Finance is a shield in times of disaster

Crises are imminent as Asia-Pacific typhoon season kicks in, but policies are being put in place across the region to insure against the economic damage

When typhoons, earthquakes or other natural disasters strike, the poor are almost always hit hardest. Farmers in the Philippines for example lose their crops, meaning they have no harvest and no income to repay often crippling debts. While some may have crop insurance, delays and complications in receiving the money can make it difficult to start over.

“Farmers perish during natural disasters trying to save their livestock and crops, because it’s the only assets they have,” said Paola Alvarez, Assistant Secretary of the Philippines Department of Finance.

The Philippines is working with public and private agencies to develop a microinsurance scheme for its poorest farmers, fishermen and other households, to give them some financial protection against disasters. For a small, affordable premium, they could swiftly and easily receive payouts from an insurance pool to help them rebuild their lives if disaster strikes.

“It’s social protection in times of crisis,” explained Alvarez.

It’s one of numerous schemes being implemented across the Asia-Pacific region to build financial resilience to disasters. The region suffers the constant threat of quakes, tsunamis, monsoon-triggered floods and other natural calamities. According to a World Bank estimate, APEC economies have been incurring disaster-related losses of more than USD100 billion every year for the last 10 years. Climate change will only increase the frequency and intensity of extreme weather events.

Strong infrastructure, early warning systems, emergency-action plans and many other measures are critical to reducing the risk and impact of natural disasters. But financial mechanisms also need to be in place in advance to ensure economies can adequately fund relief, recovery and reconstruction efforts.

Building resilience to disasters is a priority for APEC and for Chile, its host in 2019, including by sharing knowledge, experience and successful practice across the region. A study course was held in Santiago early this year which allowed policymakers from APEC economies, along with World Bank and Asian Development Bank (ADB) experts, to learn more from each other about disaster risk financing.

“The Philippines is very focused on this because we suffer from so many natural disasters. But so are other economies like Indonesia, Japan, Vietnam, Singapore and Chile,” said Alvarez, who organised the event. Many of those economies are located along the Pacific Ring of Fire, prone to quakes and volcanoes.

The course heard that reducing the risk of disaster could include building an exposure database, that involved collecting data from multiple sources, so that economies better understand the exposure and vulnerability of infrastructure, homes and businesses in villages, towns and cities, and the cost of rebuilding them.

Targeted financial instruments can then be adopted at multiple levels, including international assistance in the form of grants from multilateral bodies, risk transfer such as catastrophe bonds and other insurance-linked securities, and risk retention such as contingency allocations in an economy’s annual budget. These are proactive approaches, focused on planning responses in advance, rather than relying on fundraising and pulling funds from other critical projects in the aftermath of disasters.

“This layered approach is the most cost-effective way of financing disaster response through a range of tools to address different layers of risk, as no single instrument is optimal for responding to all disaster events,” said Benita Ainabe, a financial sector specialist at the ADB.

Mexico, for example, started its natural disaster fund in the 1990s that draws from its federal expenditure budget for rapid reconstruction of infrastructure. Australia has a scheme in place to quickly give resources directly to its states to alleviate the cost of relief and recovery assistance to disaster-hit communities. At the individual level, Japan’s insurance program protects homeowners specifically against quakes.

The Philippines, one of the most vulnerable economies to natural disasters, established an insurance program in 2017 that provides 25 provinces with more than USD100 million in insurance coverage for typhoons and quakes by pooling risk and transferring it to private reinsurance markets. The economy’s insurance service provides the insurance, while the World Bank serves as an intermediary to transfer the risk to international reinsurers.

The Philippines is working with the ADB to develop a similar scheme for 10 disaster-prone cities. Both schemes ensure rapid delivery of financing, ultimately reducing the impact of any disaster.

Unlike conventional insurance which has time-consuming damage assessment processes, these parametric schemes immediately pay out a predetermined amount once certain disaster-related indexes are met, such as magnitude for quakes or wind speed for storms. They do not cover total damages, but quickly provide much-needed funds for relief efforts, until money from other sources becomes available.

At regional levels, economies have also banded together (including in Africa, the Caribbean and the Asia-Pacific) in recent years to form catastrophe risk pools, so that they can quickly receive insurance payouts in the event of a disaster. Economies can pool risks in a diversified portfolio, retain some of the risk through joint reserves and capital, and transfer excess risk to the reinsurance and capital markets. Alvarez said the Philippines will soon join one such regional insurance platform SEADRIF.

“We have come a really long way. We have all exchanged knowledge and shared experiences. It’s become a regional priority because of the number of potential disasters we face,” Alvarez said.