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What is DRF?

Why the Commonwealth Disaster Risk Finance Portal?

The severity and frequency of natural disasters necessitates member countries to prepare, respond and recover from these catastrophes. The strategic response requires tailored support to build financial resilience. There is a plethora of financial instruments already in existence. However, member countries face challenges to access this information in a structured manner. The Commonwealth Disaster Risk Finance Portal therefore simplifies access to this information through a ‘one-stop-shop’ model. The portal is a repository of information on a range of finance instruments available to help member countries manage the financial impact of natural disasters.

Disaster Risk Finance

The ferocity of disasters has resulted in an escalation of global efforts to support countries’ enhancement of their financial resilience and protection. International finance institutions and other stakeholders increased disaster risk financing and insurance solutions to countries particularly vulnerable to climate shocks.

Therefore, disaster risk finance is the process of developing and implementing a credible financing strategy and systems to provide financial protection and increase countries’ resilience against natural disasters.

Disaster Risk Finance Operational Framework

Operationally, there are core technical steps to be undertaken in developing disaster risk finance strategy outlined as follows:
What is Disaster Risk Financing? 1
  1. Assess the risks: risk assessments for financial protection quantify potential disaster impacts based on historical and simulated data. This also includes building an effective interface between the policy makers and underlying technical models.
  2. Arrange financial solutions: Effective post disaster response and recovery relies on access to sufficient and timely resources following a disaster. This includes:
    (i) Arranging the required financial resources for the government to meet its contingent liabilities;
    (ii) Developing catastrophe risk and agricultural insurance market; and
    (iii) Developing rules and arranging finance instruments for scalable social protection.
  3. Deliver the funds to beneficiaries: resources should reach beneficiaries in a timely, transparent, and accountable manner. This requires effective administrative and legal systems for the appropriation and execution of funds from the government budget, insurance distribution and settlement (often through private channels), as well as social protection programs.
  4. Reduce the underlying risk: Sustainable financial protection requires reducing underlying drivers of this risk. It complements risk reduction by managing residual risk which is not feasible or not cost effective to mitigate. It also creates incentives to invest in risk reduction and prevention by putting a price on risk and clarifying risk ownership.

Financial Resilience

Financial resilience is one of the pillars of a comprehensive approach to mitigate the impact of disasters. This includes provision of pre-arranged or an emergency funding to protect governments, households and businesses.

In order to determine and decide on appropriate funding mechanisms/instruments, there is a need to have risk information to assess underlying price of disaster risk, costs and benefits; ascertain risk ownership and cost of capital. Additionally, choice of funding mechanism/instruments is reliant on timeliness of funding and discipline in planning.

What is Disaster Risk Financing? 2
Depending on the financial impact, finance instruments can be pre-arranged (triggered before a disaster) or post-arranged (triggered after a disaster). In addition, governments can own risk or transfer risk to a third party through insurance.
What is Disaster Risk Financing? 3

However, no single risk finance instrument can address all the risk ranging from small-scale to catastrophic events. As a result, risk layering is the cost-effective way of disaster financing through a combination of disaster risk finance instruments aimed at addressing different layers of risk.

What is Disaster Risk Financing? 4

Glossary

The glossary provides definitions of concepts and terms used in the disaster risk finance sphere.