How nations are collaborating on disaster insurance

Source(s): Academy of Management
“It was so bad [after the hurricane] that the government could not even pay the public servants … even the police started looting … Donors come to the rescue … but it takes quite a while. It takes three, six months, one year … and then you start renegotiating your debt schedule, and that also takes six months to a year, and in the meantime you’re in default.”
—International development bank representative

Caribbean hurricanes damaged up to 95% of homes in some countries and cost more than 200% of those nations’ gross domestic product (GDP) in 2017. The authors of an Academy of Management Journal article noted that “large-scale disasters are increasingly prevalent, as witnessed during the timespan of writing this paper where catastrophic bushfires in Australia and California, devastating flooding in the United Kingdom and Australia, drought across much of Southern Africa, and a pandemic affecting the entire globe all occurred.”

But through disaster-insurance risk pools, also known as multi-country risk pools, “governments of different countries can work together, and with development organizations, on solutions for responding to disasters in ways that satisfy both their own partial interests and wider regional ones,” wrote Paula Jarzabkowski of the University of Queensland and City, University of London; Rebecca Bednarek of Victoria University, Wellington; Konstantinos Chalkias of Birkbeck, University of London; and Eugenia Cacciatori of City, University of London.

Jarzabkowski said their article, “Enabling Rapid Financial Response to Disasters: Knotting and Reknotting Multiple Paradoxes in Interorganizational Systems,” analyzes “how to use anticipatory financing to respond to climate-driven extreme weather events to prevent crises. It explains disaster-liquidity insurance, an innovation in risk financing to help low-income countries respond rapidly to disasters, such as cyclones, floods, and droughts, which are increasing in frequency and severity due to climate change. Rapid responses to disasters are absolutely critical for saving lives and livelihoods. They prevent disasters from escalating as people cannot get access to food, clean water, shelter, or electricity.” 

Rapid financial responses via risk pools prove that “development and government donor dollars work. Food gets to starving babies because of these risk pools,” she said.

“For example, early financial response during the onset of drought can provide food to prevent starvation, enable vulnerable people to stay on their lands, and even sustain some livestock. Aside from the humanitarian benefits, this is also economically more viable: A rapid response that halves the number of livestock deaths is 14 times cheaper than the cost of replacing dead livestock as part of a slower relief-aid response,” she said.

“Yet, low-income countries have limited financial reserves for immediate response,” the authors wrote. Poorer nations rely “on international development and humanitarian aid, which typically comes too late, taking weeks or even months to arrive, making the availability of rapid capital critical for addressing the challenge of increase in disaster globally.”

Jarzabkowski said that because international aid cannot arrive fast enough, “disaster-liquidity insurance, an innovation developed by the World Bank, other development banks, and donor countries—often as part of their climate finance initiatives—provides market capital that can pay almost immediately after a disaster. Importantly, these innovations are now being used to help prevent disaster. For example, drought relief payments can be made when satellite pictures and soil moisture tests show the onset of drought, preventing a humanitarian crisis from occurring.”

“These initiatives started in 2007 with a risk pool in the Caribbean,” she said. “Risk pools are necessary for small and fragile economies because they provide pooled expertise for developing risk modelling of extreme weather and pooled finances to access market capital. Their success has fueled their spread, first to Africa, and then to the Pacific. Most recently, a new risk pool has been started in Southeast Asia. From 2008 to 2020, these pools have enabled 78 payouts to 24 low-income countries in the immediate aftermath of a hurricane, flood, or earthquake, or in response to drought.”

Key finding

The authors found that as stakeholders from multiple nations and sectors iron out competing needs and priorities, “working through these tensions actually strengthens pools, their disaster risk-financing products, and countries’ use of them to address disaster consequences,” Jarzabkowski said.

“Our findings also offer practical impact and optimism. Increasing severity and frequency of large-scale disasters is a fact. Governments, markets, and development organizations can work together on solutions that meet national and regional interests while accessing financial market capital. The inevitable tensions do not mean failure. Rather, working through them helps strengthen risk pools, their products, and national disaster risk management efforts,” the authors wrote.

The authors’ assessment of risk pools offer a tip for business leaders facing complex problems with multiple stakeholders. “When you need to do something and you’ve got a lot of different stakeholders with different interests, it can be very chaotic. It can feel like what you’re doing is not working. But that is the moment at which you are most likely to make it a better or more useful thing for all the stakeholders. When you get to that edge of disequilibrium when it’s very uncomfortable, if you work with that discomfort, you will probably make something that is much better over the long term. But people tend to shy away from that edge of disequilibrium, or think they’re doing the wrong thing,” Jarzabkowski said.

Risk pools basics

Jarzabkowski, Bednarek, Chalkias, and Cacciatori outlined elements of disaster-insurance risk pools:

  • “Disaster liquidity insurance is an innovation which, unlike traditional insurance where the lengthy claims process is unsuited to immediate disaster response, involves pre-defined, contractually-agreed payment triggers based on the type and severity of the disaster. For example, if the relevant disaster is a hurricane, the triggers might be a specific wind speed recorded within a defined geographical location. When these triggers are met, immediate payouts are issued to help with urgent disaster response, such as restoring power supply or providing food and temporary shelter.”

  • “Countries become members of the pool and buy a disaster liquidity product through the pool each year. Their individual country premiums are pooled to purchase commercial cover in the global reinsurance market.”

  • “A pool is administered and coordinated by a risk pool organization, which we term the network administration organization (NAO): ‘a dedicated organization responsible for coordinating the network or at least supporting such processes.’ The NAO cannot compel other organizations’ participation in the pool and operates primarily by coordinating interactions amongst other actors, as opposed to being a formal authority.”

  • “International development actors, such as development banks (World Bank) and donor countries, provide technical, financial, and operational assistance to establish and support these pools.”

  • “Disaster liquidity insurance products for country members are purchased from global reinsurance market organizations, including reinsurers who provide the capital, and modelers and brokers who provide support functions. These market actors support the process by clarifying the risk, working out how to trade it, and supporting product development.”

Risk pool models also operate in single developing nations—sovereign risk pools—such as Mexico and the Philippines. The model may be applicable to wealthier countries, as well as regions or states within wealthier countries, Jarzabkowski said.

The authors studied data on three risk pools—the Caribbean Catastrophe Risk Insurance Facility (CCRIF), Africa Risk Capacity (ARC), Pacific Catastrophe Risk Insurance Company (PCRIC)—collected from 2016 to 2020:

  • 285 reports and communications in the three risk pools and their member countries

  • 41 interviews with representatives of development banks and national donor agencies

  • 39 interviews with reinsurers and brokers

  • 34 interviews with representatives from the three NAOs

  • 21 interviews with ministers, senior government officials, and development liaison officials

  • Observations of interactions at 31 conferences, meetings, and workshops

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