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Forecast-based financing: An approach for catalyzing humanitarian action based on extreme weather and climate forecasts

Authors:
  • Red Cross Red Crescent Climate Centre
  • Red Cross Red Crescent Climate Centre
  • IVM - VU & GFDRR - World Bank

Abstract and Figures

Disaster risk reduction efforts traditionally focus on long-term preventative measures or post-disaster response. Outside of these, there are many short-term actions, such as evacuation, that can be implemented in the period of time between a warning and a potential disaster to reduce the risk of impacts. However, this precious window of opportunity is regularly overlooked in the case of climate and weather forecasts, which can indicate heightened risk of disaster but are rarely used to initiate preventative action. Barriers range from the protracted debate over the best strategy for intervention to the inherent uncomfortableness on the part of donors to invest in a situation that will likely arise but is not certain. In general, it is unclear what levels of forecast probability and magnitude are "worth" reacting to. Here, we propose a novel forecast-based financing system to automatically trigger action based on climate forecasts or observations. The system matches threshold forecast probabilities with appropriate actions, disburses required funding when threshold forecasts are issued, and develops standard operating procedures that contain the mandate to act when these threshold forecasts are issued. We detail the methods that can be used to establish such a system, and provide illustrations from several pilot cases. Ultimately, such a system can be scaled up in disaster-prone areas worldwide to improve effectiveness at reducing the risk of disaster.
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Nat. Hazards Earth Syst. Sci., 15, 895–904, 2015
www.nat-hazards-earth-syst-sci.net/15/895/2015/
doi:10.5194/nhess-15-895-2015
© Author(s) 2015. CC Attribution 3.0 License.
Forecast-based financing: an approach for catalyzing humanitarian
action based on extreme weather and climate forecasts
E. Coughlan de Perez1,2,3, B. van den Hurk2,4, M. K. van Aalst1,3, B. Jongman1,2, T. Klose5, and P. Suarez1
1Red Cross/Red Crescent Climate Centre, The Hague, the Netherlands
2Institute for Environmental Studies (IVM), VU University, Amsterdam, the Netherlands
3International Research Institute for Climate and Society, Earth Institute, Columbia University, Palisades,
NY 10964-1000, USA
4Royal Netherlands Meteorological Institute, De Bilt, the Netherlands
5German Red Cross, Berlin, Germany
Correspondence to: E. Coughlan de Perez (coughlan@climatecentre.org)
Received: 25 March 2014 – Published in Nat. Hazards Earth Syst. Sci. Discuss.: 5 May 2014
Accepted: 11 March 2015 – Published: 23 April 2015
Abstract. Disaster risk reduction efforts traditionally fo-
cus on long-term preventative measures or post-disaster re-
sponse. Outside of these, there are many short-term actions,
such as evacuation, that can be implemented in the period
of time between a warning and a potential disaster to reduce
the risk of impacts. However, this precious window of op-
portunity is regularly overlooked in the case of climate and
weather forecasts, which can indicate heightened risk of dis-
aster but are rarely used to initiate preventative action. Bar-
riers range from the protracted debate over the best strategy
for intervention to the inherent uncomfortableness on the part
of donors to invest in a situation that will likely arise but is
not certain. In general, it is unclear what levels of forecast
probability and magnitude are “worth” reacting to. Here, we
propose a novel forecast-based financing system to automat-
ically trigger action based on climate forecasts or observa-
tions. The system matches threshold forecast probabilities
with appropriate actions, disburses required funding when
threshold forecasts are issued, and develops standard oper-
ating procedures that contain the mandate to act when these
threshold forecasts are issued. We detail the methods that can
be used to establish such a system, and provide illustrations
from several pilot cases. Ultimately, such a system can be
scaled up in disaster-prone areas worldwide to improve ef-
fectiveness at reducing the risk of disaster.
1 Introduction
“Early warnings” of heightened risk, such as storm forecasts
indicating enhanced risk of flooding, are often available at
several lead times prior to an extreme weather event. These
provide a window of time to reduce the potential societal
consequences from such an event. Different types of action
can be taken in this time window, such as evacuation, or
distribution of water purification tablets. Each of these ac-
tions has its own level of cost, focus scope and preparation
needs; a mixture of such actions can increase resilience to
hazards, both prior to and during the immediate threat of a
disaster. The majority of evaluations of preventative action
demonstrate that avoided disaster losses can at least double or
quadruple the investment in risk reduction (Mechler, 2005).
However, the chance exists of a “false alarm” in which the
most likely forecasted scenario does not materialize. What is
the process by which stakeholder can select an appropriate
action in the time frame allowed by an early warning, given
this risk of acting in vain at a false alarm? Here, we offer a
methodological approach to answer this question, addressing
the gap that exists in the use of hydrometeorological early
warning information to trigger disaster risk reduction actions
in timescales of hours to months between a climate-based
warning and a disaster.
Originally, humanitarian institutions were created with a
mandate to respond to disasters only after they had oc-
curred. Over the last few decades, the discourse has shifted
to acknowledge disaster risks in long-term development
Published by Copernicus Publications on behalf of the European Geosciences Union.
