Disaster risk financing: Opportunities for regional cooperation in Asia and the Pacific
September 2021
Carefully designed disaster risk financing (DRF) instruments such as catastrophe bonds, parametric insurance and contingent credits can strengthen urban resilience to shocks and stresses. As the costs of climate-related disasters continue to rise, it is essential that a wide range of financing mechanisms can support the rising need for investment in resilience and post-disaster recovery. This report provides insights into the opportunities and challenges offered by one form of disaster risk financing in Asia and the Pacific region: sovereign risk pools.
ADB has made a commitment to deliver $80 billion in climate finance cumulatively between 2019 and 2030. Its Urban Climate Change Resilience Trust Fund (UCCRTF) is also exploring how DRF solutions can increase resilience for the cities of Hanoi and Hue in Viet Nam. The work, part of the Secondary Green Cities Development Project, aims to improve the institutional, regulatory, and financial environment to help the cities better manage the cost of extreme weather events by adopting disaster insurance.
Innovative DRF mechanisms have become increasingly cost-effective thanks to a series of advances in areas such as catastrophe risk modelling, parametric insurance products, and closer alignment between reinsurance markets and wider financial markets. The report points out that these innovations have made it cheaper to transfer risk to the global financial markets and has made multi-state risk pooling more attractive for governments looking to strengthen the safety net for people in response to climate-related disasters.
The paper explains that thanks to these advances, DRF is increasingly recognised as a way to build resilience to climate shocks because by:
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improving risk assessment and awareness;
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developing coordinated and pre-agreed post-disaster plans; and,
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implementing effective financial protection measures.
The report argues that sovereign risk pools have been used to protect citizens against the impacts of disaster, whilst protecting national budgets at a time where public finances are very stretched. The report also examines how risk pooling has been extended to the sub-sovereign level with meso- and micro-level solutions.