- The Role of Financial Institutions in Disaster Risk Mitigation Cycle;
The Financial institutions concern in disaster risk mitigation are discussed below
- 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.
- 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.