896 E. Coughlan de Perez et al.: Forecast-based financing
projects and plans; particularly after the Hyogo Framework
for Action was signed in 2005 (Manyena, 2012). Currently,
disaster-related programming focuses on these two areas:
post-disaster response and reconstruction, and long-term dis-
aster risk reduction; the greater part of the latter has histor-
ically been invested in large flood prevention infrastructure
projects (Kellett and Caravani, 2013).
However, there is a valuable window of time that exists
after the issuance of science-based early warnings but be-
fore a potential disaster materializes. We argue here that the
current humanitarian funding landscape does not make suf-
ficient use of this window of heightened risk, in which a va-
riety of short-term activities become worthwhile to imple-
ment and can provide a large return on investment. Oppor-
tunities range from reducing vulnerability, such as distribut-
ing mosquito nets before heavy rainfall, to preparedness for
disaster response, such as training volunteer teams on first
aid procedures or pre-positioning relief items before roads
become impassable. However, according to a recent review
of disaster-related financing by the Overseas Development
Institute and the Global Facility for Disaster Reduction and
Recovery, only about 12 % of funding in the last 20 years was
invested in reducing the risk of disaster before it happens; the
rest was spent on emergency response, reconstruction, and
rehabilitation (Kellett and Carvani, 2013).
In this paper, we elaborate a method to invest a portion of
this financing at times of heightened disaster risk, when trig-
gered by forecast information. This framework quantifies the
intuitive notion that many practitioners already have about
when acting early may be worth it. This quantification also
helps them make the case to donor agencies for such early
action, which is currently often not implemented because the
financing for it is not available. First, we review the con-
text behind why forecast-based opportunities are routinely
missed and discuss the use of short-term early warnings to
trigger action. To operationalize this, we suggest a forecast-
based financing model for the development of procedures to
act based on probabilistic warnings, illustrated with a simple
example from a surface water flooding alert in England and
Wales. We then describe two pilot applications of the financ-
ing system in Togo and Uganda implemented with technical
support from the German Red Cross and the Red Cross/Red
Crescent Climate Centre. We conclude with further discus-
sion of the concept and its potential for replication, as well
as further research that will enable this to be applied widely.
2 Context
We will first explore types of decisions that can be funded
to prepare for an unusually likely disaster event, followed by
background on the types of warnings available. In the fol-
lowing section, we will present the concept of our proposed
methodology to link these two.
2.1 Decisions
A variety of disaster risk reduction actions are available to
be implemented in contexts of increased risk; the most fre-
quent example is evacuation based on very short-term storm
forecasts. For example, during Hurricane Sandy in New York
City, 1000 patients were evacuated from two hospitals in
Manhattan, and the Federal Emergency Management Au-
thority (FEMA) pre-positioned urban search and rescue com-
mittees before the storm (Powell et al., 2012). In the 48h
before Cyclone Phailin hit India, as many as 800000 peo-
ple were evacuated based on weather forecasts (Ghosh et al.,
2013). These actions are not viable in the context of long-
term risk, but become appropriate in the context of a short-
term warning of heightened disaster risk.
Similarly, there are a number of risk reduction actions
that can be taken at the seasonal lead time to prevent dis-
aster losses in coming months. In the International Feder-
ation of Red Cross and Red Crescent Societies’ regional
office in West Africa, disaster management supplies were
sourced ahead of time based on a 2008 seasonal forecast
of above-normal rainfall, which improved supply availabil-
ity from about 40 days to 2 days when flooding did occur
in the region (Braman et al., 2013). In other locations, volun-
teers have used information about heightened risk at seasonal
time scales to fortify vulnerable structures, such as reinforc-
ing latrines to reduce the risk of diarrheal disease outbreaks
when above-normal rainfall is likely to occur (Red Cross/Red
Crescent Climate Centre, 2013).
In contrast with these specific cases, the majority of fore-
cast information does not routinely trigger early action in the
humanitarian sector to reduce disaster risk. For example, the
devastation from extreme flooding in Pakistan in 2010 af-
fected 20 million people. Heavy rainfall had been predicted
several days in advance, and if forecasts had been used to
trigger action, the humanitarian sector could have averted
many of the impacts (Webster et al., 2011). In the case of
drought, the 2011 famine in southern Somalia was preceded
by 11 months of early warning, including a specific famine
warning 3 months before the event (Hillbruner and Moloney,
2012).
In all of the above situations, a warning was issued and a
disaster situation followed; the distinction was whether ac-
tion had been taken to prevent disaster effects. However, this
is not always the case; warning information is probabilis-
tic (expressed in terms of risk) rather than deterministic. In-
evitably some early warnings are not followed by a hazard
event, and some hazards are not preceded by a warning. In
the former case, any action taken based on the early warning
may be seen as action “in vain”, and organizations often be-
lieve that money and time would have been better spent on
other activities.
Such a situation had negative consequences in southern
Africa when the drought anticipated due to the 1998 El Niño
event did not materialize. Farmers reduced their cropping
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E. Coughlan de Perez et al.: Forecast-based financing 897
area, and public backlash after the event made it clear that
many people had understood the seasonal forecast as a de-
terministic prediction of drought, rather than a forecast of in-
creased chance of below-normal rainfall (Dilley, 2000). Sim-
ilarly, in the Netherlands, about 200000 people were evacu-
ated in 1995, after which the dykes did not fail (Swinkels et
al., 1998).
