A calculated risk: How donors should engage with risk financing and transfer mechanisms
Risk financing is a critical element of a resilient future. The potential gains from risk financing as part of a comprehensive approach to risk management are wide ranging and include reduced humanitarian, fiscal and economic impacts, the creation of incentives to further reduce risk and greater confidence to invest with the potential to stimulate economic growth and poverty reduction. However, while it is part of the solution to managing risk more effectively, it does not work always and everywhere.
Donors have an important role to play in improving risk-informed financial preparedness but will need to adapt a new modus operandi. Donors will need to put in place policies that establish risk financing as a corporate priority and to develop new approaches and modes of programming. Donor support to risk financing and risk transfer should take into consideration the following:
1. Comparative advantage. Donors should understand, play to, and refine existing comparative advantages. There is a sliding scale of engagement and investment options that donors may select, according to their resources, risk-taking culture, capacity and interest. Donors may want to engage in one or a combination of modes or levels of engagement. In addition, donors may need to adapt internal ways of working to accommodate new partnerships and programming approaches; invest in developing internal capacity; and develop ways of coordinating and collaborating across disparate internal technical teams.
A Calculated Risk: How donors should engage with risk financing and transfer mechanisms. An OECD Working Paper
2. Catalytic investment. New technology, products, approaches and partnerships will be needed to address existing challenges in affordability and coverage, and to adapt to emergent risks. Donors have an important role to play in risk financing as ‘first movers’, providing catalytic investments in new approaches and markets where private sector actors might not otherwise engage. Donors should also underwrite the costs of a wider range of ‘enabling investments’ or ‘public goods’, including generating and sharing of risk data and providing support to markets, such as technical capacity–building, regulatory reform, consumer education and protection. These investments support the development of sustainable pro-poor, risk-financing and risk-transfer solutions in developing countries.
3. Collective approaches. Effective management of risk is the work of many actors across the public and private sector and civil society. Donors can play an important role as match-makers and facilitators, creating opportunities and incentives for public, private and civil society actors to connect and develop partnerships. Donors can also influence incentives and create opportunities for actors to connect and work more effectively towards collective approaches to managing risk – including creating incentives for their partners to develop a shared analysis of risk, which underpins coordinated and comprehensive approaches to managing risk.
4. Complexity. Risk financing may be a worthwhile long-term investment but the process is unlikely to be straightforward. Accepting complexity and uncertainty comes with the territory. Donors should be realistic in their expectations and should accept: longer-term financial commitments; a potentially high failure rate and long-range returns on investments; complex and challenging chains of accountability and difficulties attributing results within the lifetime of donor planning cycles; and they will need to create or work in a culture that is able to learn and adapt.
5. Caution. Risk financing and risk transfer are not without potential risks and unintended consequences. Donors should be alert to the potential limits and draw-backs of risk financing and be prepared to develop their own ‘layered’ approaches; rethink and adapt; and maintain complementary investments in approaches that have more reliable outcomes for at-risk populations in the short-term, such as social safety nets and humanitarian cash transfer programmes as well as disaster risk reduction. Donors should influence their partners and advocate in networks to ensure that products and initiatives take into account not just technical feasibility, client requirements and profit returns but also include the needs of the most vulnerable.
What does resilience mean for donors?