When natural disasters strike, governments need to react quickly to protect people’s lives and livelihoods. Insurance helps, but insuring against natural disasters has its own risks. Too little insurance in a bad year, and a country’s economy and food security may suffer; too much insurance in a good year, and vital resources may be drawn away from more effective programs, eventually hurting long-term development. In a new IFPRI policy brief, Ruth Hill, until recently an IFPRI senior research fellow, and Daniel Clarke, senior disaster risk financing and insurance specialist at the World Bank, look at how risk pools can help countries band together to more effectively manage and insure against the risks posed by natural disasters.
Risk pools allow neighboring countries to coordinate with one another to insure their risks together, giving them both lower costs and increased protection. Member countries contribute to the pool and then receive payouts if an insured natural disaster occurs, while mutually agreed-upon rules provide transparent guidelines. “Risk pools provide a disciplined, organized way for countries to help themselves and one another,” says Hill.
The policy brief Insuring Countries against Natural Disasters: Pool Rules looks specifically at the African Risk Capacity pool, a scheme that would insure against drought risk in Africa south of the Sahara. Unlike other risk pools that protect physical assets and public infrastructure, such as pools that insure against earthquake and hurricane damage in the Caribbean and Pacific Islands, the African Risk Capacity pool would have a different focus: people’s livelihoods. “This is really what Africa needs,” says Hill. “A drought won’t wipe out a road or a hospital, but it can destroy the livelihoods of a large portion of the population.”
Setting the Rules
The brief presents key lessons—“pool rules”—gleaned from a cost-benefit analysis of the African Risk Capacity pool. The lessons vary widely, from the need for a diversified pool of countries (“Don’t swim alone”) to the need to base payments on trustworthy information rather than poor data (“No littering in the pool”).
The most important lesson, according to Hill, is that success begins and ends with the payout plan: “It doesn’t matter how well you organize your pool if there’s not a good system in place to disburse the funds. You have to make sure the money gets to the people who need it.”
For more information on this topic:
- Insuring Countries Against Natural Disasters, by D. J. Clarke and R. V. Hill, IFPRI Policy Brief, July 2013
- Cost-benefit analysis of the African Risk Capacity facility, by D. J. Clarke and R. V. Hill, IFPRI Discussion Paper, September 2013