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Financing for humanitarian aid is broken. The costs of rapid- (like cyclones) and slow- (like drought) onset disasters are concentrated in poor, vulnerable countries, with a bill to donors of more than $19 billion last year. But far too often, we wait until crises develop before funding the response—what experts at CGD’s recent panel event (recording available at the link) described as a medieval approach of passing around begging bowls and relying on benefactors. The delays make crises worse. And since money shows up, however imperfectly, when things go wrong, it undermines incentives to build resilience, relegating vulnerable people to depending on fickle goodwill.

Our panel brought together three experts to discuss why emergency aid is failing, and how we can do better. Rajesh Mirchandani and I were joined by Stefan Dercon and Daniel Clarke, respectively the chief economist of DFID and a senior financial sector specialist at the World Bank, and Lena Heron, a senior rural development advisor at USAID. Clarke and Dercon are co-authors of Dull Disasters? How Planning Ahead Will Make a Difference, a remarkable new book (they coined the ‘begging bowls and benefactors’ phrase) setting out how the global public sector can respond better to perils by shifting from aid thinking to insurance thinking—not so much seeing like a state as seeing like State Farm

Fix the financing, fix the response: Somalia vs. Ethiopia

What are the costs of the old way of doing business? Given Dercon, Clarke and Heron’s experience working in sub-Saharan Africa, it’s no surprise that examples of drought and famine came up. One teeth-grinding example amongst many is a recent famine in Somalia: “Between August 2010 and the declaration [of famine], the Famine Early Warning Systems Network...produced 78 bulletins and undertook over 50 briefings to agencies and donors.” We saw the crisis coming but wasted precious months, a delay that contributed to the onset of a famine which ultimately killed “...tens of thousands of people, most of them children.” What’s the point of an early warning system if we ignore the warning?

This year’s drought in nearby Ethiopia hints at what a better future could look like. Rather than waiting for donors to pay into a response fund, the Ethiopian government tackled growing hunger due to crop failures by ramping up food aid and cash transfers to vulnerable homes through its productive safety net programme. But the authorities could only do this because the price of oil had slipped to an unexpected six-year low, freeing up cash from a national fund earmarked to stabilise local oil prices (recently supplemented with a $100 million World Bank loan). Insurance thinking makes windfalls like this predictable.

Insurance thinking to save lives

Donors do their best—for example, USAID has introduced crisis modifiers, which allow programmes to get more funding or redirect existing funding in response to conditions on the ground. But aid thinking can still fail to get money in place, in time. And since money arrives when the situation is most dire, it undermines incentives to do better. Clarke and Dercon argue that to insure ourselves—either by using actual insurance contracts or, more simply, rules governing when we can spend savings—we need to understand the risks we face, put a price on them, and set out who does what when the insurance pays out.

And as Heron pointed out, considering these costs also prompts us to invest more in resilience, generating a healthy development dividend: for example, insurance can catalyse investments in things like drought-resistant crop varieties because it raises the returns to lowering future costs (“My insurance is cheaper when I need less cover”). And safety nets like Ethiopia’s are also an entry point for development programmes, potentially improving financial access, and gradually scaling up from the poorest and most vulnerable people to better-off but still vulnerable, rural homes.

New CGD Working Group on Scaling Disaster Insurance Up & Across

CGD’s newest work programme is focused on delivering some of these wins. Our Payouts for Perils working group brings together senior figures from the global insurance sector, humanitarian agencies, governments in frontline countries, and donors. The exam question is simple: programmes that help governments insure themselves in the Pacific (PCRAFI), the Caribbean (CCRIF), and sub-Saharan Africa (ARC) all demonstrate that insurance thinking lowers the costs of disasters by getting the financing right. It also pays off: for example, a recent evaluation of Mexico’s federal disaster insurance programme finds that local GDP is 2-4 percent higher in areas covered by post-disaster payouts. So how can we take advantage of new tools—like parametric insurance contracts—to scale these successes up and across, making them available to many more governments and many more frontline agencies?

The shift to insurance thinking won’t be frictionless. As Dercon pointed out, it requires governments and donors to acknowledge the risks that they implicitly carry, and be willing to cover them. That may be uncomfortable for donors accustomed to the freedom of choosing what to fund, and when.

But we all agreed that donors and vulnerable governments are already spending billions tackling these risks. The challenge, then, is how we can use more of this financing to prepare ahead of time, not merely react. Dull Disasters teaches us that we can’t eliminate these risks—but planning ahead and knowing that we can pay for them will make these perils far less deadly.

Want to know more? You can watch a recording of CGD’s panel event, read about our new working group on these topics, and download a new CGD policy paper about using insurance to solve problems facing humanitarian aid.

Disclaimer

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.