When I was a teenager, I hitchhiked from Lithuania to Armenia and back. Time rich and cash poor, I took risks I wouldn’t today.
My trip was filled with comparisons and contrasts. Some things, like squeezing into a crammed Lada remained almost constant from country to country. Others, like landscapes and local delicacies, evolved throughout.
When I found myself back in Istanbul last month, I was again struck by these contrasts. As I discussed disaster risk reduction financing with the finance ministers of the countries in which I once hitchhiked, I marveled at the region’s cultural, political, economic and geographic diversity.
Resilience needed at all levels
Each country in Eurasia faces three common challenges: rising hazards, increasingly concentrated exposure and high gaps in disaster financing and protection.
Across the region, communities are at risk, and governments are often unable to adequately fund disaster recovery efforts.
The Western Balkan floods of 2014 vividly illustrate this, having claimed 85 lives and displaced over half a million people. In three days of rainfall and landslides, Bosnia and Herzegovina experienced damage equivalent to 15 percent of its GDP, and panic when it was announced that 120,000 unexploded landmines might be on the move. A national state of emergency was declared by the Serbian government, which took a €227 million emergency loan from the World Bank, on top of over €100 million in aid from donor nations.
Further east, Georgia and Tajikistan are among the top ten countries with the highest average annual loss from disasters relative to GDP.
In all countries, the need for resilience exists at all levels – from the farmer to the finance minister. Resilience depends on having the right laws, building codes, preventative infrastructure and flexible insurance and financing mechanisms.
Spreading the risk and investment
With hard-earned development gains at the mercy of earthquakes and extreme weather, what can be done to shore up socioeconomic resilience?
When a one percent increase in insurance penetration reduces taxpayer burden by one fifth, it becomes obvious that risk financing promotes sustainable development. Much ground was covered to this end during the Istanbul event.
One solution gained traction: sovereign and sub-sovereign catastrophe pools. Turkey has been securitizing earthquake risk in alternative markets since 2013. However, many nations in Eastern Europe and Central Asia lack the technical or financial capacity that a catastrophe bond requires. Discussion therefore turned to multi-national sovereign risk transfer.
This approach, which has proven its worth in the Caribbean, Latin America and Africa, has four advantages:
- Uncertainty declines when more members take part
- Expenses are shared between members
- Premiums decrease with geographic and peril diversification
- Any profits are retained by the pool
A supranational pool in the region would also appeal to insurance-linked securities’ (ILS) investors, who are hungry to diversify their portfolios across new geographies. Turkey’s issuances demonstrate that there is appetite and capacity for this.
For such pools to gain traction, there needs to be a galvanizing force. Differences in political will and regulations may present challenges for this region. That said, eleven countries in the region share a history as former Soviet states. Eight are members of the Commonwealth of Independent States and participate in the CIS Free Trade Area. This may help to find common ground.
Reducing and measuring risk
While catastrophe bonds provide an effective solution for tackling residual risks, they are not a silver bullet. Much can be done to reduce the underlying exposure. Our discussion explored various solutions: resilient urban planning, retrofitting, smart flood barriers and nature-based defenses.
Today’s innovative risk financing solutions combine disaster risk financing with disaster risk reduction to enforce, for example, safer building codes.
Irrespective of whether the region moves forward by physical adaptation, financial transfer or both, a better understanding of the risk is important. As Gerd Trogemann, manager of UNDP’s Istanbul Regional Hub, put it, “development cannot be sustainable if it is not risk-informed” and if you can’t measure it, you can’t finance it.
Thus, analytics are vital. Governments need to understand and prepare for all potential scenarios, especially the devastating tail events that are often missing from the historical record.
Municipalities cannot wait for a disaster to catalyze investments. They must quantify the cost of inaction to reveal the importance of risk reduction.
Many countries in Eastern Europe and Central Asia are at this crucial juncture in their DRR financing journey. UNDP has a vital role to play — convening and catalysing action across national borders.
Inaction will lead to disaster – and those most in need will continue to be those least able to pay. The time is now for governments to adopt #ResilienceFinance strategies.