowest layer, budgetary instruments such as reserves or contingency funds address medium to high-frequency events with low severity. The risk is retained. In the medium layer, the severity of events is higher at moderate frequency. Contingent credit products such as catastrophe DDOs provide this layer with rapid and uncomplicated access to liquidity at manageable costs. In the highest layer, risks can be transferred using market-based instruments for less frequent but very severe events. This is the layer where insurance and catastrophe bonds are most cost-efficient.
In practical terms, this means that under a risk-layered approach, insurance would not have to pay out for a less severe event because it would be covered by liquidity from a budget reserve. In the face of a very severe event, instruments from all layers would be used complementarily to cover the losses.

The InsuResilience Global Partnership and its members promote the development of comprehensive Disaster Risk Finance (DRF) Strategies. In 2021, at least 47 countries were developing a national DRF strategy. One vision 2025 target is to have 80 comprehensive DRF strategies in place by 2025.

Risk Layering

Overview of CDRFI Instruments

CDRFI instruments can either be designed to provide rapid financial relief to households and businesses directly, in order to address negative disaster impacts on, for example, livelihoods or business operations; or they can be designed to pre-arrange finance for governments, humanitarian agencies, and international and local non-governmental organisations for disaster preparedness and rapid response:

  • At the household and business level (meso and micro), instruments comprise for example livelihood protection, livestock and crop insurance, property insurance, business interruption insurance, risk-sharing networks, and credit guarantees.
  • At the level of governments, humanitarian agencies and CSOs (macro), instruments are used to ensure that money is available when needed (money-in), and the processes to ensure that the money is spent on providing what affected individuals and communities need when they need it most (money-out):
    • Money-in: risk transfer products (e.g. insurance via regional risk pools), contingent credit mechanisms, contingency funds, pre-arranged finance (forecast-based finance), or financial market instruments such as catastrophe bonds, where appropriate, etc.15;
    • Money-out: shock-responsive social protection, early action protocols, contingency plans, cash transfers, etc.

Key Benefits of CDRFI

This suite of financial tools, from microinsurance to sovereign risk transfer, credit instruments, and risk retention strategies brings:

Availability and certainty in funding to enable rapid response to disaster shocks, relief and recovery

Capacity to plan more reliable, to reduce the impact of shocks and to bounce back better in the face of climate and disaster

Increased prepardness for disasters through strengthened risk management competence, e.g. collaborative planning leading to enhanced ownership

Glossary

The InsuResilience Glossary defines technical and political terms that are used in the CDRFI community. The glossary has been developed in a participatory process with members of the Partnership and builds upon existing frameworks such as the UNDRR.