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Instrument Development
The insurance penetration level in Pakistan is one amongst the lowest in the world, standing at 0.9% of the GDP in 2018. The Fund is to develop two DRF solutions in the first phase, which is to continue until 2020. At least one of these solutions is to be piloted in this context.
The prospective solutions are to be identified and developed for the following layers of risks. The SG will steer the overall direction of the instrument development, reflecting the actual needs of the country to the best possible extent.
DRF Instrument Development
Range of potential financial instruments available or to be considered for developing a continuum of disaster risk financing includes but not limited to:
| DRF Instruments | Support DRM Cycle | Example |
|---|---|---|
| Government Revenue & Budget Allocation (including Ex-Ante Taxation) | Prevention, Preparedness | Fiji has set up an Environment & Climate Adaptation Levy to fund environmental, carbon-reducing and climate adaptation projects. The levy is a tax on prescribed services, items and income and is administered by the Ministry of Economy. The funds are used to support disaster relief and response, meteorology services, rural development, cyclone rehabilitation, urban development, agricultural development, sustainable resource management, infrastructure development, energy conservation, and environmental conservation |
| Bonds (excluding Cat Bonds) | Prevention, Preparedness, Recovery | Fiji issued a sovereign green bond in 2017 to close its climate-resilient development resourcing gap. The approximately USD 50 million bond was one of the first issued by an emerging market country. Over 90% of the bond proceeds focus on adaptation projects. |
| Traditional DRR, Development, and Climate Finance | Prevention, Preparedness | In 2020, the Cook Islands received a USD 10 million loan from the ADB for their Disaster Resilience Program to support the government’s their disaster risk management activities. In Vanuatu, the National Green Energy Fund was launched in 2018 to support financial and non-financial intermediaries in the provisioning of affordable, sustainable energy. The fund was created with the support of the Global Green Growth Initiative and with the intention of attracting capitalization from the Green Climate Fund |
| Sovereign Risk Insurance | Transfer | PCRIC is a regional sovereign risk pool that was designed to increase the financial resilience of Pacific Island countries by improving their capacity to meet post-disaster funding needs. During the pilot phase (2013-2015), PCRIC provided sovereign risk insurance to Cook Islands, the Marshall Islands, Samoa, Solomon Islands, Tonga and Vanuatu. Tonga received a USD 1.27 million in 2014 following Tropical Cyclone Ian and Vanuatu received a USD 1.9 million payout in 2015 following Tropical Cyclone Pam |
| Public Assets Insurance | Transfer | In 2019, Indonesia implemented the State Assets Insurance Policy Phase II. This Property All Risk coverage includes earthquake, volcano, tsunami, flood, typhoon, landslide and terrorism and insures government buildings that provide public services and governance tasks, such as office buildings, education buildings and hospitals |
| Micro insurance | Transfer | The Pacific Financial Inclusion Programme has helped over two million low-income Pacific Islanders access formal financial services and financial education. In 2017, PFIP worked with FijiCare to launch a bundled microinsurance product that includes term life, funeral expenses, personal accident and fire coverage. An annual combined cover limit of about USD 5000 costs only USD 25, or about one Fijian dollar per week |
| CAT Bonds | Transfer | The Philippines sponsored a CAT bond with annual coverage of USD 206 million for protection of national government assets against earthquakes and severe typhoons, and USD 390 million in protection against severe typhoons for 25 local government units in 2018.109 In late 2019, the Philippines sponsored a new three-year cat bond |
| Forecast Based Finance (FbF) | Preparedness, Response | In 2017, the International Federation of Red Cross and Red Crescent Societies developed Early Action Protocols for the Philippines in collaboration with the Philippine Red Cross. Those protocols covered typhoons and floods in 22 provinces of the Philippines, allowing FbF recipients to strengthen shelters ahead of typhoons, evacuate of livestock and harvest crops, and temporarily relocate small business stocks ahead of urban flooding. Starting in 2019 the project was expanded to also include drought |
| Contingency and Reserve Funds | Preparedness, Response, Recovery | The Tuvalu Climate Change and Disaster Survival Fund is a nationally driven and nationally owned fund that provides a sustainable, predictable and accessible source of finance for Climate Change and Disaster Risk Management activities. Tonga’s emergency fund was established in June 2008. An appropriation up to USD 2.79 million can be placed into the fund in any fiscal year. The fund is able to accrue, and the resources are used exclusively for the purpose of providing timely and efficient relief and reconstruction following an emergency. |
| Extrabudgetary Funds | Response, Recovery | While some Pacific Islands countries, including Tonga, Tuvalu, and Kiribati, have long-term dedicated national funds to help absorb the financial costs of climate change and disaster-related losses (see above), other Pacific countries have more general sovereign wealth funds to manage revenue from non-renewable sources, revenue windfalls, and donor contributions that can be drawn upon in the event of an emergency. In the wake of Tropical Cyclone Winston in 2016, the Fiji government allowed pre-retirement pension withdrawals as a way to smooth consumption and rebuild assets. Pension fund members were allowed to withdraw up to around USD 3,000 as long as it was within the cumulative cap on withdrawals of 30% of the total. About 180,000 applications were approved and the average amount withdrawn was about USD 750. Vanuatu has also allowed early withdrawals; in the aftermath of Cyclone Pam, 40,000 members were allowed to withdraw up to 20% of their retirement savings. |
| Budget Reallocation and Realignment | Response, Recovery | Governments often realign budgets for a variety of reasons. In the Solomon Islands, for example, there are three options for acquiring additional funds to facilitate response activities. 1) Transfer funds between accounts within an agency, which requires approval of the head of agency and the minister of finance. 2) Seek a contingency warrant, subject to cabinet approval and in the event that the contingency warrant allocated for that financial year is depleted. 3) Request a supplementary budget allocation from the contingency warrant. According to the Public Financial Management Bill, the finance minister may seek supplementary appropriations when an urgent and unforeseen need has arisen, and the cabinet has granted its approval. |
| Ex-Post Taxation | Response, Recovery | After Tropical Cyclone Evan, Fiji provided a tax incentive (a 200% tax deduction) on donations for to the “Prime Minister’s Fund” (the National Disaster Relief and Rehabilitation Fund) to help finance the recovery. After the Great East Japan Earthquake in 2011, Japan issued Japanese Government Bonds to finance the reconstruction costs. The repayment costs of those were mostly financed by an increase in income and per capita local tax with a duration of 25 years starting in 2013. |
| Contingent Credit/Cat DDO | Response, Recovery | The ADB in 2018 approved USD 24 million of catastrophe triggered contingent disaster financing for Pacific islands the Federated States of Micronesia, the Marshall Islands, Solomon Islands and Tonga. Disbursements are triggered when a state of disaster or emergency is declared by the respective government, allowing them to pay out very quickly. This follows a contingent credit drawdown from the ADB in 2018 by Tonga following Tropical Cyclone Gita. |
| Disaster Response Banking Instruments | Response, Recovery | In 2015, Tuvalu was hit by tropical cyclone Pam, resulting in over USD 10 million in damages and threatening Tuvalu’s long-term fiscal sustainability. The World Bank’s IDA committed USD 3 million through the Crisis Response Window to help reduce fiscal pressure and to assist infrastructure reconstruction. |
| Disaster Risk Finance Facilities | Response, Recovery | In 2020, the World Bank’s Pandemic Emergency Financing Facility provided Fiji with a USD 1 million grant from its insurance fund to allow Fiji to strengthen its health system in the context of the COVID-19 crisis. This was in addition to a USD 6.4 million concessional IDA loan. |
