Growing financial protection pre-arranged financing reaches USD 9.8 Billion in 2023: report

The Centre for Disaster Protection, an organisation focused on enhancing financial support and preparedness for disaster response in low- and middle-income countries, presents its latest annual report, The State of Pre-arranged Financing for Disasters 2024, which offers valuable insights into the initiatives of international development donors to improve financial mechanisms that can be activated before disasters occur.

This report features data from the Global Shield Secretariat and the Centre’s own findings on the available financing mechanisms that could be triggered by specific disasters.

It also examines significant advancements in the pre-arranged finance (PAF) toolkit as well as the broader policy landscape.

In examining international development financing for PAF, the report notes a decline from USD 1.9 billion in 2021 to USD 852.2 million in 2022, which constitutes only 1.1% of overall crisis financing.

This reduction is partly due to a decrease in qualifying disasters during 2022 compared to the heightened activity in 2020 and 2021, when the Covid-19 pandemic resulted in large-scale payouts from contingent loans and grants offered by multilateral development banks.

When these contingent payouts are excluded from the analysis, the total financing drops to USD 249.3 million in 2022, 11.5% below the five-year average. Additionally, funding for PAF remains heavily concentrated in middle-income nations, with merely 3.1% (USD 183.8 million) allocated to low-income countries between 2018 and 2022.

Although data for 2023 is not yet available, preliminary indications suggest an increase in international development financing for PAF compared to the previous year.

Regarding the overall landscape of PAF coverage in 2023, the report indicates that while there has not been a clear upward trend in support for PAF from international development financing in recent years, there are signs of countries enhancing their financial safety nets.

The Global Shield Secretariat reports that total financial protection from PAF reached USD 9.8 billion in 2023, marking a third consecutive year of growth.

Additionally, the number of individuals protected by PAF instruments increased significantly, with 232 million people benefiting from these financing mechanisms, reflecting a 27% rise from 2022.

Lydia Poole, Associate Director – Policy and Evidence at the Centre for Disaster Protection and co-author of the report, commented: “This is a critical moment to push for meaningful reform of the international financial architecture, as current approaches are struggling to keep pace with the rising challenges of a multipolar world facing frequent and severe shocks.”

Poole continued: “In this second edition of The State of Pre-arranged Financing for Disasters 2024, we see encouraging signs of progress, particularly with increased coverage in low- and lower-middle-income countries and innovations in the PAF toolkit. However, pre-arranged financing is still far from being the default mode for disaster response, and overall coverage remains low, especially in low-income countries. To create an effective PAF architecture, we must adapt to the unique political and technical constraints that impact a country’s ability to build fiscal resilience to disasters.”

While the majority of this coverage remains in middle-income countries (USD 7.8 billion in 2023), there was substantial growth in low-income countries, where coverage rose from USD 91.8 million in 2022 to USD 308.9 million in 2023, largely due to the increased adoption of parametric insurance through the African Risk Capacity risk pool.

The report also highlights ongoing enhancements to the PAF toolkit, including the introduction of new climate-resilient debt clauses by multilateral development banks.

Despite these improvements, challenges remain regarding the attractiveness and affordability of PAF, which hinder broader adoption and adequate coverage in the most vulnerable areas.

Furthermore, the call for reforming the international financial architecture offers a significant opportunity to prioritise pre-arranged financing. However, the current pace of progress falls short of the transformative changes needed to shield economies from future shocks and to make the international financial system more responsive to crises.

Michèle Plichta, Senior Researcher at the Centre for Disaster Protection and co-author of the report, added: “The research behind this influential report builds on a larger set of multi-year global data to compile the 2024 edition. Working with the best evidence available, the report shows that crisis response funding is still heavily reliant on legacy instruments, with most financing being mobilised only after disasters occur.”

Plichta further stated: “While multilateral development banks lead in providing PAF for disasters, the uptake of these tools remains limited due to affordability challenges, including rising public debt. Although efforts are being made to reduce costs through premium support and more favourable loan terms, the demand for PAF in the most vulnerable areas remains low. It’s crucial that we intensify our efforts to make PAF more accessible and effective, ensuring that the most at-risk communities are adequately protected before disaster strikes.”

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