To evaluate the usefulness of an early warning system,
both the number of disasters that are “hits” (a) and “false
alarms” (b) are of interest, expressed in the 2×2 contingency
table below, Table 1 (Suarez and Tall, 2010; Buizza et al.,
1999). In this case, “forecast-based action” refers to whether
or not there was a forecast of increased risk of the disaster in
question that led to action being taken, and “disaster” refers
to whether or not a disaster happened within the forecasted
lead-time. We will come back to the elements in this table
in later sections when discussing funding disbursements rel-
ative to the frequency of each of these categories.
2.2 Warnings
For many actions, the risk of acting in vain is outweighed by
the likely benefits of preventing or preparing for disaster; for
example, if a life-threatening hurricane has an 80% chance
of making landfall, many people would choose to evacuate,
even given the one in five chance of a false alarm. How can
decision-makers navigate the attributes of forecast informa-
tion, ranging from location to lead time to magnitude, and
pair them with appropriate actions? Several major prerequi-
sites to the use of early warning information for disaster risk
reduction exist: warnings, opportunity for action, and man-
date.
First, there must be a relevant early warning available.
In this paper, we focus specifically on hydrometeorological
disasters and the early warnings that are available through
weather and climate forecasting. Rainfall and temperature
forecasts for coming months, weeks, or days, exhibit some
skill in many parts of the world (Hoskins, 2013). These fore-
casts, where available, can indicate heightened risk of disas-
ter. According to a Foresight expert evaluation of forecasting
capacity, current science has “medium to high” ability to pro-
duce reliable forecasts for the timing of storms and floods
in a 6-day lead time in many locations (Foresight, 2012).
At the seasonal level, research indicates that an increased
probability of above-normal seasonal rainfall totals in stan-
dard forecasts is correlated with increases in the chances of
heavy rainfall events (Hellmuth et al., 2011). Indices of the
El Niño Southern Oscillation (ENSO), which are responsi-
ble for much of the predictability in seasonal forecasts, have
also been linked to flooding frequencies in more than one
third of the world’s landmass (Ward et al., 2014). The Famine
Early Warning System (FEWS) provides detailed forecasts
using both short and long-term information in Africa and the
Caribbean (Ross et al., 2009).
Table 1. Contingency table depicting possible scenarios for
forecast-based action.
Yes disaster No disaster
Yes forecast-based action Hits aFalse alarm b
No forecast-based action Miss cCorrect rejection d
Secondly, the opportunity for early action is not always
available within routine humanitarian operations; about 88%
of humanitarian financing is delivered only after disaster ef-
fects have already commenced (Kellett and Caravani, 2013).
In the case of Somalia in 2011, the Consolidated Appeal Pro-
cess for Somalia was funded at only 47% during several
months of urgent early warnings. In contrast, secured fund-
ing shot up to exceed 100% of the original request within 2
months after famine was declared. Ultimately, the appeal was
revised to nearly double the request for funding, because the
situation had deteriorated so far (Maxwell and Fitzpatrick,
2012).
Lack of funding based on early warnings is attributed to
protracted debate over the best strategy for intervention, in-
herent uncomfortableness on the part of donors to invest in a
situation that will likely arise but is not certain, the high con-
sequences of “acting in vain”, and the lack of responsibility
or accountability to act on early warnings (Ali and Gelsdorf,
2012; Hillbruner and Moloney, 2012; Lautze et al., 2012).
Post-disaster evaluations of the humanitarian responses to
this event call for mechanisms to trigger and incentivize con-
sistent early action based on available early warning infor-
mation, with responsible persons clearly designated (Bai-
ley, 2013; Ali and Gelsdorf, 2012; Hillbruner and Moloney,
2012).
Thirdly, the mandate to take action based on early warn-
ing systems is not well-defined. It is often unclear who would
be responsible for making this type of decision and what de-
cision is appropriate based on the early warning. If the an-
ticipated hazard does not materialize after the early action
is taken, the decision-maker is considered culpable for his
or her poor decision-making. This risk of “acting in vain” is
inherent in probabilistic risk information; many employees
are consequently reluctant to make decisions without 100%
certainty that the hazard will happen (Demeritt et al., 2007;
Suarez and Patt, 2004).
Should someone be willing to assume the risk of acting
based on an early warning, it is not clear at which thresh-
old of forecasted probability it is worth taking action. Pow-
ell et al. (2012) conclude that many losses during Hurricane
Sandy could have been averted had standard operating pro-
cedures (SOPs) been in place in more organizations, which
designate specific duties and responsibilities for hypothetical
situations.
