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Introduction to Disaster Risk Financing and Forecast-based Financing

Disaster Risk Financing (DRF) and Forecast-based Financing (FBF) are new forms of humanitarian action that move away from a solely reactive approach to crisis, and instead encourage the humanitarian and development sectors to take a more systematic and robust approach to managing and financing activities to address emerging risks.One key reason why humanitarian action has traditionally arrived late1 is that it is often triggered by indicators that are based on impact and loss, and is responding to an event that has already occurred. Equally, the development sphere has traditionally failed to recognise the dynamism of the context in which longer-term work is implemented. DRF and FBF take a different approach. These techniques focus on monitoring the early risk indicators of a forecasted, impending or imminent crisis, and using those indicators to release financing earlier than would usually be the case. DRF and FBF therefore provide the opportunity both to avert and mitigate the crisis, and to prepare for more timely emergency responses, thereby minimising losses and saving lives. These approaches enable us to act earlier, either before the shock has occurred to enable households to prepare and manage the consequences (“early action”), or very soon after (“early” or “timely response”) to limit the impact. DRF and FBF are similar in that they bring together scientific risk analytics, contingency planning and risk-based funding. They can be developed across a range of relatively slow-onset and predictable natural hazards, such as drought, flooding, heat and cold waves, and even more sudden-onset crises, such as landslides, earthquakes and tsunamis. Conflict and other human-induced crises can also be monitored, and in some cases predicted, allowing the risks to be better managed.

However, DRF and FBF also differ in that Disaster Risk Financing has an additional focus on the useof financial instruments and financial risk management tools to manage risk and fund a response, ex ante or ex post. DRF looks at “layered financing” options – the use of separate but complementary funding mechanisms for crisis events. An example of this is the use of insurance services for the most severe event to complement existing humanitarian and development funding channels, alongside national mechanisms: financing mechanisms are “layered”.