logo image

On July 8 last year, the U.K. Prime Minister, Theresa May, announced her intention to establish the Centre for Global Disaster Protection.

The big idea: capitalize on the City of London’s expertise in financial services in order to help the governments of developing countries become more resilient to natural disasters, using risk transfer, where appropriate, to avoid humanitarian crises and augment disaster aid.

Later that month, Lord Bates, the U.K. Government Minister of State for International Development, shared more color on the Centre’s remit. Addressing the International Insurance Society, he explained:

“It is about investing in the data, research and cutting-edge science to analyze risk and design systems that work well for the poorest people. It is about providing training and sophisticated analytics.

It is about pre-disaster planning, including bringing vulnerable people into the dialogue on how support should flow in an emergency.

It is about providing neutral advice — supporting countries in making decisions about which financial instruments are right for them.

It is about innovation — looking at new ways of working and building new collaborations across the finance and humanitarian communities, to design financial instruments that work for developing countries.”

Lord Bates’ address also highlighted the analytical role RMS played in the U.K. Government’s decision to create the Centre.

At the request of the U.K. Department for International Development (DFID), RMS looked at 77 of the world’s poorest countries, many of which are prone to earthquakes, hurricanes, typhoons, droughts, and floods. The analysis revealed that the economic loss every year from natural disasters across those 77 countries is US$29 billion on average. And that’s just the annual average loss (AAL). Simulations suggest that there’s a material chance (ten percent) that these countries will experience economic losses from natural disasters of US$47 billion next year, affecting 180 million people.

The RMS research didn’t just examine the scale of the challenge though.

Together with Vivid Economics and re:focus partners, we have also been working with DFID on the potential for private capital — harnessed through risk transfer — to play a meaningful role.

Of that US$47 billion in economic losses, our simulations suggest that US$6 billion (12 percent) would likely be met by humanitarian aid. A further US$2 billion (five percent) would be covered by insurance. The remaining 82 percent would have to be shouldered by the people directly affected, or their governments, which are among the world’s poorest.

The question arises, therefore — what can be done to meet this US$39 billion shortfall?

From Noble Aims to Bold Action?

Several times since that Lord Bates speech, finance and humanitarian professionals alike have asked me the same questions:

Have you heard any more about the Centre? Is it real? Is it up and running yet? What is it actually doing?

The Centre’s work is, however, very much underway. Indeed, those of you that follow these things on social media will have seen that the Centre’s first working session took place earlier this year.

Which brings us to today’s news: the Centre’s first Innovation Lab.

Co-convened by Lloyd’s of London, the Lab format is conceived by DFID as a vital tool for the Centre to stimulate innovative financial solutions to close that US$47 billion gap. An open forum, the Lab brings together public and private sector experts to generate, stress-test and incubate new solutions to meet specific problems identified by DFID.

This Lab format is aligned with a key objective of the Centre; namely to harness the expertise of the finance and aid sectors in a joint effort to address political, economic, market and technical issues. It is only through this kind of combined effort that innovative and workable solutions to complex development problems can be found.

From Theory to Practice: Aligning Incentives for Resilient (Re)construction

DfID Dominica
Aerial view of part of Roseau, the capital city of Dominica after Hurricane Maria, September 20, 2017.  Two Category 5 hurricanes struck within two weeks, leaving affected communities across the Caribbean likened to “war zones” Picture: Russell Watkins/Flickr DFID

Framed in no small part by the experience of HIM (Harvey, Irma, and Maria), the U.K. Government’s initial focus is on resilient recovery and reconstruction, including ways to incentivize resilient infrastructure.

This is a very good place to begin. After all, every year hundreds of billions of USD are invested in infrastructure and a large proportion of this will be vulnerable to natural disasters. If such infrastructure is not made resilient up front, the costs can be much higher in the long-run. Yet the economic incentives to build in resilience are often not strong enough to drive action, especially in developing countries.

