The CGD Podcast: We Can Fix Emergency Aid with Disaster Insurance

Guests: Stefan Dercon (Chief Economist, DFID & Oxford Professor), Theo Talbot (Senior Analyst, CGD Europe)
Host: Rajesh Merchandani (CGD)
Date: August 10, 2016

Episode Overview

This episode explores how the international community could radically improve disaster relief by moving from reactive fundraising to proactive financing—specifically through disaster insurance. Stefan Dercon and Theo Talbot argue that insurance and risk pooling can incentivize better preparedness, provide reliable funding for disasters, and strengthen government capacity, all while reducing delays and inefficiencies plaguing the current aid model.

Key Discussion Points & Insights

The Problem with Current Disaster Relief Funding

• Reactive Approach: Current model relies on donor appeals and public fundraising after disasters strike.
  • Unpredictable funding—often, only about half of pledged donations arrive.
    • Stefan Dercon [01:23]: “Whenever we do these appeals, maybe about half of these appeals get actually paid up. Now, you may have made some kind of plan, but if half the money only comes in, how are you going to use it?”
• Incentive Failures: Scramble for resources fosters poor planning, fragmented and uncoordinated responses, and competition among NGOs to “plant the flag.”
• Capacity Depletion: Delays and uncertainty can erode government capacity, leaving people without timely support.
• Case Example: Haiti earthquake, where slow donor responses meant the first meaningful payout came from an insurance pool—not from aid organizations.

Insurance as a Solution and Its Benefits

• Thinking in Terms of Liability: Insurance requires acknowledging what’s at risk and planning for specific trigger events.
  • Shifts mindset to one of preparedness and deliberate financial planning.
  • Encourages governments to consider: What do we want to protect? Who do we protect? Under what circumstances?
• Clarity and Predictability: By knowing coverage and triggers in advance, governments and donors can act rapidly and effectively when disaster occurs.
• Multiple Financial Tools: Insurance is one instrument—others include contingency funds and contingent credit lines, all of which require planning and clear criteria for use.
• Incentive to Reduce Risk: Insurance premiums provide motivation to invest in risk mitigation, as lowering risk means lower premiums.

How Disaster Insurance Can Work

• Risk Pools: Regional pools already exist (e.g., African Risk Capacity [ARC], Caribbean Catastrophe Risk Insurance Facility [CCRIF], PCRAFI in the Pacific).
• Parametric Insurance: Payouts are triggered by measurable parameters (e.g., wind speed, earthquake magnitude) rather than subjective assessments.
  • Theo Talbot [07:10]: “Parametric insurance kind of takes the reliability of the insured person, the insured party, out of the equation...because these are contracts written on things like wind speed or the violence of an earthquake. These are geophysical data that can’t be affected by the insured or the insurer.”
• Real-World Example: Haiti’s first earthquake payout came from a Caribbean risk pool using parametric contracts, paving the way for fast and direct government relief.

Strengthening Government Systems & Response

• Integration with Social Protection: Kenya links their ARC insurance to social protection programs, allowing rapid scale-up to more people in case of drought.
  • Stefan Dercon [11:00]: “They’ve linked the ARC...to actually a social protection system that exists all the time. But the insurance policy allows the system to scale up during a drought to reach more people...That’s the kind of way that we want to do.”
• System Incentives: Participation in risk pools incentivizes governments to set up effective response mechanisms in advance, contrasting with improvised post-disaster systems.

Financial and Political Challenges

• Affordability and Buy-In:

  • Difficulty convincing cash-strapped governments and populations to pay insurance premiums for uncertain benefits.
  • Poorer countries have competing spending needs, making insurance a tough political sell.
    • Rajesh Merchandani [12:25]: “I certainly don’t like having to write a check to the insurance company...How do you get cash strapped governments...to decide to spend money on insurance?”
  • Political incentives often favor visible, post-disaster spending over less tangible, preventive investment.
    • Stefan Dercon [15:50]: “There’s plenty of evidence...that governments or people in power...can get electoral benefit from being seen to be the benefactor after a disaster.”

• Encouraging Long-Term Thinking: Policymakers and donors should champion preparedness as being in the long-term interest, despite political headwinds.

  • Stefan Dercon [15:50]: “It’s actually up to those of us who are involved in preparing policy...to bring that long term dimension.”

The Role of the Private Sector and Remaining Gaps

• Industry Engagement: Insurance industry is increasingly interested in developing these new markets, seeing benefits for risk diversification and business growth.
  • Theo Talbot [16:25]: “The insurance industry is increasingly...ready to work on this platform.”
• Limits of Insurance: Not all risks are easily insurable or contractible—so a robust humanitarian system remains necessary as a “last resort” insurer:
  • Stefan Dercon [17:12]: “We’ll still need a humanitarian system that actually can bail the whole system out...and cover those risks that are hard to plan for.”

Policy & Political Dimensions (UK/Donor Perspective)

• UK as a Leader: UK’s large humanitarian spending, insurance expertise, and political momentum make it well placed to lead innovation in disaster insurance.
  • Stefan Dercon [18:05]: “As the UK we spent billions on humanitarian aid...getting these incentives in place...is one part of making [the] humanitarian system function better.”
  • Leveraging London’s status as a global insurance hub supports both development and national interests.

Notable Quotes & Memorable Moments

• Stefan Dercon [01:23]: “If we wait until the disaster strikes and then we are going to scramble for resources...it's already quite late. And the problem is by doing this so late, we create very poor incentives to actually prepare ourselves properly for these responses.”
• Theo Talbot [02:59]: “When we insure something, we acknowledge that we have that liability… Preparedness creates government capacity.”
• Theo Talbot [07:10]: “Insurance doesn't set most people's heart racing, but Stefan and I...are grinning about the possibility of this.”
• Theo Talbot [09:02]: “The first payout [after Haiti’s earthquake] came from the Caribbean Sovereign Risk pool...That one little pinprick of light went so right.”
• Stefan Dercon [15:50]: “There’s plenty of evidence that...money that [would have been] spent for preparedness doesn't really give you electoral gain.”
• Stefan Dercon [18:05]: “The UK is the world center of insurance. Surely we won’t have that much objection...to actually harness some of the expertise and the capital that is present in London.”

Timestamps for Major Segments

• 00:05 — Introduction of guests and topic
• 01:16–02:46 — Why reactive disaster aid is problematic
• 02:46–04:10 — How insurance changes incentives, enhances preparedness
• 04:10–06:37 — Designing insurance contracts for countries (clarity, triggers)
• 07:10–09:44 — The appeal of parametric insurance; Haiti earthquake example
• 09:44–12:25 — Effectiveness of existing risk pools (ARC, CCRIF); integration with social protection
• 12:25–15:45 — Political and financial challenges for governments and populations
• 15:45–16:25 — Importance of long-term policy perspective
• 16:25–17:43 — Private sector’s increasing interest; need for humanitarian backup
• 17:43–19:49 — UK government’s commitment; donor policy implications

Further Reading & Resources

• Book: Dull: How Planning Ahead Will Make a Difference by Stefan Dercon & Daniel Clarke (World Bank)
• CGD Working Group: Led by Theo Talbot and Owen Barder — policy paper titled Payouts for What? Why Disaster Aid Is Broken and How Catastrophe Insurance Can Help to Fix It. (cgdev.org)

This episode is a comprehensive look at why international disaster aid needs reform and how innovative financial instruments like insurance can offer a more effective, coordinated, and proactive future for global humanitarian response.