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How can risk pools best encourage resilience to natural disasters?

Nicky responded that risk pools provide the ability to benefit from economies of scale and provide financial efficiency for countries, as part of a wider DRM strategy where risk mitigation is also used to deal with shocks (such as large natural disaster events). Insurance is not a resilience method itself but can support integrated resilience plans – it is a safety net to be used to manage residual risks after other adaptation and mitigation measures have been applied. Essentially risk pools should be seen as part of a risk management package, empowering countries to take ownership of their risks through collective adaptation and mitigation strategies. There is a mutually beneficial arrangement between Disaster Risk Reduction and risk financing, because as risk is reduced, insurance should be cheaper, thus creating a virtuous circle of benefits from payouts to member countries. However, the signal can be slow to filter through (hence the rationale for donor support where needed) and there is an opportunity to develop proactive dialogues between countries to encourage ‘resilience first’, backed up by risk financing. The risk pools work best where there is a contingency plan in place to act, and systems ready to scale up (like shock responsive social protection) to get support quickly to those in need.

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"Risk pools help make insurance affordable for countries, but need to be implemented alongside risk reduction, preparedness plans and shock-responsive delivery systems so that money can reach those in need after a disaster quickly"

Nicky Jenns

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Benedikt added that that by providing a financial perspective to risk, pooling and risk financing can encourage governments to recognize the value of an integrated risk management strategy which combines risk reduction and transfer strategies.

One of the largestÌýchanges over the last decadeÌýhas been thatÌýnational MinistriesÌýof FinanceÌýare now becoming the primary counterparty departments in Pool structures, recognizing that the links between development andÌýfiscal policy are increasingly important and have a direct role in preparing for physical climate risks.

An optimal distributionÌýorÌýgeographical spreadÌýthat can spread the risk (assuming most natural disasters will not affect the whole of the region within the Pool) is a key aim of mature Risk Pools,Ìýbut it is important to ensure that Pools can be started, by working with countries which are in a position to work together as starting point, and then working to expand as other countries are able to join.

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"Financing must reach the right beneficiaries at the right time, through social protection and other systems. If the money sits in a bank account it does not do much good. Financial planning within countries is critical"

Benedikt Signer

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Lesley noted that going through a risk pooling framework helps countries understand and plan for disasters. For example, involvement in a regional risk pool will require countries to consider the roles and responsibilities of key government, national agency and external partners across risk reduction, mitigation and risk transfer, for example:Ìý

• Ministry of Interior – emergency response, disaster management

• Ministry of Finance – insurance programme management, accounting, governance

• National insurance industry – local risk capacity, claims management, analytics

The types and severities of each peril can determine how individual countries, and their respective agencies, will organise and mobilise within a risk pool, and how they can integrate. The creation of a managing entity is a key action within the Risk pool, to act on behalf of each member, and to centralise the resources and methodologies applied.

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What are the main challenges in ensuring risk pools are effective? How may this change going forwards?

Lesley noted that the initial challenge is very often in countries being able to assess the position of financing within a clear disaster risk framework. In Africa most countries do not yet have a framework for disaster response, so there is a need to go through this process. It important to identify the accountable government departments and agencies, and to ensure there is an appropriate political mandate from the heads of state and ministers to enable the countries’ engagement. Managing the political engagement is extremely complicated. The affiliation of ARC with the African Union provides a means to engage countries at the appropriate political levels.

There is often a challenge of premium affordability and premium payments are often competing against other national priorities, including health, education and social development. Costs are also related to the size of the risk pool. If you have a limited number of countries as members, premiums can be more costly and the share of the fixed costs will be greater per member. Equally the benefits of diversification may be reduced with a smaller spread of risk. Expanding the number of participants will act to reduce risk and operational costs.

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"Risk Pools such as ARC can help countries identify and own their risks, and to develop appropriate risk management strategies, including financial risk transfer"

Lesley Ndvolu

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There is also a political challenge with a need to help politicians and ministers understand the benefits which requires efforts to determine the costs and benefits of the pooling arrangement, based on best assessments of the likely frequency and severity of future losses, and likely costs against payouts. Both Lesley and Benedikt highlighted the importance of engaging with key stakeholders throughout the development of a risk pool, in particular to ensure that there is clarity on the expected benefits, and socio-economic value, of the risk pool, associated capacity building and risk reduction strategies.