This is particularly pertinent following the devastating hurricanes in the Caribbean. Billions of USD will need to be mobilized to reconstruct the islands’ infrastructure, economies, and buildings.

How can we make these funds go further? How can we support “building back better” to reduce the impacts of future events? Yes, there is a need to balance building back better with building back quickly. But, if we hurry and fail now, we commit countries to repeat the experiences of 2017.

The theory is well understood. Capital market instruments can collateralize potential losses from future natural hazards, whilst offering incentives for the sponsor to make effective risk-reducing investments. In practice, however, there is little evidence that insurance pricing has driven real improvements in resilience. This is in no small part due to the upfront costs of resilience versus the very long-term benefits.

There are broader political economy challenges also, which can lead to underinvestment in risk reduction, preparedness, and response capacity. The result: slow, unreliable, expensive disaster response.

In this context, the value of financial solutions to collateralize future potential losses from natural hazards may be higher in developing country governments than previously estimated. Might recent capital markets innovations make delivery of such solutions more cost-effective?

A particular focus of the first Lab is how to link risk transfer instruments with reconstruction financing and broader infrastructure finance. The hypothesis: collateralizing the benefits of risk reduction will greatly incentivize resilient practices. The key: enabling the resilience dividend to be realized up front during the construction phase. These savings could then be used to cover (in part or in full) the additional cost of more resilient infrastructure.

No Quick and Easy Answers

This first Lab will doubtless stimulate dialogue and build networks. It will catalyze new ideas, which can be implemented by the private sector, the Centre or both.

This is an open process. All analyses generated from this initial Lab project will be in the public domain. The plan is to write them up not just for a more technical audience, but also to publish a call-to-action for business leaders and policymakers alike.

Over the next few months, today’s ideas will be discussed, evaluated and scrutinized. The best innovations will be carried forward by the Centre, helping U.K. Government to tackle some of the biggest challenges that the world faces.

No one has a monopoly on good ideas. That’s why the Centre is bringing together a broad range of expertise. That’s why participants from the Overseas Development Institute (ODI), the World Bank, and the Start Network are involved. That’s why advisors from the likes of Willis Towers Watson, Parhelion, Clyde & Co, DLA Piper, Mott McDonald and Arup are engaged, along with capital providers like Amlin, Beazley, Hiscox, Munich Re, Nephila, Ren Re, Securis, Swiss Re and XL Catlin.

In working with DFID, RMS is being stretched in new and meaningful ways. In running the Innovation Lab, the Centre for Global Disaster Protection challenges us to better fulfill our societal mission. If you want to get involved; if you want to make a difference, please don’t hesitate to reach out to us.

