For example, insurance tends to be cost-effective only for extreme events, while contingency funds are more cost-effective for more frequent, lower intensity, and thus less costly shocks. Combining different instruments and using different ones for different types of shocks— known as “risk layering”—can derive significant cost savings. Which instruments will be most appropriate for a given adaptive social safety net and country differs from case to case, depending on varying risk profiles, associated costs, and previously existing response funding arrangements. The most appropriate mix of instruments can be adopted in the form of a disaster risk financing strategy (box 2.7). BOX 2.7: Layering Risk Financing Instruments for Adaptive Social Protection: The Case of Kenya
The Hunger Safety Net Program (HSNP) provides regular cash transfers of around US$27 per month to more than 100,000 extremely poor households in Northern Kenya. The HSNP also includes a scalability mechanism that provides temporary emergency cash transfers to affected households following weather-related disasters.a Since 2014, it has been triggered more than 20 times and disbursed more than US$26 million to more than 275,000 households. The HSNP scale-ups are triggered using an early warning indicator—the vegetation condition index, which reflects drought conditions on the ground. When the pre-agreed trigger threshold is met, poor households in drought-affected areas receive temporary transfers, up to a maximum of 75 percent of the population in affected areas.b HSNP scale-ups are currently financed through the government`s budget and also supported by the World Bank and the United Kingdom through various operations. In 2020, the government adopted the HSNP financing plan, which is embedded in the country’s National Disaster Risk Financing Strategy approved by the government in May 2018.c This sets out a financing approach to meet the cost of transfers in 98 percent of drought years via a risk-layering approach: for more frequent, smaller (and thus less costly) droughts, scale-up funding would come from an emergency transfer fund, replenished by annual budget allocations. For the more exceptional and expensive severe droughts, the Government of Kenya is considering the option of funding to come from a sovereign insurance policy. This combined approach aims to protect the government budget against high HSNP payouts and to reduce the volatility of government contributions. The sovereign insurance policy has not yet been purchased, and the government has so far covered the financing needs through budget allocations.d a. World Bank (2018a). b. Calcutt, Maher, and Fitzgibbon (2021). c. World Bank (forthcoming a). d. World Bank (forthcoming b).
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