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The International Federation of Red Cross and Red Crescent Societies’ Disaster Response Emergency Fund (IFRC) has issued the first-ever insurance payout for natural disasters. This significant, historical moment marks a series of possibilities in using innovative financial models to address devastations triggered by climate change. What does this mean for the future of humanitarian aid? What role does the private sector play in addressing humanitarian disasters?
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The International Federation of Red Cross and Red Crescent Societies’ Disaster Response Emergency Fund (IFRC) has issued its first-ever insurance payment for natural disaster relief.
The IFRC’s Under Secretary General for Global Relations and Humanitarian Diplomacy, Nena Stoiljkovic stated: “The scale of the needs caused by 2024’s disasters is sobering. But the fact the insurance is helping with the burden is good news and proof that there are innovative finance solutions that we hope to grow in coming years.”
The first of its kind for the aid sector, the IFRC policy is facilitated in conjunction with insurance broker, Aon. The deadly Typhoon Yagi, which impacted Southeast Asia in September 2024, generated a total disaster spending well over US$37 million.
Typhoon Yagi was one of the strongest storms ever to hit Vietnam, also impacting the Philippines, Thailand, Laos, and China.
Yagi killed hundreds of people, left over six million without power, resulted in significant agricultural and infrastructural damage and loss, and generated serious economic loss.
In Vietnam alone, damages exceeded US$3.3 billion, including the significant destruction of industrial areas, which fuel the nation’s GDP.
For countries like Vietnam that are dependent on their manufacturing sector to keep their economy alive, the impact of a natural disaster like Yagi is devastating.
Vietnam, much like its affected neighbors, depends on the generosity of wealthier countries and the intervention of international organizations in order to begin recovery efforts.
The United States provided a mere US$1 million, while the European Union gave $720,000. These funds were primarily geared toward immediate humanitarian needs. While these amounts are significant, they are just a drop in the bucket with damages upwards of $3.3 billion.
The IFRC funding is triggered to provide some protection to relief funds in contexts that are continuously facing intense and frequent climate disasters.
The issue of financing solutions to deal with the effects of climate change was a key issue discussed during the 2024 United Nations Climate Change Conference COP29 meeting.
The proposed strategy during the COP29 meeting was that the richest countries, which are also the ones responsible for the most greenhouse gas emissions, would pay into a fund that would be diverted to poorer nations.
Poorer nations, which are also the most affected by climate change devastation, don't have the resources to mitigate climate disasters and rebuild afterward.
At COP29, it was calculated that over $1 trillion would be necessary as part of a fundraising effort, largely stemming from private financing options.
While the COP29 wasn’t able to reach a firm resolution on the matter, with leaders from the United States and China both skipping the event and sending representatives instead, it is clear that financial models are part of the future to address resilience in the face of climate change.
So how does the IFRC insurance scheme work? A payout of several million dollars is released when the demands for the amount of funds dedicated to natural catastrophes reach a particular threshold.
A deductible is set each year and anything that goes beyond that, up to a certain amount, is covered by an insurance payout.
This scheme was first devised in 2023, but the IFRC didn’t reach the deductible threshold in order to benefit from the insurance payout.
In 2024, Typhoon Yagi tipped the scales, triggering the threshold, and making the insurance funds accessible for the first time in history.
Following Yagi, mass flooding in Béchar, Algeria, led to the displacement of thousands of families. The relief efforts that IFRC was able to provide stemmed from insurance companies.
Aon’s President, Eric Andersen, noted that this was made possible through “an innovative risk management program pioneered by the IFRC, brokered by Aon, and funded by international donors.”
Similar to the insurance homeowners may have, this insurance isn’t additional money in a separate account but is rather a consequence of serious financial loss, in which insurance is used to mitigate complete collapse.
The use of commercial insurance to help pay for the fallout of humanitarian disasters demonstrates the role that the private sector can play in supporting vulnerable groups in times of need.
The IFRC hopes to widen its coverage of disasters to include crises like epidemics. The organization hopes that donors will be further encouraged to contribute toward funding, as their contribution will be expanded on through the private sector under this umbrella.
As crises continue to grow rather than diminish, this poses a serious challenge for these kinds of funding schemes, namely that disasters are unpredictable.
This means that there may be a period of no disasters, which is the ideal time for insurance companies, as they collect premiums without having to pay out. But these quiet periods can be followed by continuous disasters, which puts insurance entities at higher risk.
Having a constant stream of donor contributions creates greater stability, and the IFRC hopes that donors will be encouraged by this model.
Organizations like the IFRC offer a sense of lessened risk for insurance companies, as they have a clear understanding of how the organization operates and what they spend accordingly. The IFRC has a strong international reputation and a reliable track record on their spending over the decades.
This strategy is not just limited to organizations like the IFRC, governments are taking note as well. The British government has already stated that private insurance will be a key element of its international development strategy moving forward.
Sources: (IFRC) (Reuters) (Global Reinsurance) (World Economic Forum)
See also: How to prepare for emergencies and disasters when traveling abroad
Red Cross breaks ground with first-ever natural disaster insurance payout
Innovative risk management model offers a way forward
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The International Federation of Red Cross and Red Crescent Societies’ Disaster Response Emergency Fund (IFRC) has issued the first-ever insurance payout for natural disasters. This significant, historical moment marks a series of possibilities in using innovative financial models to address the fallout of disasters caused by climate change. What does this mean for the future of humanitarian aid? And what role does the private sector play in addressing humanitarian disasters?
For these answers and more, click through the gallery!