UNDP and UN-OHRLLS Engagement Initiative seeks to build capacity for long-term financial risk management
Joining forces to build financial resilience in least developed countries
March 1, 2023
The world is increasingly complex and increasingly risky. Natural hazards, extreme weather events, and other disaster shocks are becoming increasingly common and pose a significant threat to progress on sustainable development, especially as they do not appear in isolation but rather increasingly join together with other shocks such as the pandemic, and rocketing food and energy prices, to form massive complex vulnerabilities and risks.
Least developed countries (LDCs) are the most severely affected by these multiple shocks, but they also often lack the necessary capacity to manage them. This is particularly the case with financial management where multiple weaknesses ensure countries are substantially vulnerable to shocks, which contribute to the alarming statistic of 60 percent of LDCs already in or at risk of debt distress1,, compared to 39 percent before the pandemic. Insurance and risk financing are increasingly seen as critical for sustainable development. However, insurance penetration rates in the LDCs are often less than 1 percent, compared to figures of 5, 6 or 7 percent seen in other developing countries. Further, the protection gap (the gap between insured and non-insured losses in the wake of disaster) in all developing countries is below 10 percent, and even lower for LDCs.
Mechanisms to rapidly mobilize finance for disaster response are often not integrated into budget processes and development plans, insurance companies are deterred by restrictive legislation, demand for insurance is also low due to a lack of awareness and/or trust in insurance schemes, there are also issues related to the affordability of premiums. Public Financial Management is often not informed by an understanding of risk, and therefore does not factor in the need for financial risk management. Engagement with the private sector, national, regional or international, is often undermined by a lack of understanding of issues, challenges and opportunities. Together, these issues result in massive financial vulnerability, leaving the most at-risk communities and countries exposed to risks, and lives, livelihoods and critical assets largely unprotected.
To build financial resilience to climate risks and integrate insurance and risk financing into development, the IRFF works with 17 of the world’s largest insurers to develop sovereign risk financing solutions in 22 countries, including five LDCs – Bangladesh, Nepal, Tanzania, Ethiopia, Mozambique. However, there is an urgent need to do much more in LDCs and for this reason, the United Nations Development Programme (UNDP) Insurance and Risk Finance Facility (IRFF) has launched the Engagement Initiative. The is a dedicated programme which seeks to build capacity in LDCs to adopt insurance and risk financing solutions, enhance the regulatory and legislative environment, integrate risk transfer into government decision-making, and drive engagement between government and the insurance industry. The initiative is currently active in three countries – Comoros, Senegal and Uganda – and will soon select two more, and is financed by the German Government (BMZ). The programme of work in each country is tailored and builds on a diagnostic of the current environment for insurance and risk finance in each LDC.
The LDC5 Conference in Doha provides the opportunity to not only highlight these issues but also work to address them in the long term. For this reason, UNDP and the Office of the High Representative for Least Developed Countries, Landlocked Developing Countries, and Small-Island Developing States (UN-OHRLLS) have joined forces to tackle this issue by building the financial resilience of these countries, growing the current programme of work to 20 countries over the next five years.
Not only will this investment in the foundational components of financial risk management protect the lives and livelihoods of the most vulnerable, it will also increasingly strip away uncertainty and risk from economy and society, incentivizing growth and development. The Doha Plan of Action for LDCs is a critical document and presents a roadmap for not only LDC stability but also growth. In a world where the news is mostly gloomy, this initiative will build hope and translate potential into prosperity. Building the financial protection of these countries can and must enable that vision to be realized.
"The LDC5 Conference in Doha provides the opportunity to not only highlight these issues but also work to address them in the long term."
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