Community-based risk management refers to the strategies adopted by households to mitigate the impact of shocks and cope with risk. Risk can be classified as idiosyncratic, meaning one household’s experience is typically unrelated to neighboring households’, or covariate, meaning that many households in the same locality suffer similar shocks.

Examples of idiosyncratic shocks are illness (chronic rather than infectious disease), crop yield shocks, and singular events (e.g., property loss due to fire or theft). Covariate shocks occur because of natural disasters, war, price instability, financial crises, etc., to which almost everyone in a community is vulnerable. Examples of community-based risk management arrangements in developing countries include indigenous, informal arrangements such as rotating savings and credit groups, funeral insurance societies, transfers and reciprocal gift-giving. There are also newer, semi-formal community-based microfinance, storage and insurance arrangements, typically introduced by the government or an NGO. It is important to note that community-based arrangements and strategies to manage risks can, in principle, help households cope with idiosyncratic shocks but not with covariate shocks, unless communities find a way to transfer risk outside the community or to others within the community who are willing and able to take on more risk.

Since social funds work closely with a range of community, public and market agents, they are in a good position to work with community-based institutions to improve their capacity to manage risk. Possible interventions could be supporting burial insurance societies and health insurance associations. Other examples in which social funds could contribute to reducing both income and asset risk includes the support of public health programs for disease, pest and pathogen control. Social funds might also subsidize the initial contributions needed by poor households to join an insurance pool, or underwrite the start-up costs needed to create relevant insurance products.