When Hurricane Beryl tore through Grenada and Saint Vincent and the Grenadines in July, right at the start of the 2024 hurricane season, it knocked out power and communications, destroyed buildings and left 11 people dead as well as thousands homeless. Supercharged by warm seas, Beryl rapidly strengthened to a category 5 hurricane. The total economic damage in St Vincent and the Grenadines was around $230m (£180m), or 22% of GDP.
Ocean warming means that rapidly intensifying hurricanes such as Beryl are increasingly common. “They cause major emergencies for populations who are becoming more and more vulnerable due to more fragile infrastructures,” says Elina Ceballos, director of programmes for the Cuban Council of Churches.
Extreme heatwaves, droughts, wildfires and floods are also occurring more frequently around the world, and they typically hit low-income countries the hardest. To begin the process of recovery, governments need fast access to finance. Today, this is typically requested through formal appeals and arrives after a disaster has occurred, even though the impact of extreme weather events is increasingly easy to model and predict. Often funds arrive late or simply don’t cover the scale of the damage.
This can lead to difficult economic trade-offs for low-income countries. “If you divert money for crisis response, you might have to cut back on funding for education or infrastructure development,” says Lydia Poole, a senior expert and co-author of a report on financing for disasters produced by the Centre for Disaster Protection, which works with governments, development banks and other organisations to change the way the world plans and pays for disasters.
One of the key approaches for achieving better protection, she says, is through pre-arranged financing (PAF), which can increase the predictability, speed and effectiveness of disaster responses. Essentially, governments make financial arrangements that will cover the impact of a disaster before one actually happens, with payouts occurring when pre-agreed conditions are triggered.
“It provides some sort of guarantee that the funding will arrive and it will arrive at the right time, and that will hopefully … avoid some of those really difficult trade-offs,” Poole explains.
A range of financial instruments fall under the PAF umbrella, including contingent disaster loans and grants, insurance, regional risk pools, catastrophe bonds and climate resilient debt clauses. Nevertheless, pre-arranged financing remains a very small portion of international crisis financing today.
The centre’s 2024 report found that international development financing for PAF for disasters actually fell from $1.9bn in 2021 to $852m in 2022 – amounting to just 1.1% of total crisis financing supported by international aid. However, this drop doesn’t necessarily represent a downward trend. “The nature of pre-arranged financing means it is only triggered when qualifying or specific disasters happen,” says Michèle Plichta, senior researcher at the centre and co-author of the report.
Improving access
There are also signs that countries are putting in place more financial protection. Coverage provided by aid-supported pre-arranged financing instruments – that is, the maximum amount that would be paid out if all pre-agreed conditions were met – reached an unprecedented $9.8bn in 2023. This figure represents a third consecutive year of growth and resulted in coverage expanding by 27%, from 183 million people in 2022 to 232 million in 2023.
While this coverage remains concentrated in middle-income countries ($7.8bn in 2023), coverage in low-income countries also grew substantially, from $91.8m in 2022 to $308.8m in 2023.
Reforms that will make pre-arranged financing more affordable and accessible for low-income countries are, however, still sorely needed, says Poole. Just 3.1% ($183.8m) of international development financing for PAF reached low-income countries between 2018 and 2022.
This is because countries that are grappling with high levels of debt often find contingent disaster loans unappealing. “Taking on more loans is just not affordable for them,” says Plichta.
Multilateral development banks are attempting to address the issue. “The World Bank has just introduced new lending terms for their Catastrophe Deferred Drawdown Option … to make it more attractive for low-income countries,” Plichta explains. “But we are yet to see whether that leads to more uptake.”
Designing new financial instruments is only one part of the puzzle, however. Even if governments have access to a range of instruments, the provider-driven, highly technical and rapidly evolving nature of pre-arranged financing can hamper their ability to determine which combination of instruments is right for them. If expectations around coverage don’t match the payout received after a disaster – perhaps due to a lack of transparency around the triggers or a lack of robust data – it can lead to disillusionment and potentially withdrawal from regional risk pools or other initiatives.
Finance ministries and other government departments may also lack the capacity to ensure that pre-arranged financing reaches those who need it most. “In some ways, designing an instrument is the easy part,” says Poole. “The much harder part is making sure that you have functional public financial management and social protection systems in place that can move money through government systems, and deliver it into the hands of vulnerable people.”
Paying for premiums
Accessibility and affordability issues are often mirrored at the smallholder level. The severe drought in Malawi this year has affected about 9 million people – nearly half of the population – with up to 4.2 million experiencing acute food insecurity. It is the latest in a number of back-to-back climate disasters, including Cyclone Freddy, the longest tropical cyclone ever recorded.
Michael Mwale, a resilience officer at Churches Action in Relief and Development (Card) Malawi, which is a member of the Global Network of Civil Society Organisations for Disaster Reduction (GNDR), says many farmers struggle to access insurance. “Most farmers in Malawi are subsistence farmers, so their farms are not large enough to prove of interest to insurance companies,” he says. Literacy issues also mean that many are unaware of the benefits of certain insurance products. Even those who do manage to access them, often with help from NGOs such as Card, still face the financial burden of paying for premiums.
Social enterprises and other organisations are attempting to address these issues and improve access to climate insurance in Malawi and other parts of Africa. The United Nations World Food Programme, in partnership with the Malawian Ministry of Agriculture and the Adaptation Fund, has also distributed around $1.3m in insurance payouts to 36,000 farming households whose crops were recently damaged by climate shocks. Nevertheless, Mwale says that the amount of disaster finance that is pre-arranged is still “very, very little” in comparison to that which arrives after a crisis.
Describing the importance of early action in general, Becky Murphy, head of policy for GNDR, says: “It is essential that those living on the frontline of the climate crisis can access sufficient and timely finance to act fast when early warnings are issued.”
More donor-funded premium support, which provides grants to cover a portion of insurance premiums, could make it more financially viable for low-income countries to participate in regional risk pools such as African Risk Capacity (ARC) and Caribbean Catastrophe Risk Insurance Facility (CCRIF). Through the ARC Replica initiative, humanitarian organisations can also now purchase “replica” insurance policies under the same terms and conditions as a government, thereby expanding climate risk coverage among vulnerable populations.
The response to Hurricane Beryl demonstrated much of the progress that has been made on pre-arranged financing over the past decade. Along with record payouts from the CCRIF, Grenada also became the first country in the world to trigger a climate resilient debt clause in a government bond, allowing it to defer around $30m in debt repayments to prioritise recovery from the disaster.
Pre-arranged financing is, of course, only one part of the disaster response toolkit. “Preparedness is fundamental, and for this it is necessary to train community leaders to bring knowledge to the most vulnerable areas,” says Ceballos. “Equally, adapting regional and national warning systems to the specific contexts where people live is critical.”
But, when it comes to covering the cost of disasters, Poole says: “Planning in advance and putting in place financial preparedness measures should really be the default approach.”
Find out more about funding disaster recovery in The State of Pre-arranged Financing for Disasters