Such SOPs would be based on thresholds of climate vari-
ables, similar to those calculated for post-disaster payments
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898 E. Coughlan de Perez et al.: Forecast-based financing
in index insurance programs (Leblois and Quirion, 2013;
Hellmuth et al., 2011; Barnett and Mahul, 2007). In fact,
forecast-based financing is informed by precedents that in-
tegrate seasonal forecasts into index insurance products. For
example, Osgood et al. (2008) propose a mechanism to in-
fluence the amount of high- yield agricultural inputs given
to farmers according to whether favourable or unfavourable
rainfall conditions are expected for the season. An El Niño
contingent insurance product was developed for the region
of Piura (northern Peru): a business interruption insurance
policy was designed to compensate for lost profits or extra
costs likely to occur as a result of the catastrophic floods
as predicted by a specific indicator of El Niño (known as
“ENSO 1.2”). Indemnities were based on sea surface tem-
peratures measured in November and December, which were
taken as a forecast of flood losses that would occur a few
months into the future (February to April). The insured entity
chooses the amount to insure (which must not be larger than a
maximum amount determined by an estimation of the largest
plausible flood losses). Designers of this instrument specifi-
cally targeted risk aggregators: firms that provide services to
numerous households or businesses exposed to El Niño and
related floods, such as loan providers and the fertilizer sec-
tor. This is likely the first “forecast index insurance” product
to receive regulatory approval (GlobalAgRisk Inc., 2010).
For a comprehensive analysis of insurance-related instru-
ments for disaster risk reduction, see Suarez and Linnerooth-
Bayer (2011).
3 Concept
We address these barriers of opportunity and mandate by
proposing a forecast-based financing mechanism coupled to
risk-based operating procedures. Based on the successes and
failures of previous efforts to act based on climate-based
early warning information, we elaborate three components
of a system for early warnings to become operational: (a)
information about worthwhile actions, (b) available funding
mechanisms, and (c) designated entities that are responsible
for taking the pre-planned actions. A systematic forecast-
based financing system integrates each of these three ele-
ments, contingent on the availability of (skillful) forecasts
for the region in question. The case of a surface water flood-
ing alert in England and Wales is used to demonstrate the
application of this framework.
3.1 Matching forecasts with actions
Depending on the impacts in question, there are a number of
actions that could be taken to prevent humanitarian outcomes
(Fig. 1); however, only a subset of actions will be appropriate
based on a specific piece of early warning information. Of all
the possible actions, we undergo a matching process to select
Figure 1. Idealized schematic depicting known risk of disaster im-
pacts over time. Known risk of flooding increases when forecasts of
rainfall are issued; the change in risk is a function of the probability
of the forecasted event. Selected actions will be a function of both
lead time (the difference between action based on long-term risk
and seasonal risk) and the magnitude of flood risk (the difference
between the far-right actions in both plots).
those that are most appropriate given the lead time and the
probability of the forecast.
In the case of England and Wales, the surface water flood-
ing warning service issues an alert based on the probabil-
ity (p) of rainfall intensity exceeding a 1-in-30 year return
period. Based on this, an extreme rainfall alert pilot was
disseminated directly to professional emergency responders
(Hurford et al., 2012). Of all the actions that could be taken
by the recipients, not all are possible to complete given the
lead-time of a specific forecast. From the larger list, actions
will be eliminated if they cannot be completed in the avail-
able time frame before the anticipated disaster. For exam-
ple, people are not able to build drainage canals based on a
short-term forecast, but could create teams to clear existing
drainage canals based on a seasonal forecast. In comparison,
flood response drills could be carried out within a few hours
or days of the forecasted disaster (Fig. 1). Many emergency
responders receiving the pilot alert indicated that a lead time
of more than two hours is necessary for most actions (Parker
et al., 2011).
Subsequently, actions need to correspond to the strength
of the specific forecast, such that high-regret actions are not
taken based on a very small increase in disaster likelihood.
For example, it would not make sense to evacuate based on
a low probability forecast, but perhaps flood response drills
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E. Coughlan de Perez et al.: Forecast-based financing 899
would be appropriate as they can withstand “acting in vain“
(Fig. 1). Assuming that action will be taken every time a
forecast reaches probability p, how often will the actor take
“worthy action”, in which the action was followed by a dis-
aster?
In the forecast-verification literature, there are a number of
studies using Table 1 to evaluate forecasts for their likelihood
of achieving “hits” for the variables that they are forecasting
(i.e. mm of rainfall). In this paper, we consider this 2×2 ta-
ble iteratively for each probability that could be issued by a
single forecasting system to identify thresholds at which it
is “worth” taking action (i.e. 10% chance of 10mm of rain-
fall in the coming 24h, vs. 20 % chance, etc.). Therefore,
forecast-based action will be triggered (top row of Table 2)
when the forecast issued shows a probability >=p; Table 1
therefore varies as a function of p. Using the results, we will
determine threshold levels of pthat can be used to trigger
humanitarian action to reduce the risk of disaster. nis the
sum of all boxes in the table, representing the total number
of units (i.e. days) in which a forecast could be issued.
For a forecast lead time and probability p, we derive the
variables in Table 1, to answer the following question: if we
take action every time the forecast exceeds the threshold,
how often our action be followed by a disaster, and there-
fore be worthwhile? To do this, we estimate the correct alarm
ratio R(p) (fraction of all forecasts of probability p) as
R(p)=a(p)
a(p)+b(p) R(p)=a(p)
a(p)+b(p) .(1)
In forecast-verification literature, this term is referred to
alternatively as the “frequency of hits” (Doswell et al., 1990)
and the “correct alarm ratio” (Mason and Graham, 2002). In
the UK, emergency responders indicated that if the correct
alarm ratio was less than 70%, “awareness raising” would
be the only feasible action (Parker et al., 2011).
