Tying disaster relief to insurance could speed up aid

With natural disasters forecast to worsen, vulnerable countries and aid donors should look to insurance to get faster payouts to those most affected and stop disasters spiralling into costly long-term development challenges, says new research from the Center for Global Development.

Insurance would allow governments to better allocate money and can spur higher investment in resilience, it argues.

The CGD report, issued last month, says the poorest countries have little coverage for natural disasters which risk jeopardising development and can increase displacement, conflict and regional instability.

"We have various mechanisms for disaster relief, most of which could be adapted to have pre-agreed payouts, so we would have insurance-like principles within our existing institutions and learn from the insurance industry," Owen Barder, director for CGD Europe, told a panel discussion on the report.

"One of the things insurance companies help you do is work out how to bring down your premium because they can identify the risks that you face... at the moment there is no incentive to invest in resilience," he added.

Developing-country governments need help to access insurance markets and set up concessional contracts whereby donors could co-pay for insurance policies and ensure contracts are tied in with measures to better protect against disasters, Barder said.

Pre-arranged financing would help aid agencies avoid the delays they incur as they scramble to raise money to fund disaster relief work, said panelists.

But convincing both donors and governments with a short-term focus to buy insurance could prove hard, they conceded.

"Pre-agreed financing is a really good mechanism that forces you to think beforehand what to protect, who to protect and how you’re going to do this," said Stefan Dercon, chief economist at the UK's Department for International Development, who was involved in the report.

While money raised by donors helps countries cope with the immediate impact of natural disasters, it is often a drop in the ocean in terms of the long-term costs and fails to maximise its impact due to unpredictability, said the report.

Calling on governments and donors to transfer risk to the insurance sector and free up funds, the CGD cited figures from reinsurer Swiss Re showing an annual "protection gap" for lower income countries of $112 billion.

Disasters affected over 83 million people last year in low and middle-income countries, the report noted.

NO SURPRISES

The report said international aid to deal with disasters often fails to arrive "when it would do the most good".

"We must stop treating disasters like surprises," it said, noting that spending to clean up after they strike vulnerable countries is on the rise.

While innovative insurance mechanisms are available, only 10 percent of emergency aid between 2010 and 2015 was linked in advance to predictable events, said the CGD. More effective disaster response could stop these turning into "stubborn and long-term development challenges", it argued.

The report highlighted the case of Ebola in West Africa, saying the outbreak would have cost $5 million to contain when it was first detected in Guinea 2014, but that cost spiralled to $1 billion eight months later.

"Prearranging funding and using concessional insurance will not lower the risk of natural hazards," said the report.

"But these innovations will enable planning ahead, save lives by expediting response, make scarce aid funding stretch farther to deal with more risks, and sharpen – rather than blunt – incentives to reduce vulnerability."