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.
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.
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.