In the case of advisory forecasts in the UK, 9 out of 36
advisories were followed by flooding in Hurford et al. (2012)
case study areas. If action had been taken on the basis of each
advisory, the correct alarm ratio is about 25% (2011). The
remaining 75% (1 R(p)) corresponds to the likelihood of
acting “in vain”.
Such actions will have economic consequences, which are
given by Table 3 (Richardson, 2012). Costs are represented
as C, and losses as L; they do not vary depending on the fore-
cast probability. For the “act in vain” category, there is often
a change to the original cost, 1C, perhaps reputational risk
or the need to dismantle preparations and move them back
to storage. The additional cost, 1C may be very significant;
the reputational risk of a false alarm could outweigh (quali-
tatively) the benefits of a worthy action. This is, of course, a
simplified representation of reality, not capturing, for exam-
ple, the probability that an action will be successful at pre-
venting the target loss. The cost of acting in vain might also
be different than the cost of worthy action, given that supplies
Table 2. Contingency table based on a forecast threshold of pto
trigger action.
Yes disaster No disaster
Yes forecast >=pHits a(p) False alarm b(p)
No forecast >=pMiss c(p) Correct rejection d(p)
Table 3. Contingency table of costs and losses as outcomes of
forecast-based action.
Yes disaster No disaster
Yes forecast-based action C C +1C
No forecast-based action L0
might need to be returned to warehouses, and efforts made to
address the “cry wolf” effect.
The discount rate is not acknowledged here, as most of the
actions take place on a timescale of less than a year. Time
discounting would therefore have a fairly insignificant im-
pact compared to the existing uncertainties. If the actions
lasted for many years, it would be appropriate to include
the discount rate, which could decrease the relative weight
of the benefits, assuming that they occur less frequently than
the costs. A more complicated version would also take into
account the probability density function of different magni-
tudes of disaster, but the general principles outlined here will
remain in effect.
Given this, we select actions for forecasted probability pin
which the losses in a business-as-usual scenario (no forecast-
based action at all) exceed the combined costs and losses in
a scenario with forecast-based action. All worthwhile actions
should satisfy the following:
L·a+c
n(p)> C ·a+b
n(p)+1C ·b
n+L·c
n(p). (2)
Not all disaster consequences can be expressed in eco-
nomic terms, therefore this relationship will also need to be
acceptable in qualitative terms by implementers. In addition,
many of these actions will have long-term benefits, regard-
less of disaster incidence (i.e. educational interventions to
promote hand-washing).
3.2 Funding mechanisms
The second component is a preparedness fund, a standard
funding mechanism for forecast-based financing that is des-
ignated for use before potential disasters. Funding from this
mechanism will be disbursed when a forecast is issued, sup-
plying enough money to carry out the selected actions, with
the understanding that occasionally funding will be spent to
“act in vain”. Financial procedures need to be in place to en-
sure the rapid disbursement of the fund when an early warn-
ing is issued, and accountability measures such that the fund-
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900 E. Coughlan de Perez et al.: Forecast-based financing
ing is only used for designated early actions that correspond
to that early warning.
The most basic method to determine how much funding
is needed for this mechanism over a specified time period is
to assume that all actions that were possible at the forecast
lead time and also satisfied Eq. (2) are funded every time the
corresponding forecast probability is issued. If Crepresents
the cost of acting based on one warning, the total needed for
the preparedness fund (T ) would therefore be represented as
T=C·a+b
n(p)+1C ·b
n(p). (3)
If there are several forecast probabilities, or several differ-
ent types of forecasts, at which action is advisable, the total
funding required would sum the funding needed for each of
the individual forecasts. Note, however, that consecutively
occurring forecasts do not need to repeatedly fund the same
action, and stipulations need to be made for the autocorre-
lation of forecasts. In the UK, the emergency rainfall alert
had three forecast levels: advisory, early, and imminent, that
corresponded to 10, 20, and 40% probabilities of exceeding
the given rainfall threshold. Because each forecast should be
matched with different actions based on lead time and prob-
abilities, the preparedness fund should account for the like-
lihood of each probability being issued, as well as their cor-
relation in time. If the forecast probability is defined as p,
the total amount of funding needed to react to all possible
forecast probabilities is represented as
T=
1
Z
0
C·a+b
n(p) dp. (4)
In operations such as the one from the example above, the
equation is simplified to the sum of the costs to take action
on each of the three categorical forecast alerts.
When disaster risk is substantially increased, R(p) in-
creases and more actions are eligible to be selected in Eq. (2)
for that particular forecast, and therefore greater amounts of
funding are disbursed when the chances of a disaster are
higher. In practice, additional factors will be included to
specify external drivers, such as the political repercussions of
repeatedly acting in vain, and the interaction effect between
actions. For example, if sand-bagging will prevent flooding
for 3 months, then it is not eligible to be carried out again
within 3 months of the original action, even if a “matching”
forecast is issued in the interim. In other cases, certain ac-
tions are prerequisites for others; evacuation can only be car-
ried out if evacuation shelters have been identified ahead of
time.