Share:
You May Also Like
March 17, 2019
Exposure Trending

A postcard from Manila… Situation: rapid, uncontrolled urbanization and limited enforcement of building codes. Complication: unwieldy administrative procedures, limited funding, a lack of technical expertise and #NIMTOO. Result: an alarming rise of building vulnerability in hazard-prone communities putting millions of low-income people at extreme risk. While many local government officials recognize this problem, progress is painfully slow. Housing vulnerability continues to rise. What to do?   The Issue of Our Age? According to my favorite bricklayer, Dr. Elizabeth Hausler, housing vulnerability is the defining issue of our age. By 2030, three billion people will live in substandard homes. That’s one third of the world’s population. Just ask Santiago Uribe Rocha, the first Chief Resilience Officer employed in a non-OECD country. In Colombia over the past 20 years, more than ten million people have moved to major cities like his, Medellín. The lack of affordable housing has led many of these low-income families to settle on the outskirts, often building haphazardly with poor quality material. According to CENAC (Centro de Estudios de la Construcción y el Desarrollo Urbano y Regional), three out of every five new homes built in Colombia today are of “informal origin”. In other words, 60 percent live in homes that are built without any legal procedures or formal design process. Despite acknowledging the issue, city governments often lack the means to effectively deal with increasingly vulnerable housing stock. Cumbersome bureaucracies complicate matters. In some neighborhoods, city officials require over six months to approve the retrofit of a single home. The result: hundreds of thousands of low-income families remain significantly at risk of death, injury and destitution in an earthquake. Change Is Building RMS has been working closely with Build Change since 2013. By sharing research, expertise and resources, we’ve been supporting the non-profit’s preventive programs in Latin America, the Caribbean, Nepal and, most recently, Southeast Asia. The partnership, focused on promoting the benefits of retrofitting homes for low-income families living in informal neighborhoods, is closely aligned with RMS’ overarching, societal purpose. After all, for the last 30 years, RMS’ mission has remained the same: to make communities more resilient through a deeper understanding of the impacts of extremes. With RMS’ support, Build Change has been able to develop the basis for successful retrofit projects. Shared value abounds… The local governments have been convinced to effect and enforce changes to urban planning and building ordinances. The local construction industry has been upskilled and employed. The local insurers are finding new opportunities to offer affordable policies. The local residents now have disaster-resilient homes and insurance coverage. Quantifying Resilience; Increasing Institutional Urgency Catastrophe risk models have been vital to this process. By combining science, technology, engineering and data to simulate the potential impacts of future disasters, RMS modeling puts a number on the potential impacts of “informal” housing. Moreover, the models can be used to evaluate how risk might reduce if mitigating measures are put in place. A virtuous circle often results: quantifying the value of building practices drives funding; funding helps protect more communities; more communities protected demonstrates the value of resilient building practices; more funding follows. For example, in 2016 RMS quantified the cost-effectiveness of a proposal for a scaled retrofit program in Bogotá, Colombia. Preliminary analysis showed that over 120,000 deaths and US$2.8 billion could be avoided in a 1-in-200-year event by retrofitting homes in the five neighborhoods studied. RMS and Build Change also demonstrated that the project would deliver an attractive return on investment. Analysis showed that the retrofits could be completed using existing local skills, with minimal training, and for less than half the price of demolishing to rebuild. In this case, the modeled output did not just increase the institutional urgency to deal with the problem of vulnerable housing. The analytics also contributed to the wider acceptance in Colombia of retrofitting as a viable solution. Now What? In approximately five years of formal partnership, RMS and Build Change have collaborated to greatly improve the safety of seismically-vulnerable communities. By combining our risk modeling expertise and institutional support with Build Change’s technical knowledge and grass roots approach, we’ve not only demonstrated that retrofitting in vulnerable neighborhoods is possible. We’ve also shown it’s a cost-effective way to save lives and livelihoods. As a result, the Government of Colombia recently made the retrofitting of 600,000 homes an urgent, national priority. Of course, our work in Latin America is by no means done. And collaborations with Build Change continue in Haiti and Nepal as well. Immediate attention, however, has shifted to the Philippines. It’s too early to judge the outcomes. But with 69 million low-income people living in 15.6 million vulnerable homes today, the potential to make a difference is huge. By quantifying that potential, we hope to develop a compelling business case to address what is arguably the issue of our age. By putting a number on the resilience dividend, we hope to attract the #ResilienceFinance needed to make some of the world’s most densely populate cities significantly safer.…

