Practice Review on Innovations in Finance for Disaster Risk Management

There have been a range of recent developments to improve access among poor and vulnerable communities to financing tools that promote resilience and reduce disaster risk. The paper will examine both 1) risk financing tools for providing financial resources post-disaster in exchange for financial commitment pre-disaster (such as insurance, catastrophe bonds, and contingent credit commitments) and 2) broader financial tools to promote savings and investment to strengthen resilience and to protect individual and community assets and resources through pre-disaster prevention and mitigation. The paper looks in particular at four tools – microfinance, social funds, micro insurance, and catastrophe pools – which have generated great interest for use in increasing access to financing for disaster risk management either at household, community, or national levels. While there are also other tools that exist, these four tools collectively address significant gaps in the need for access to effective disaster risk management financing across the range of critical stakeholders – including households, small businesses, communities, and governments – in poor and vulnerable countries. Each of these tools has demonstrated some success in addressing gaps at specific levels and together they have the potential to be quite complementary and broad range in their targeting. However, the potential for effectively linking these tools with effective prevention has not yet been fully realized.