NB Financial Innovation
Resilience Meets Disaster Economics: Investing to stop disasters before they start can save lives and money
Editor’s note: This post originally appeared in the Stanford Social Innovation Review.
Each January, thousands of leaders—from the private sector, civil society and government—gather in the snowy hamlet of Davos, Switzerland, to participate in the World Economic Forum’s annual meeting. Each year, we wrestle with weighty issues, including global recession, energy crises, and political upheavals.
This year was different. Instead of focusing on the problems of today, we considered how to anticipate and better prepare for the problems of tomorrow. The World Economic Forum calls this concept “resilient dynamism.” I call it smart work that is long overdue.
Global needs for crisis response are increasing. From drought in the Horn of Africa to battering storms in Haiti, natural disasters are becoming common and responding to them can be expensive. At the same time, donor funds are becoming scarce, as the global economic outlook remains gloomy. According to the International Monetary Fund, the global economy grew by just 3.2 percent last year, the slowest pace since the 2009 recession. Growth for this year—in the face of lagging recovery in the United States and Europe, and even slowdown in emerging markets—does not look much stronger.
This confluence of circumstances should drive a change in how the world funds crisis response. It is cheaper and easier to deal with a disaster if devastation is mitigated or even prevented in the first place. Yet the UK’s Department for International Development (DFID) notes that in the 20 countries that received the most humanitarian aid over the last five years, only 1% of the $150 billion spent went toward helping people prevent and prepare for disasters.
Thinking is starting to evolve. Last year, US, British, and European government funders of foreign aid announced programs that would place greater emphasis on building resilience to shocks like hurricanes, earthquakes and droughts. These are promising developments, but resilience needs to be embraced by the private sector and civil society as well as government donors; all of us must work together to make long-term, truly groundbreaking solutions stick.
What do resilience strategies look like in practice? Efforts to get smart about resilience are what initially brought Mercy Corps together with the microfinance institution Fonkoze and the global reinsurance leader Swiss Re in Haiti. The 2010 earthquake highlighted the country’s many long-simmering problems, including lack of economic opportunity.
Fonkoze had worked in Haiti for 15 years, making loans to tens of thousands of women who strive to escape abject poverty by starting small-scale businesses. Again and again, Fonkoze witnessed that even as a woman struggled to climb out of poverty, one storm would often ruin her entire inventory, and with no safety net, she would slide back to where she’d started.
In the face of this troubling scenario, Fonkoze, Mercy Corps, and Swiss Re mapped out a microinsurance product for Haiti and beyond. To support this new endeavor, we created a for-profit company called MiCRO that combines parametric insurance—featuring a payout that is quickly triggered by measurable, weather-related thresholds such as wind speed or rainfall—with a possible second payout if the original payout is insufficient to cover actual losses.
In 2012, MiCRO enabled Fonkoze to pay out more than $6.8 million to more than 28,000 clients for damages, primarily from Tropical Storm Isaac and Hurricane Sandy. Assessments show that Fonkoze borrowers are willing to pay a small premium to have better control over their financial destinies, and Swiss Re estimates that the global microinsurance market could yield annual premiums of $40 billion. All of this adds up to communities that are better off, more resilient to shocks, and less dependent on foreign aid.
While MiCRO seeks to help individuals mitigate their financial risks at the local level, this kind of thinking is taking place even at a cross-continental level in Africa. The African Risk Capacity (ARC) Project is a unique partnership led by the African Union Commission, with support from the World Food Program, among others. The index-based weather risk insurance pool would provide African governments with contingency funding in the case of severe drought. The engine behind this endeavor is a sophisticated modeling tool called Africa RiskView, which calculates drought response costs across the continent. Implementation of ARC is still underway, but it looks to be an ambitious and promising undertaking.
Initiatives like MiCRO and ARC certainly won’t stop shocks from happening, but they can improve people’s abilities to cope with them. At a time of global belt tightening and increasingly volatile weather, leaders would be wise to look ahead and make cost-effective investments that help people not only survive, but thrive.