DFID disaster risk transfer plans hint at capital markets potential

The UK’s Department for International Development (DFID) has underlined its commitment to improving and advancing economic development in the world’s poorest and most vulnerable countries, which includes the expansion of innovative climate and catastrophe risk insurance solutions from the private sector.

Although unclear from the report, our interpretation is that DFID could look to utilize the insurance-linked securities (ILS) sector as well as the insurance and reinsurance markets to broaden the reach of catastrophe and climate risk transfer solutions, to the world’s poorest and most vulnerable.

It appears that DFID suggests the use of capital markets-backed reinsurance capacity in a new report, urging multilateral institutions, which it plans to increase its involvement with, to “be more innovative in how they use their balance sheets so that enough resources are allocated to the right places on the right terms. This includes providing new insurance products to attract investment into difficult markets – for example from pension funds.”

This comes from DFID’s first Economic Development Strategy, which highlights the very urgent and growing need to improve the economic and financial position and stability of the world’s poorest regions, against climate and weather related catastrophes, and the impacts of a rapidly evolving and increasingly complex macro-economic landscape.

The Economic Development Strategy provides comprehensive analysis and insight into what DFID plans to do to reach its goals, and what approaches are necessary in order to advance economic development in emerging countries.

The report highlights a number of areas that DFID will look at improving and establishing in order to improve economic development in emerging countries, and the need for private sector involvement and adequate, affordable risk transfer is highlighted throughout.

“As one of the world’s largest capital markets and a global centre of financial expertise, the UK has a central role to play in channeling private capital to developing economies. The City of London can become a leading financial centre for the developing world, supporting economic growth, job creation and an exit from aid.

“We will draw on the UK’s world-class expertise, including expanding access to climate risk insurance so that people are protected in the face of disasters,” explains the Strategy.

Catastrophe risk insurance schemes, or pools for poorer, vulnerable regions do exist in various parts of the world, and can be seen with the African Risk Capacity (ARC), the CCRIF SPC, and the Turkish Catastrophe Insurance Pool (TCIP), to name but a few.

But with climate, and extreme weather-related events seemingly increasing in severity and frequency across the world, there’s a very real need for all developing regions, which are often vulnerable to a range of natural disasters and climate-related events, to be able to utilize affordable and effective risk transfer solutions.

DFID stressed this urgent need, providing some insight into what it plans to do over the coming months and years.

“We will work with the insurance and risk finance industry to expand access to climate and catastrophic risk insurance, providing vulnerable developing countries with faster and more reliable funding in the event of shocks such as natural disasters. This can reduce the need for expensive humanitarian relief, reassure private investors and help people rebuild their lives.

“We will help countries, communities and individuals, especially girls and women, to manage risk and build resilience to the impacts of climate change, for example through insurance and other risk-finance schemes. We will help deliver the G7 commitment to expand access to climate risk insurance for up to 400 million additional poor people by 2020,” says the report.

The use of parametric insurance, for example, which ensures rapid payout post-event is used in ARC and other catastrophe risk pools, and ILS features and capacity used in conjunction with more traditional risk transfer solutions has the ability to create affordable, effective and innovative solutions for the world’s poorest and most vulnerable.

In recent years DFID has shown a strong and growing commitment to improving economic development and stability in emerging, vulnerable regions, through the use of private and public sector partnerships and the expansion of risk transfer.

Beyond a commitment to help the G7 reach its InsuResilience target of providing 400 million of the world’s most vulnerable with affordable insurance protection by 2020, DFID has supported other ventures designed to increase catastrophe risk insurance penetration in poorer regions.

This includes backing the launch of Global Parametrics, a parametric risk transfer provider backed by a third-party capitalised risk fund, which will target selling only parametric risk transfer and index insurance coverage to organisations which are largely unprotected today.

“Right now there is a desperate shortage of private and public investment in the world’s poorest countries, despite the significant opportunities. The UK will catalyse investment by using innovative financing approaches, as well as helping countries to improve their investment climate,” says the report.

The task is a tough one that will undoubtedly require public and private sector commitment and innovation, something that DFID feels the UK is uniquely positioned to provide.

Once again risk transfer solutions from the insurance, reinsurance, and ILS markets have been highlighted as a necessity if the more developed markets around the world are serious about improving and advancing the economic stability and resilience of emerging, vulnerable, and poorer regions.