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Risk-informed approaches to humanitarian funding: Using risk finance tools to strengthen resilience

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ODI - HPG
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Barnaby Willitts-King, Lena Weingärtner, Florence Pichon and Alexandra Spencer

Executive summary

The international humanitarian system is exploring ways to respond differently to meet needs in the face of the funding gap.

The Grand Bargain, for example, is making some progress in improving the efficiency and effectiveness of the response system. In parallel, there is an increase in the use of disaster risk financing (DRF) instruments to address needs using a more timely, pre-planned, riskinformed approach. Having the right funding mechanisms in place to be able to respond appropriately in advance of, or as quickly as necessary after, a shock is critical.

In its most ambitious form, a more riskinformed approach to humanitarian action – including DRF – is being developed by a number of key actors in the humanitarian system. Humanitarian actors are also contributing expertise to better dealing with the underlying causes of vulnerability and fragility through better development responses in coordinated humanitarian–development nexus approaches.

The Directorate-General for Civil Protection and Humanitarian Aid Operations (DG ECHO), through the Inspire consortium, commissioned this study from ODI to explore the role that pre-arranged financing can play in reducing or mitigating disaster impacts by supporting anticipatory action and response.

The study terms of reference (ToR) state the objective is ‘to assist DG ECHO in developing approaches to mainstreaming risk-based financing and specific risk financing tools for reducing the impact of disasters, decreasing overall ex-post humanitarian funding and enhancing preparedness.’ DRF in the humanitarian sector Traditionally, DRF has been defined as a mechanism of financial protection for countries to ‘increase their financial response capacity in the aftermath of disasters and to reduce the economic and fiscal burden of disasters by transferring excess losses to the private capital and insurance markets’ (Mahul, 2011). As such, DRF is a complement to comprehensive disaster risk management, which – according to frameworks commonly used in application to DRF – spans risk reduction, preparedness, response, recovery and reconstruction (World Bank, 2018c).

While an element of planning and preagreement of funding is essential to all DRF instruments, some instruments may be geared towards disbursing funds in anticipation of an event, whereas others facilitate response, recovery or reconstruction afterwards.

The varying needs in different windows of opportunity for action (shown in Figure 1) thus influence the choice and design of instruments.

Critical elements of DRF include:

• Risk modelling: understanding and quantifying risks and defining trigger mechanisms or softer, risk-informed, allocation and decision-making processes.

• Pre-planned activities and delivery mechanisms: through contingency plans, early-action protocols, standard operating procedures and systems that can balance effective and timely disbursement of funds with requirements of accountability and transparency of humanitarian actors and donors.

• Pre-agreed and timely funding: supported through a combination of different financial instruments, which are layered for protection against events of varying severity and frequency. How instruments are layered also depends on their relative cost-effectiveness and timeliness for different types of events (World Bank, 2018c; Harris and Jaime, 2019).
The humanitarian DRF community of practice is engaged in an evolving debate about how traditional design processes for DRF must be adapted to be compatible with humanitarian objectives and principles. Donors play several roles in DRF:

  1. Direct implementation of DRF instruments.

  2. Funding partners to set up and run DRF instruments.

  3. Policy and advocacy role.

  4. Innovator and early adopter role.

While most of DG ECHO’s budget is focused on response – and allocated in a responsive manner – DG ECHO supports or has engaged with a number of DRF instruments to varying extents, both from the response and disaster preparedness budgets.

This study focuses on four instruments that have been considered relevant for further investigation: crisis modifiers, microinsurance, pooled funds and replica mechanisms attached to disaster risk pools. DG ECHO is already investing in some of these instruments, however a critical issue is the importance of embedding how these instruments are deployed within a clearer operational framework, giving strategic coherence to what is currently a fragmented approach.