The International Federation of Red Cross and Red Crescent Societies (IFRC), in collaboration with Aon, Lloyd’s Disaster Risk Facility and the Centre for Disaster Protection, has announced the launch of a groundbreaking financial mechanism to transform disaster response.
This tool provides a backstop for the IFRC’s Disaster Response Emergency Fund (DREF).
According to the Federation, the 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 when disaster occurs and surpass national resources available.
This pioneering risk transfer mechanism will ensure swift and agile support is available when a disaster occurs.
The new insurance tool will provide DREF with contingency funding of up to 20 million Swiss Francs ($23 million). This means that once DREF’s allocated funding for natural hazards hits 33 million Swiss Francs ($38 million), the reinsurance is triggered to replenish DREF’s reserves.
IFRC’s ambition is to grow the fund every year to reach 100 million Swiss Francs in 2025 ($116 million). Currently, there is an alarming increase in small and medium-scale emergencies, and funding may not always be available when needed.
Andrew Mitchell, Minister of State for Development and Africa, UK Foreign, Commonwealth and Development Office commented: “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.”
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 organisation highlighted.
The reinsurance acts as a safety net for DREF, it explained, 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.
Eric Andersen, President of Aon, said: “The impact of climate is giving rise to an increasing number of natural disasters that are disproportionally affecting underserved communities. At Aon, we are honored 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 the risk and the innovation in our industry to address the humanitarian impact from climate-related disasters.”
John Neal, Lloyd’s CEO, added: “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.
