Reimagining risk transfer: Indemnity insurance for the DREF

Author: Conor Meenan & Cristina Stefan

Photograph: IFRC

For the past two years, the Centre for Disaster Protection’s Advisory team has worked alongside the International Federation of the Red Cross (IFRC) to explore an innovative financing mechanism supporting the ambition to scale the available finance in the Disaster Response Emergency Fund (DREF) using risk transfer and the private insurance market.

The DREF is a central pool of money which uses rules-based approaches to distribute emergency funds to National Societies in moments of crisis. Since 2009, the DREF has made over 1,500 individual allocations, disbursing 350 million CHF (GBP 319 million) to support 175 million crisis-affected people in 172 countries. This flagship fund allows critical emergency funding to flow while providing an important bridge to slower funding during larger or protracted humanitarian crises.

DREF has been highly successful in responding rapidly and reliably to crises globally, and its role in responding to humanitarian crises continues to increase. Worrying trends in climate, conflict, and health-related crises encouraged IFRC to consider other financing approaches to ensure that DREF can continue to act as a first port of call for the immediate financing needs of local responders and people who are ultimately affected by crisis.

Learning from the private sector to meet future humanitarian challenges

In the context of the DREF Fund ambition and given its characteristics as an emergency fund with strong governance and rules-based, transparent historical allocations, insurance was identified as a good fit to strengthen DREF’s ability to continue supporting National Red Cross and Red Crescent Societies in years where they experience exceptional levels of crises.

The Centre for Disaster Protection has acted as an impartial adviser for IFRC and the DREF as they worked through the insurance structure options with Aon and private sector partners. Through creativity, challenge, our impartial position and quality of our analysis, we helped the project team assess DREF’s future financing challenges and the insurance options available to match them. As a final project deliverable, the Centre provided IFRC with a written Value for Money analysis to provide IFRC and their partners with an independent analysis of the characteristics of the proposed risk transfer policy relevant to the IFRC value statement.

The type of insurance product used for this transaction – indemnity insurance – has been tried and tested in other contexts by the insurance industry, but it is innovative in a humanitarian context. In a first for humanitarian risk transfer, the DREF pool is now being protected using an insurance policy that is based on reported allocations as opposed to parametric triggers, which are more typical for transfer of complex risks. Allocations towards natural hazard-related crises will be monitored and reported throughout the year. Once a threshold is reached, the insurance policy will step in to supply a financial backstop to the DREF fund up to a certain annual limit. This simple policy structure is only possible since DREF has rules-based approaches for allocations and a historical record to show how the fund has worked in previous years, supporting the estimation of future expected allocations and transfer to the private markets in exchange for a premium payment.

Blending creativity and experience in an inclusive approach

IFRC and DREF are experts in humanitarian response and financing. Aon and industry partners bring the depth of private sector experience to identify and develop fit-for-purpose insurance options. Innovative solutions like this require partners to be creative enough to consider new ideas and experienced enough to deliver them. As is often the case in partnerships that bridge across sectors, the ways of working, values and language can be difficult to navigate. Our multi-disciplinary team has first-hand experience in these challenges, having previously worked across humanitarian and insurance sectors.

This project exemplifies the mission and values of the Centre for Disaster Protection, that seeks to develop better ways to protect people against future crises. We provided IFRC teams with high-quality independent and impartial analyses, which empowered IFRC and their stakeholders to make informed judgement on the value proposition of the final insurance policy. This innovative approach will be an important test case for IFRC and the wider humanitarian sector.