In many cases, there might be a ceiling on the amount of
money initially allocated (T ) to pilot this mechanism over
a specified amount of time. In this situation, the amount of
funding in the preparedness fund must be distributed among
the possible forecasts. Each forecast of probability pwould
have a corresponding disbursement amount (D) proportional
to the probability of disaster conditional on that forecast, and
this disbursement amount will need to be divided among all
actions that could be implemented based on that forecast.
If Dis small, only the most priority actions will be imple-
mented. Statistically, the Dwill be calculated such that T
will be fully spent at the end of the allocated time period.
This is represented as
T=
1
Z
0
a+b
n(p) ·D(p)dp, (5)
where D(p)/( a
n(p))should be equal for all values of p.
Using this method, there could be a number of categor-
ical forecast probabilities (p) calculated to receive a very
small disbursal amount, which might not suffice to carry out
any selected actions. This could be the case for a very com-
monly forecasted event. Comparing the disbursal results to
the cost of actions C(p), we eliminate categories of pfor
which D(p)<C (p). We then re-solve the above equations
for the reduced number of probabilities (p) until all disburse-
ments are greater than the cost of at least one of the actions
that should be implemented at each remaining probability p.
This method assumes that funding should be allocated ac-
cording to the likelihood of disaster, although this assump-
tion could be replaced by other priorities, such as allocating
funding according to the effectiveness of the actions. It would
also be possible to set time-varying thresholds to be more
conservative in spending at the beginning of available time
period, and more free with spending the remaining amount
as the end of the budget period draws near. When calibrat-
ing the system over a longer time period, we recognize that
thresholds may vary to reflect progress in insights or chang-
ing drivers.
3.3 Responsibility
Once the forecast alert levels have been paired with appropri-
ate actions, the actions must be taken every time the forecast
alert is issued. In England and Wales, 86 % of emergency re-
sponders who received pilot extreme rainfall alerts in 2008–
2009 said that the alerts were useful to them, but only 59%
reported that they took any action as a result of receiving the
advisories. Organizational processes need to be defined to
assign responsibility to act based on warnings; in this case,
emergency responders indicated that they were still clarify-
ing internal plans to react to these warnings (Parker et al.,
2011).
In response to this, we propose the development of an
organization-specific set of standard operating procedures
that specify each selected forecast, the designated action, the
cost, and the responsible party. Whenever the alert is issued,
such as a forecast of a certain amount of rainfall, the des-
ignated action is taken by the responsible party, using funds
from the financing mechanism that will be immediately made
Nat. Hazards Earth Syst. Sci., 15, 895–904, 2015 www.nat-hazards-earth-syst-sci.net/15/895/2015/
E. Coughlan de Perez et al.: Forecast-based financing 901
available. It is assumed that there will be instances of acting
in vain. Based on the results of each action, stakeholders can
continually evaluate and update the information used to cre-
ate the SOPs, ensuring ongoing effectiveness of the mecha-
nism.
4 Pilot applications
In Uganda and Togo, the National Red Cross Societies will
be piloting this approach to quantify the relationship be-
tween forecast probability and resource disbursement with
technical support from the German Red Cross and the Red
Cross/Red Crescent Climate Centre from 2012 to 2018. Re-
search and development of the standard operating proce-
dures is funded by the German Federal Ministry for Eco-
nomic Cooperation and Development (BMZ), complemented
by project funding for long-term disaster risk reduction ac-
tivities to address disaster risk at longer as well as short time
scales.
In both countries, the pilot application of this preparedness
fund will focus on flood disasters. In northeastern Uganda
and along the Mono River in Togo, flooding disasters are re-
current and a major source of humanitarian losses. In five
target districts of northeastern Uganda, flooding and extreme
rain account for more than half of all disasters recorded in
DesInventar databases (UNISDR et al., 2011). In Togo, the
Red Cross has developed a set of colour-coded river gauges,
such that communities upstream observing the river move to
a “red” level volunteer to notify communities downstream
that the water is on its way; the actions taken based on the
existing information will form a basis for the larger variety
of “early actions” that will be financed under the new system.
To assess possible actions that could be funded in an-
ticipation of a flood, the Red Cross/Red Crescent Climate
Centre designed a participatory game that can be played
both with disaster-prone communities and with humanitar-
ian staff; these types of “serious games” can be used to foster
discussion and creativity in a collaborative setting (Mendler
de Suarez et al., 2012; Maenzanise and Braman, 2012). The
game begins with a brainstorm of actions to prevent specific
disaster impacts, and designates a portion of the participants
to represent a “flood”, who penalize unrealistic actions and
note which actions require funding. This panorama of possi-
ble actions ranges from planting a variety of crops to stock-
ing water purification tablets; actions are grouped according
to whether each one is possible to accomplish at specific lead
times that correspond with available early warning informa-
tion: observed rainfall, short-term rainfall forecasts, and sea-
sonal rainfall forecasts (Fig. 2). Clearly, cropping decisions
cannot be made with a lead time of days before a disaster,
while purchasing medical supplies might be possible within
24h.
