Financial mechanisms for climate adaptation and disaster risk management

Our approach to identification of effective financial mechanisms for climate adaptation and disaster risk management is still evolving.  At present, most existing financial mechanisms for risk management have two major limitations:

1. They provide funds to replace assets lost during disasters but do little to reduce future risks.  With few exceptions, mechanisms such as insurance are not structured and do not provide a strong financial incentive for investing in activities that reduce risk.  In addition, they do not support strategy shifting following disasters – they replace pre-existing assets but do not explicitly encourage replacement of those assets with others that are lower risk.

2. They do not directly serve some of the communities that are most vulnerable to disaster and the impacts of climate change.  Insurance programs, for example, primarily serve individuals and organizations with substantial assets who can afford significant premiums.  The insurance business model faces major challenges in meeting the needs of less well-off communities and does not serve communities where risks are high.

Given the above two major gaps, our approach to the identification of effective financial mechanisms for supporting disaster and climate risk reduction is currently focusing on the identification of strategies that explicitly encourage strategy shifting to reduce current and future risks and also strategies that are capable of serving the needs of poor and vulnerable communities.  Within this we are investigating insurance mechanisms that spread the risks associated with increases in climatic variability (such as index-based crop insurance) and also that are capable of penetrating poorly served groups (such as micro-insurance).  We are also investigating how such mechanisms can be linked with national strategies for spreading risks at global levels through reinsurance or catastrophe bonds.  Finally, we are harvesting lessons at a global level from the few existing financial strategies that explicitly seek to reduce risk exposure and support strategy shifting.  These current activities are seen as the first step in a much longer-term process toward the identification of financial mechanisms that encourage risk reduction and support poorly served populations.