Project Body:

      1. The Role of Financial Institutions in Disaster Risk Mitigation Cycle;

The Financial institutions concern in disaster risk mitigation are discussed below

  1. Insurance

In developing countries, it is difficult to establish the link between insurance and mitigation. The need for mitigation is high as many structures are completely uninsurable since they are not only located in settlements without basic services and/or in flood plains or other places with high probability of disaster occurrence. In addition, many of these structures are not built with solid materials and appropriate building standards, while their occupants often lack legal ownership title (World Bank 1999). The poor, in addition, do not have adequate financial incentives, let alone the means to take mitigation actions. Local Governments, at the same time, lack the capacity to develop and enforce land use management plans and building standards to improve the conditions of these settlements. Insurers wanting to provide insurance services to the poor face the challenge of setting up affordable rates which can also ensure the financial sustainability of the programme. In the end, even if a risk is considered insurable, it may not be profitable or sustainable, since, as Kureuther (19980 puts it,” … it may be impossible to specify a rate for which there is sufficient demand and incoming revenue to cover development, marketing, and claim costs of the insurance and still yield a net positive profit” 9p270. this was precisely the experience of insurance companies in the USA that led them to declare flood risk as unmarketable. Without a mandatory requirement it is difficult to spread the risk among a large number of people in order to provide affordable insurance rates.

Under certain circumstances, even when risks are technically insurable, there may be alternative risk management products that are more adequate, such as savings and emergency funds. It may be feasible to provide disaster insurance services, but given high risk exposure levels, insurance premiums will most likely have to be set a rate only few can afford. In countries like Mexico, for instance, low coverage stems in part from the high premium prices that the insurance industry has to charge in zones that are highly prone to earthquakes (World Bank 1999). In low risk exposure areas, people do not have the incentive to buy insurance coverage, which further reduces the insurer’s scope to bring down costs to a viable level through cross-subsidization.

  1. Microfinance Institutions in disaster risk management

local MFIs can undertake a wide range of complementary activities to mitigate disaster risk, and thereby contribute to ensure that emergency responses become more community-based and sustainable MFIs have an important role to play by promoting disaster risk and vulnerability assessments of their clients. Although further research is required, several factors seem to influence the effectiveness of MFIs during disasters. Those institutions with good leadership, sound financial management and accounting systems, and a certain level of disaster preparedness manage to respond faster and better to the disaster situation. Rapid access to cash, made available in the form of emergency funds or through efficient transfer of external funds, are particularly critical.

Having committed and easy to deploy field staff allows certain MFIs to carry out damage assessments rapidly and to monitor the situation closely. In turn, damage assessments and close monitoring of the situation enables these institutions to respond better to their clients’ needs and the assessments provide them later on with more accurate estimates of the funds needed for the recovery process. Another critical factor influencing the relative success of MFIs assistance during disasters is the level of engagement with, and relative dependency on donors and international NGOs. Currently, involvement of microfinance in disaster risk management in many countries remains highly vulnerable to the ebbs and flows of donor funding. Given ongoing relationships, donors and governments have typically found it practical to channel emergency and recovery funds through MFIs. In fact, the major source of funds for the products and services offered by MFIs in post-disaster situations has been grants from donors. Setting up new MFIs as a post-disaster response however, may not be effective because these institutions would lack experience, and knowledge of the area of the affected households.

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