Nicola added that there is a problem of perception of the performance of risk pools once in place. The ability of pools to make disbursements at the point of need is the ultimate determinant of their success. Assessment of impact and social value are often difficult to monitor, and the value of insurance is not always easily determined, particularly where insurance is not already well established as a common means of financial risk transfer.

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"How do you develop something that is both politically and financially sustainable, that also builds resilience?"

Nicola Ranger

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Perception of effectiveness is a real problem. Risk Pools do work well, but the problem is whether they are perceived to be successful. The value of the scheme will need to be clear to the countries, particularly when they may not see a financial benefit in periods of few or no payouts.

This needs a careful approach to determining the optimal type and level of coverage. The challenge will be to set the level of losses to be covered by the insurance (often termed the ‘attachment point’) to a level which will provide payouts for more regular events, but this will in turn result in larger premium costs due to the higher likelihood of losses occurring. Detailed assessment of expected losses, and the use of a range of innovative approaches that can provide the option to pay out against more frequent, but smaller, losses; as well as protection against the largest potential disasters.

Benedikt agreed and noted that managing expectations is also critical. Expectations can become misaligned, particularly after countries have invested considerable resources and time into the development of a pooling risk transfer product. There is a perception that there will be financial protection from future events, but if there is no payout, due to the particular conditions of coverage not being met, it can result in erosion of confidence in the programme, and potential withdrawal. Flexibility in the design of the risk transfer structure can work to reduce issues of expectation misalignment.

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In response to the audience question on how pools can work to deliver development impact, and constantly improve the ability to deliver to the key objectives, Lesley replied that risk pools are important in terms of meeting objectives, not just impact on people, but also in the way they influence government policies, in taking stock of the risks they are exposed to, with a plan to address them. Most people in Africa are vulnerable, so plans are critical.

Claims payout is critical. There is a detailed contingency plan for ARC members in how they will use the funds from ARC payout. ÌýThis encourages key strategic questions of how benefits will be made available at the point of need and in good time. ARC can pay out initially within 10 days of the event and this can reduce the negative development impacts of shocks.

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"Risk pools require governments to have a detailed plan on how the funds will be used - where will grain be imported from, who will it go to?"

Lesley Ndvolu

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Nicky added that the development impact (how payouts support quicker recovery and reduce negative impacts on people) can assess the value of risk pools, and help make the case for these to be aid-funded. An example of good development impact reporting can be seen in the reporting of the START network’s drought response in Senegal in 2020, funded by ARC, alongside a Government of Senegal-led response.

In answer to the question of how risk pools can be designed to be flexible to changing risks and conditions, Nicola made the point that risk pools are very flexible arrangements and can cope with changing risks. One consideration will be how to manage the challenge of potentially increasing premiums due to changing levels of emerging risks, for example potentially covering pandemic risk coverage, which again highlights the need for risk pools to deal with increasing complexity.

Benedikt added that pools can be set up as needed, ensuring the governance and institutional arrangements are appropriate to enable flexibility. Pools do evolve to add more products and coverage as they develop.

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"COVID-19 has shown that we need to think about the changing nature of risk, when they may not have been included in the original risks covered by the pool"

Nicola Ranger

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What role can geography and geographers have on developing risk pools, for example to ensure that financing most effectively reaches beneficiaries?

Nicky emphasised that geographers can make key contributions to the development of risk and resilience pools, particularly in contributions to the development and validation of the models and data essential to building the view of risk, as well as the frequencies and severities of future events, particularly where there is a complex spatial and temporal interdependency between natural events. Geographers can provide a key role, working in-country with NGOs and national governments to improve the ‘ground truthing’ of the models and data, which is critical to successful delivery.

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"Geographers are really important for the process, both from the technical perspective – there needs to be ‘ground-truthing’ of some of the models used, and in understanding and making the case for these kinds of risk financing arrangements"

Nicky Jenns

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More resources

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World Bank Group -

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