Natural disasters, such as floods, droughts, earthquakes, and extreme heat, are becoming more frequent and costly due to climate change, urbanization, population growth, and increased construction in high-risk areas. These events affect millions annually, particularly in middle- and low-income countries. In 2023 alone, natural disasters resulted in 74,000 deaths globally and caused $250 billion in losses.
The financial strain on government budgets from these disasters disrupts development and investment efforts aimed at building long-term resilience. Key sectors like agriculture, transport, energy, tourism, and industry suffer significant impacts. Vulnerable groups such as low-income households and rural communities face disproportionate challenges that exacerbate social inequalities.
Insurance can play a crucial role in mitigating the financial impacts of natural disasters by offering protection against asset damage and encouraging risk mitigation before disaster strikes. However, developing insurance markets is challenging in many developing countries due to limited data access and weak regulatory frameworks. Both developed and developing markets struggle with increasing disaster risks affecting insurance affordability.
A cooperative effort between public and private sectors is necessary to develop effective insurance markets that provide sustainable solutions for vulnerable populations. Disaster risk finance products shift the focus from reactive to proactive approaches in managing disaster response financing.
The World Bank advises over 70 countries on policy reforms related to disaster risk finance strategies. For example:
- In Morocco: The World Bank's analysis helped design a strategy combining catastrophe insurance with solidarity principles to protect households from disasters. Following the 2023 earthquake, $300 million was released from the Solidarity Fund.
- In Somalia: A consortium mobilized finance for vulnerable pastoralist households using digital bank accounts combined with livestock insurance.
- In Indonesia: The state assets insurance program protected around 11,000 buildings during floods and earthquakes.
- In Malawi: Private sector parametric reinsurance strengthens social safety nets with contingency funds for emergency cash transfers during droughts.
- In Turkey: The Turkish Catastrophe Insurance Pool (TCIP) aims to increase market penetration through public-private partnerships.
These examples demonstrate how tailored disaster risk finance strategies can enhance resilience against shocks through public-private partnerships.