For each possible threshold of early warning information,
we evaluate the risk of flooding conditional on the forecast by
using a coarse hydrological model to simulate the change in
likelihood of inundation. In the participatory game, disaster
managers and community members will be asked to describe
the consequences of worthy action and acting in vain for each
action that is suggested, in both qualitative and quantitative
terms. In the case of purchasing water purification tablets,
acting in vain will result in an opportunity cost relative to
investment in other activities, but worthy action could pre-
vent the loss of life in a cholera epidemic. Ultimately the as-
sessment of whether consequences and likelihood of acting
in vain outweigh the consequences and likelihood of worthy
action (Eq. 2) will be a decision on the part of disaster man-
agers based on economic and social assessments. Combining
those results with the consequences elicited in the simulated
flooding game, we will match forecast thresholds with rele-
vant actions.
In comparison with the flood alert system from England
and Wales that is described above, the actions developed for
standard operating procedures in Uganda and Togo are likely
to be somewhat different. In particular, the UK alert sys-
tem focused on surface water flooding, while riverine flood-
ing and water logging are likely to be of greater interest in
Uganda and Togo. For the latter, longer lead-times can be
expected for forecasts, although the forecasting skill might
not be optimal for lack of observational data. This will likely
allow for actions that target the spread of water-borne dis-
ease, for example, which are less of a problem in the UK. In
addition, there are differences in forecast skill between the
UK and equatorial Africa; the latter has less data available,
but potentially larger skill at the seasonal level due to tele-
connections with the El Niño Southern Oscillation.
Funding for this pilot mechanism has been provided by
the German Red Cross, and a set amount is secured for each
country (EUR 100000 and 50000 for Uganda and Togo,
respectively) in a preparedness fund. Because the funding
amount is pre-determined, this will be used as a constraint
on how many of the eligible actions can be funded in a given
year (Eq. 5). Matches of forecasts and actions will be re-
viewed and adjusted by disaster management staff familiar
with the region. When a final product is acceptable to ev-
eryone, results will be codified in SOPs that indicate fore-
cast levels of alert, corresponding actions, responsible par-
ties, and the funding that will be released to ensure the ac-
tions are taken. The funding in this case is intended as a pi-
lot, and is not a sustainable stream post-2018; mechanisms to
refill and expand this pilot will be investigated.
With the methodology proposed here, specific actions can
be selected that are worthwhile investments based on early
warning information. While standard funding mechanisms
and operating procedures are necessary to ensure consistent
action based on forecasts, it is as of yet unclear what portion
of total disaster funding should be allocated to such forecast-
based financing operations. While results vary depending on
www.nat-hazards-earth-syst-sci.net/15/895/2015/ Nat. Hazards Earth Syst. Sci., 15, 895–904, 2015
902 E. Coughlan de Perez et al.: Forecast-based financing
the programme itself, positive benefit-cost ratios have been
shown for a variety of long-term disaster risk reduction pro-
grammes (Mechler, 2005). Based on the initial results from
pilots of this concept, a similar probabilistic benefit/cost ra-
tio (B/ C) can be assessed for this methodology, as in Eq. (6)
(not corrected for discount rate).
B
C=R1
0L·a
n(p)C·a+b
n(p)dp
T.(6)
Comparing results to the B/ C ratios for long-term disaster
risk reduction will indicate the marginal benefit of additional
funding spent in either category, thus reshaping the funding
landscape for disaster risk reduction and preparedness and
focusing on the most impactful actions at each timescale.
5 Discussion
As incentives emerge to use forecasts for disaster prevention
and preparedness, forecasting capability will be a major con-
straint in maximizing the potential of such early warning sys-
tems. Individual cases of “missed events” could draw criti-
cism to such investments in forecasting; it is key to weigh
the investment in forecasting capacity or other aspects of an
enabling environment for forecast-based financing with the
possible benefit of such a system over time. Africa in par-
ticular has a lack of functional weather stations, including
synoptic stations, which limit our ability to forecast mete-
orological events with skill (Rogers and Tsirkunov, 2013).
Investments in both hardware and software in developing
country meteorological and hydrological services is needed
to address this gap. In the interim, recent research to merge
existing sparse observations with satellite data can aid in de-
veloping more precise understandings of climate given the
information available historically (Dinku et al., 2012). Any
increase in the percent of disasters foreseen (also known as
the hit rate) a/a +cor an increase in the correct alarm ratio
a/a +bdue to increase in forecast skill will directly increase
our ability to prevent and prepare for disasters; this increase
can be estimated directly using Eq. (7).
This framework quantifies the intuitive notion that many
practitioners already have about when acting early may be
worth it. This quantification also helps them make the case to
donor agencies for such early action, which is currently often
not implemented because the financing for it is not available.
Of course such quantification is not trivial – it does require
context-specific analysis. In that analysis, the lack of histor-
ical disaster data will pose certain constraints. The impact
of uncertainty in probability estimates, both of disaster im-
pacts and of forecast probabilities, needs to be assessed, and
thresholds of certainty established for identifying meaning-
ful results. Local knowledge about the recurrence period and
impact of extremes can be incorporated when calculating the
fund, even if it carries inherent uncertainty.