November 13, 2018
Financing Resilience

Almost one and a half million people have died in natural disasters over the past 20 years. This is a waste of life; a waste of potential. Natural disasters also have a massive economic impact. Our models suggest natural catastrophes cost the world’s poorest countries almost US$30 billion a year on average. Hard-won development gains are regularly wiped out — and it is the poor and the vulnerable who are most impacted. In case anyone had forgotten the crippling impacts of natural disasters, 2017 served a painful reminder. Hurricanes Irma and Maria left vulnerable people in the Caribbean devastated. Somalia, Ethiopia and Kenya struggled with drought. Floods and landslides wrecked lives and livelihoods in Sri Lanka and Bangladesh. And then there was Hurricane Harvey which, along with the California wildfires, made 2017 the costliest on record in the United States. Whenever and wherever catastrophe strikes, our thoughts are with those so profoundly affected. We did not, however, need last summer’s tropical cyclones to understand that something is not working. We did not need Irma and Maria to learn that investments in resilience reduce losses from natural disasters. And we did not need the events of 2017 to know that incentives are too often insufficient to drive action in the most vulnerable regions. These truths are at heart of the Centre for Global Disaster Protection. Innovation is required to solve such complex humanitarian, political and economic problems. The impacts of recent disasters — and the need to finance reconstruction — have heightened the innovation imperative. They provide an opportunity to deploy financial instruments which catalyze investments in resilience; financial instruments which enable vulnerable communities to recover faster. RMS too knows that it is possible to stop manufacturing natural disasters. And RMS knows that financial mechanisms could in theory securitize — and therefore incentivize — the potential “resilience dividends” from investments in disaster risk reduction. After all, RMS has been intimately involved in some of the best-known thought-leadership in this space. Yet equally well understood is the fact that financial structures which incentivize resilience are difficult to implement in practice — in developed and in developing countries. There is no shortage of challenges. To move from theory to practice; to redirect capital at the required scale, ideas need to be fleshed out, structures need to be robustly designed and cash flows need to be tested. Any new financial mechanisms must pass muster with all stakeholders, lest the intended benefits evaporate. Since 1988, RMS’ mission has remained constant: to make communities and economies more resilient to shocks through a deeper understanding of catastrophes. Now, with the Centre’s help, experts from the finance, humanitarian and development communities have for the first time come together to refine financial instruments, address practical challenges and provide the interdisciplinary buy-in which mobilizes action. In this collaborative environment, innovation has happened. The recent launch of a new report on Financial Instruments for Resilient Infrastructure is a product of that innovation. RMS was commissioned by the U.K. Government’s Department for International Development to run the Centre for Global Disaster Protection’s first “Innovation Lab.” With support from Vivid Economics, re:focus partners and Lloyd’s of London two reports have been published — a 100-page technical report and a 50-page innovation report. Both are freely available here. The four new financial mechanisms examined in the report can help monetize the resilience dividend, thereby incentivizing both resilient building practices and risk financing. The outcome: less physical damage, fewer lives lost and faster economic recovery whenever nature proves too much. More is needed, of course. Policymakers and donors have a crucial role to play, not least in sponsoring pilots, funding the quantification of resilience, promoting risk-based pricing, supporting risk finance and advocating duties of care around life, livelihood and shelter. Thankfully the significant public benefits of resilience justify the investment. And now we have four new financial instruments for donors and the market to pilot in real-world situations.…

Daniel Stander
Daniel Stander
Global Managing Director, RMS

Daniel has spent 20 years bringing new ideas to the risk industry. He has responsibility for driving innovative, strategic solutions across RMS’ entire client base. He is also the Global Head of RMS’ Public Sector Group, leading RMS’ relationships at all levels of government.

Daniel has worked closely with public and private entities around the world, advising them on a variety of complex risks, including natural hazards, environmental stresses, malicious attacks and pandemic outbreaks. Deeply committed to education, his work is motivated by a desire to make communities and economies more resilient to acute shocks.

Prior to RMS, Daniel managed the group strategy and development function at an 80,000-employee, £10 billion global healthcare group, serving 30 million customers in over 190 countries. He also has considerable start-up experience, having been a founding team member of an award-winning, SaaS company.

The driving force behind 'Resilience', he received a City of Miami Proclamation recognizing his commitment to delivering urban resilience in the face of sea-level rise and extreme flooding. Daniel has served on the management boards of several charities in areas as varied as education, disability, interfaith social cohesion, grassroots sport and the arts.

Daniel graduated from Oxford, double-first with Honours. He also studied for a Masters at the Humboldt in Berlin and is a graduate of the Center of Creative Leadership.

cta image

Need Help Managing Your Portfolio?

close button
Overlay Image
Video Title

Thank You

You’ll be contacted by an Moody's RMS specialist shortly.