The document discusses the need for an objective sovereign disaster risk finance ratings system to facilitate countries' access to risk financing. Such a ratings system would assess countries' financial resilience to disasters, ability to pay insurance premiums, and operational capacity to effectively deploy funds to assist populations during crises. The conference requests that UNISDR, ARC, CCRIF and other partners establish a steering committee to oversee developing standards for private sector ratings entities to assess countries and other stakeholders.

1. ARC Sovereign Disaster Finance
Ratings System (SDFR)
5th International Disaster & Risk Conference IDRC Davos
24-27 August 2014

2. African Risk Capacity (ARC)
• The African Risk Capacity is a continental sovereign risk pool and early
response mechanism designed to provide cost-effective contingency
funding to African Governments to execute pre-approved contingency
plans in the event of severe weather disasters
• ARC’s mission is to help African Union Member States improve their
capacities to better plan, prepare and respond to extreme weather events
and natural disasters and to assist its Member States to protect the food
security of their vulnerable populations

3. Three ARC pillars creating value
ARC brings together three critical elements to achieve its mission:
• Early Warning: Africa RiskView
• Insurance: Index-based insurance and risk pooling
• Response: Contingency Planning
Two value drivers make ARC an efficient tool to manage droughts and
other risks for Member States:
• Improved risk management through risk transfer and risk pooling
• Early response actions and improved targeting
 Estimated cost-benefit of US$ 4.4 for every US$ 1 spent on ARC versus
traditional emergency response ¹
¹ARC Cost Benefit Analysis, IFPRI, Oxford University and Boston Consulting Group

4. Creating value
• Assistance to government in assessing and quantifying risk, identifying the different
tools for effective risk management in addition to risk transfer
• Enabling government determine what is appropriate for the country to support the
resilience building of the affected communities based on frequency of pay-outs; lower
pay-outs more frequently or Higher pay-outs less frequently
• Envisaged to protect the investment government is making in building community and
household resilience through risk reduction initiatives and other social safety net
programs; avoiding households asset depletion during drought and preventing
households from falling into the chronic food insecure situations
• Capacity building on early warning systems, risk transfer and contingency planning

5. Parallel with ARC: the PRM
PRM rating was used to assess operational plans against ARC’s
Elaboration of OP
Submission to
TRC and
recommendations
Submission to
PRM
Issue of Certificate
of Good Standing
Access to funds
from ARC
standards and guidelines
Eligibility criteria
1 2
• Time sensitive
• Livelihood saving
• Duration
Implementation criteria
Payment of
Premium
• Operations
• Admin & flow of funds
• Needs assessment & targeting
• M&E

6. The idea
• Process alerted us to the opportunities for:
– countries to highlight, and mitigate, the gaps in their disaster management and
leverage the progress made in disaster planning to attract financing
– enhanced analytical rigour and international independent credibility to the
assessment of Member States’ ability to effectively execute their plans.
• Began exploring the idea of whether there is a scope to extend the use of
ARC services to non-ARC Ltd funding streams, by establishing an objective
standard-setting and certification body for index-based insurance products
and other risk financing for catastrophic disasters.
This in essence is a ratings proposition.

7. Beyond the PRM: What are we measuring?
• Such a ratings mechanism would objectively assess a country’s:
– financial resilience to disasters, through assessing its ready access to capital in
relation to its quantifiable risk;
– where appropriate, the ability and willingness to pay premiums for disaster risk
financing instruments and to cover other costs related to the maintenance of
reserves; and,
– operational capacity to effectively and to accountably deploy funds to assist
affected populations in times of crisis.

8. Beyond the PRM: What are we measuring?
• Will also include the quality and effectiveness of their interventions in terms
of how they were deployed but also the appropriateness of the interventions
in the first place. It should also include aspects that relate to:
– the speed and efficiency of all country processes within the DM system,
– operational capacity of governments and its partners,
– the strength of existing response systems
– the strength and accuracy of their targeting and needs assessments,
– timing of response
– the quality of their M&E&R systems
– evidence that responses are working and improving
• Without this, policy frameworks and reserves mean nothing as
assistance will not be deployed effectively.

9. Beyond the PRM: What are we measuring?
– Analyse OPs vs. based on ARC’s guidelines eligibility criteria.
– Rank expected efficiency of targeted outcomes vs. benchmarks.
– Assess track record in meeting requirements of beneficiaries
Operations plan
assessment
– Analyse flow of funds once received by entity
– Assess divisions or structures through which funds pass, legal structures
governing the process, and provide a weak-link analysis.
Financial structure
assessment
– Appropriateness of systems and IT infrastructure to monitor the flow and
dissemination of funds internally
– Assess value of beneficiaries’ funds eroded through transactions and
facilities provided by 3rd parties.
Systems and leakage
assessment
– A forward looking view based on proposed advancements and corrective
measures relative to existing structures
Development
prospects assessment
– Assess if robust oversight and directional framework can support activities
– Absence of adequate RMCG factors may weaken country’s capacities
– Neutral or negative Impact on overall rating
Risk Management
and Corporate
Governance (RMCG)

10. Conceptualising the Ratings:
Key considerations
• It is a call for a wide engagement of stakeholders throughout the disaster risk reduction and
management ecosystem, to participate in the elaboration and implementation of a credible
independent entity that would establish and assess continually improving standards towards the
common goal of better disaster preparedness in an increasingly unstable environment.
• For capital providers:
- Measure risk of providing disaster financing to a country
- Compare across geographies disaster preparedness
• For countries:
- Ex-ante assessment to attract disaster financing
- Incentivise improvement of broader risk management platform in medium to long term

11. Next Steps?
• Assess feasibility
• Define scope of first assessments
• Engage funding providers and countries
• Open market for service providers
• Any suggestions?

12. Text
• Recognizing the need for financial and operational preparedness for disasters, and acknowledging
the significant contribution and increased demand from lower income countries for the services
being provided by regional risk pools such as the African Risk Capacity (ARC), the Caribbean
Catastrophe Risk Insurance Facility (CCRIF) as well as the private risk markets, multi-lateral
agencies and donors, there is a need for an objective sovereign disaster risk finance ratings
system to facilitate access to risk finance for sovereigns.
• Such a ratings mechanism would objectively assess a country’s 1) financial resilience to disasters,
through assessing its ready access to capital in relation to its quantifiable risk; 2) where
appropriate, the ability and willingness to pay premiums for disaster risk financing instruments and
to cover other costs related to the maintenance of reserves; and, 3) operational capacity to
effectively and to accountably deploy funds to assist affected populations in times of crisis.
• The Conference requests the United Nations International Strategy for Disaster Risk Reduction
(UNISDR), ARC, CCRIF, OCHA, the Collaborative Africa Budget Reform Initiative (CABRI) and
private sector partners to establish a steering committee to oversee the development of standards
to be applied in a ratings system by private sector ratings entities aimed at offering assessments
to countries and other stakeholders.