The International Federation of Red Cross and Red Crescent Societies (IFRC), in collaboration with global professional services firm Aon, Lloyd’s Disaster Risk Facility and the Centre for Disaster Protection, has announced a pioneering approach to disaster response. The groundbreaking risk transfer mechanism will ensure swift and agile support is available when a disaster occurs. This tool provides a backstop for the IFRC’s Disaster Response Emergency Fund (DREF).
Emergency Funding Always Available When Needed
DREF has proven to be the simplest, fastest, most transparent, and localised way for IFRC’s member National Societies to access reliable international, short-term emergency funding for community action in all kinds of disasters when needs surpass the resources available at the national level. The new insurance backstop will be a critical safety valve for DREF’s life-saving work, ensuring the DREF can continue to meet the needs of today while standing ready for the crises of tomorrow.
Andrew Mitchell, Minister of State for Development and Africa, Foreign, Commonwealth and Development Office UK says: “Climate change is devastating the lives of millions around the world. With natural disasters on the rise, this innovative new insurance will provide extra funding for life-saving emergency assistance. This is UK expertise at its best – funding from the UK, insurance purchased through the City of London and technical support from the Centre for Disaster Protection.”
IFRC’s ambition is to grow the fund every year to reach 100 million Swiss Francs in 2025 (US$116 million, €104 million, £89 million)1. Currently there is an alarming increase in small and medium-scale emergencies, and funding may not always be available when needed.
The new insurance tool provides DREF with a contingency funding of up to 20 million Swiss Francs (US$23 million, €21 million, £18 million). Essentially, once DREF’s allocated funding for natural hazards hits 33 million Swiss Francs (US$38 million, €34 million, £29 million) the reinsurance is triggered to replenish DREF’s reserves.
By transferring risk from strained public balance sheets to the private sector, DREF is now able to respond more flexibly and effectively, with the potential to reach an additional 6 million vulnerable people each year. The reinsurance acts as a safety net for DREF, ensuring that extra funds are available and ready to provide aid to vulnerable communities, even during periods of increased demand.
Aon and Lloyd’s Disaster Risk Facility together developed the insurance mechanism and designed a unique structure drawing upon DREF’s 40 years of experience in supporting IFRC’s member National Societies across the world. Importantly, this has been achieved without forcing any changes to DREF’s current operational process.
DREF insurance is supported by international donors including: the UK Foreign, Commonwealth, and Development Office (UK FCDO); the British Red Cross and Danish Red Cross; and the private sector. DREF Insurance is also co-funded by InsuResilience Solutions Fund (ISF) to support insurance premium funding and product development. Global law firm Reed Smith provided legal advice to IFRC, with support from Swiss law firm Lenz & Staehelin and offshore specialist law firm Ogier.
Jagan Chapagain, IFRC Secretary General says: “Strategic partnerships with the private sector are essential to address rising humanitarian needs and the humanitarian funding gap. We have a responsibility to respond rapidly and at scale, in the most effective and sustainable manner and to ensure that our actions are locally led and community centred. Our partnership with Aon and the Centre, and through the bespoke insurance solution for DREF, allows exactly that.”
Eric Andersen, president of Aon, says: “The impact of climate is giving rise to an increasing number of natural disasters that are disproportionally affecting underserved communities. At Aon, we are honoured to play a role to help protect DREF from volatility and increase its capacity to effectively distribute funds to those in need through our innovative capabilities in matching capital to risk and the innovation in our industry to address the humanitarian impact from climate-related disasters.”
The partnership has resulted in a completely novel – yet replicable and scalable – reinsurance product that:
- Is tailor-made for DREF and modelled on its actual historic performance
- Uses publicly published data, supporting transparency and accountability of approach
- Is, for the first time, an indemnity-based reinsurance model that has been developed within a Humanitarian Disaster Risk Finance context
- Is designed to make use of well-established commercial catastrophe re-insurance markets, reducing cost and improving scalability (allowing it to be used in other humanitarian contexts)
- Has been continuously vetted and subject to an independent assessment prior to ensure its applicability
Daniel Clarke, Director, Centre for Disaster Protection says: “Having the right plans in place before a crisis is crucial for effective management of its impacts. We are proud to have supported IFRC and Aon teams to develop a risk transfer policy that strengthens DREF’s ability to provide emergency funds that will help meet needs of people affected by crises globally.”
Annette Detken, Head of the InsuResilience Solutions Fund, says: “IFRC’s intention to enhance and complement DREF’s capacities when hit by climate-related hazards is a unique opportunity to bring development work closer to the humanitarian work and pilot climate risk insurance as a means for enhancing humanitarian aid activities. The ISF is proud to co-fund this innovative programme adding capacity to improve the resilience of vulnerable people in many parts of the globe.”
John Neal, Lloyd’s CEO says: “Insurance has a vital role to play in building society’s resilience against climate-related risks: acting as a backstop when the worst happens, and a buttress for preparedness in the meantime. This innovative response tool builds on the work of our Disaster Risk Facility and shows what our market can do when we collaborate with our partners in government to close global insurance gaps and mitigate the human and financial impacts of natural catastrophes.”
The capacity for the reinsurance deal was offered by the three founding members of the London-based Lloyd’s Disaster Risk Facility, as led by Hiscox alongside Chaucer and RenaissanceRe, with Fidelis MGU completing the placement as the sole representative of the Bermuda market.