In September, a unique indemnity insurance policy held by the International Federation of Red Cross and Red Crescent Societies (IFRC) started to pay out millions of dollars that will help it deal with disasters.
Insurance industry and humanitarian leaders together hailed this as an historic milestone.
The Disaster Response Emergency Fund (DREF) policy responded after reaching its deductible threshold of CHF 33 million (US$38 million) in one calendar year. This came, said a Red Cross media release, largely because of Super Typhoon Yagi in Asia.
Aon’s president Eric Andersen (pictured above) explained this novel insurance arrangement – known as pre disaster risk financing - to Insurance Business.
“The Red Cross-Red Crescent has dozens of national organizations and they’re all responsible for fundraising,” said Andersen. “But at the corporate centre they keep a pool of money designed for when something overwhelms a local country’s ability to respond - and they get that through donations from countries or wealthy individuals.”
However, the dilemma they have, said Andersen, is how to leverage this money when they have a year of particularly bad disasters.
“What they’re finding is governments are getting more and more stretched and have less money to donate when things go bad,” he said.
The other major challenge for humanitarian organisations like the Red Cross, said Andersen, is responding quickly when a disaster happens.
“But with the governments, to go raise money, it can take six months to a year, at which point they haven’t been able to respond to the crisis,” he said.
Two years ago, Andersen said, the finance director of the Red Cross called his brokerage to try and find a solution.
“She had the idea of how to leverage public-private partnerships,” he said. “We didn’t know her beforehand and we’re not the broker for the Red Cross but it was just a nice opportunity to work with them.”
The Aon president said they worked together on how to create a version of an insurance excess fund that would trigger once it reached its limit, in their case CHF 30 million with a CHF 3 million buffer.
“So a bunch of Lloyd’s of London syndicates that brokered the program are now paying the Red Cross, when the Red Cross needs money, for the rest of the year,” said Andersen.
A big boost for the Red Cross’s relief work.
“On a net basis, it’ll give them US$16 million of extra disaster money that they didn’t have before - it’s a great outcome,” he said.
Andersen suggested that another big win for this insurance project was demonstrating how effective public-private partnerships can be in helping counter the world’s increasing number of disasters.
He also said he learned a lot about just how differently private corporations and not for profits regard money. Understanding these differences was an important learning curve, he said, for developing the trust that enabled this insurance project to succeed.
“We’re usually dealing with large corporations and there’s no attachment to the money, you’re looking for value, making sure it makes sense,” said Andersen. “But if you’re with the Red Cross-Red Crescent, you’re either buying an insurance policy, or you’re buying 20 tents, or you’re sending a shipment of food.”
For that reason, he said humanitarian organisations regard money very differently.
“They look at every dollar - as they should,” he said. “So getting them to understand the value and getting their donors to understand it was a long process.”
Andersen is confident that this type of insurance arrangement could become more widely used by both governments and not for profit organisations.
“I think the whole concept of this pre disaster risk financing is becoming a much bigger deal,” he said. “I’m going to be a little snarky because in my world that’s called insurance but nobody likes to use the word insurance anymore, so now it’s pre disaster risk financing - which is fine.”
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