In this vein, additional research will be required to
achieve a large-scale application of forecast-based financing
schemes. In particular, calculating the risk of hazards based
on forecasted rainfall should be assessed and verified with
hydrological estimates using statistical and dynamical tech-
niques.
Most of the variables considered here, from action options
to forecast skill, vary sharply between regions, and therefore
forecast-based financing systems must be designed for a spe-
cific hazard at a specific geographical scale. Standard oper-
ating procedures developed in one area are unlikely to have
value if applied indiscriminately elsewhere. Further research
should study the effect of varying each of these parameters,
and the resulting differences in forecast-based financing po-
tential across regions and hazards.
Calibrating cost and benefit estimates will be difficult. For
example, the cost of acting or the cost of acting in vain might
need to be estimated iteratively, based on whether the actor
had recently acted in vain, and would therefore be reluctant
to take a risk again. Similarly, a “miss” by the system could
cause a lack of confidence in the system itself. The equations
here could be extended with a “risk perception” factor that
changes in response to false alarms or successful interven-
tions. This would be calibrated with information from the
practitioners. All cost estimates should undergo sensitivity
analyses in order to assess the robustness of the value of this
funding mechanism; if we perturb our estimates of probabil-
ities and costs in the above equations, how does this affect
the results? At what point does uncertainty in these values
greatly influence the selection of actions and the estimation
of their benefits? In addition, there will be interaction effects
between short-term and long-term investments, the latter of-
ten constraining the ability to make decisions in the short-
term.
6 Conclusions
Climate information presented as early warnings are only as
valuable as the actions that are taken in response to the infor-
mation, even if the information is a perfect warning of future
events. While weather and climate forecasts do not exhibit
perfect skill, tailoring of forecast information to the opera-
tional contexts of the humanitarian sector can dramatically
increase the uptake of existing forecast products.
In this light, innovations need to lead to improved tailoring
of the information itself to better serve the needs of the target
decision-makers sector, rather than simply tweaking the vi-
sual display of existing information (Rodó et al., 2013; John-
ston et al., 2004). Currently many disaster warnings issued
by established early warning systems in developed countries
go unheeded for lack of standard plans for forecast-based
action (Kolen et al., 2013). At the seasonal level, standard
forecasts provide little information on the likelihood of ex-
treme events. The Global Framework for Climate Services
Nat. Hazards Earth Syst. Sci., 15, 895–904, 2015 www.nat-hazards-earth-syst-sci.net/15/895/2015/
E. Coughlan de Perez et al.: Forecast-based financing 903
has made disaster risk reduction a thematic priority area, and
seeks to encourage dialogue between forecast producers and
users to better identify opportunities and needs for tailoring
this information (Hewitt et al., 2012).
Forecast-based financing systems are an excellent op-
portunity to foster and operationalize such dialogues. The
system outlined above makes use of existing forecast-
verification methods in conjunction with user-defined infor-
mation on risk reduction costs and disaster losses. When
housed in such a system, this information can break down
the barriers of opportunity and mandate that currently pre-
vent the systematic use of forecasts in the humanitarian sec-
tor, and develop SOPs that ensure ongoing return on invest-
ment. The net benefit of such a system will only be clear in
the long term, as the hits and false alarms begin to accumu-
late and converge on their true frequency.
Ultimately, the value of forecast-based financing systems
will be greater than simply the losses avoided when the fund
is released. If such a system is in place, actors in that re-
gion will be aware that many disaster effects are likely to be
prevented due to forecast-based action. Because of this, ac-
tors can focus on development investments with less concern
that a disaster event will suddenly demolish their investment.
Further pilots and research to quantify the value added of
forecast-based financing schemes is needed to provide the
evidence base for forecast-based funding and the widespread
development of climate-based SOPs.
Acknowledgements. Research and development of the standard op-
erating procedures described in this paper was funded by the Ger-
man Federal Ministry for Economic Cooperation and Development
(BMZ). The Togo and Uganda Red Cross societies have generously
agreed to enable additional research and implementation in the field,
with support from the German Red Cross.
The forecast-based financing idea emerged through participatory
game sessions designed with Janot Mendler de Suarez, in the con-
text of the project “Forecast-based humanitarian decisions” funded
by the UK Department for International Development (DFID) and
the Netherlands Directorate-General for International Cooperation
(DGIS) for the benefit of developing countries. However, the views
expressed and information contained in this paper are not necessar-
ily those of or endorsed by DFID or DGIS, who can accept no re-
sponsibility for such views or information or for any reliance placed
on them. Additional research support was provided by the Norwe-
gian Research Council, through the project “Courting Catastrophe?
Humanitarian Policy and Practice in a Changing Climate”. Brenden
Jongman received financial support from an NWO-VICI grant on
global flood risk (grant agreement number 45314006).
The authors are also grateful for the support of Geert Jan van Old-
enborgh.
Edited by: T. Glade
Reviewed by: two anonymous referees
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