Highlights

This paper analyzes how a portion of the current disaster risk finance architecture is serving developing countries. We focus on the three regional risk pools— CCRIF SPC (formerly the Caribbean Catastrophe Risk Insurance Facility) (referred to throughout as “CCRIF”); African Risk Capacity (ARC); and Pacific Catastrophe Risk Insurance Company (PCRIC)—that offer parametric disaster insurance to developing countries.

Disaster risk finance instruments, including insurance, should be deployed in combination to address the various “layers” of risk, but few countries appear to be following a “risk-layering” approach.

Donors and development banks should deploy targeted premium support to assist countries that need it most to access insurance; however, countries should consider the long-term fiscal prudence of using loans to pay for insurance premiums.

The pools must manage unmet expectations and basis risk more effectively. This will require investing in the quality of models, adopting rules-based processes for managing unmet expectations, and incorporating features (e.g., secondary triggers) to manage basis risk.

The pools should scale up investment in product development and roll out sovereign-level parametric cover for additional perils as rapidly as possible, while also exploring new and creative product lines and collaborations.

Strengthening the risk pools and promoting risklayering approaches will require new sources of sustained, long-term, concessional finance that go beyond the ad hoc donor support provided to date. We suggest three options to do this; namely, expanding the role of the World Bank’s International Development Association (IDA), promoting the role of regional multilateral development banks (MDBs), and creating a new Risk Solutions Incentive Fund.