Disaster risk financing

The growing crisis protection gap is a significant driver of global hunger, as it leaves vulnerable people without the financial support they need to recover from shocks - whether weather-related or otherwise - that threaten their lives, livelihoods and food security. This gap means that people often lack the resources to protect themselves and rebuild in the aftermath of crises, exacerbating food insecurity. 

Smallholder farmers, pastoralists, small and micro entrepreneurs across the world are highly vulnerable to climate-related risks, such as droughts, floods, tropical cyclones, hurricanes and storms. They also have very limited access to the risk financing tools and services that can provide protection from the resulting financial losses. This means that they are often unable to protect themselves and rebuild in the aftermath of crises, exacerbating food insecurity. 

At the same time, governments are also struggling to keep pace with the growing scale and complexity of risks. Compounding shocks – such as extreme weather events, conflict, financial crises and pandemics – are stretching national budgets and limiting governments' ability to respond effectively to disasters.

More needs to be done to make funds available that can meet the immediate needs of disaster-affected populations and complement humanitarian donor funding. A scale-up of climate and disaster risk financing (DRF) instruments is urgently needed to enable governments and the humanitarian sector to protect the most vulnerable people from the rising frequency and intensity of weather-related shocks. 

In the face of these challenges, the World Food Programme (WFP) has proven that investing in readiness through pre-arranged finance is critical to protecting lives, livelihoods and food security. Pre-arranged disaster risk financing—agreed in advance, triggered by objective parameters and rapidly disbursed when shocks occur—has therefore become an essential pillar of effective humanitarian action. Through DRF, WFP helps communities and governments to better prepare for, respond to and recover from climate-related shocks. WFP has developed and tested innovative DRF solutions by focusing on two approaches: inclusive risk financing (at the household and community level) and macro-level risk financing (at the regional and national levels). Additionally, to cover the different levels of risk, WFP adopts a risk-layering approach.

By diversifying its risk financing instruments, WFP aims to strengthen its response capacity and enable fast assistance to reach vulnerable populations more effectively.

Inclusive risk financing: This refers to financial solutions – such as savings, loans and insurance – designed to make financial protection accessible to under-served and vulnerable populations. As weather-related shocks grow in frequency and intensity, these tools play a critical role in helping communities prepare for, manage and recover from extreme weather events. Over the past fifteen years, WFP has unlocked access to financial services for over 15 million people through integrated risk management strategies. Building on its work with the R4 Rural Resilience Initiative,    WFP has evolved this model into a more comprehensive Inclusive Risk Financing approach. Read more about WFP’s IRF approach here.
Macro-level disaster risk financing: (DRF) refers to financial tools that enable governments and humanitarian actors to respond swiftly and predictably to large-scale disasters, particularly climate-related shocks. Humanitarian assistance is often mobilized only after a disaster has caused widespread damage, however, macro-level DRF enables pre-arranged funding to be released immediately when specific, measurable conditions—such as rainfall deficits or temperature extremes—are observed. WFP works to advance macro-level DRF instruments so that when disaster strikes, these instruments provide rapid funding to support affected communities, either through government-led social protection systems or directly through WFP’s assistance. Read more about WFP’s Macro-level DRF programmes here.
Risk layering: To optimize resources, WFP is adopting a risk-layering approach in some countries – combining different financing instruments based on the severity and frequency of shocks in a given country. The ARC Replica insurance policy triggers if the conditions are met at the national scale. However, when the scale of the impact of a shock is more localised and not enough to reach the national scale required to trigger the ARC Replica insurance policy, WFP has established an index-based contingency fund that enables WFP to provide targeted assistance. Additionally, for extreme shocks with low-frequency, WFP has introduced the Catastrophe Layer, which provides additional financing to enable WFP to provide assistance when a country experiences a catastrophic shock.