Devex Invested: The climate insurance lottery low-income countries can’t afford

It’s hot — and getting hotter. We all know that. January 2025 was the hottest January on record, following 2024, which was the warmest year on record. For investors eyeing climate-vulnerable markets, that heat translates into risk: Why put money into infrastructure if the next storm can wash it away?

The answer at the heart of this debate is not a shiny new technology but a decidedly unsexy tool: insurance. But it’s causing a rift in the climate community. Advocates say we need more climate-friendly insurance mechanisms to unlock billions in private capital for climate adaptation. Critics argue it’s an unfair burden, leaving vulnerable countries to pay premiums for disasters they didn’t cause — and that many of the existing tools don’t work well, sticking countries without a payout when catastrophe strikes.

The Bridgetown Initiative is working with the Insurance Development Forum to push products such as parametric insurance — where payouts are tied to thresholds such as rainfall or wind speed. The approach reduces the cost of sending out people to assess damage by automatically linking payouts to climate catastrophe. Supporters argue these tools create the safety net needed to bring capital into climate-vulnerable countries.

But these models have proved to be less than perfect. After Hurricane María, Puerto Rico’s parametric insurance, which was tied to wind speed, didn’t pay out because the damage was caused by flooding, not wind. And in Jamaica, a “catastrophe bond,” which comes with higher premiums, didn’t trigger after Hurricane Beryl last year, because the air pressure required for a payout wasn’t hit, leaving the island empty-handed. Some economists say these products look less like protection and more like a pricey gamble for countries least responsible for the crisis.

“If I had hair, I would be tearing it out in frustration,” says Ilan Noy, a professor focused on the economics of disasters and climate change at Te Herenga Waka–Victoria University of Wellington in New Zealand. “The insurance sector is pushing [parametric insurance] on mostly low-income countries, but we don’t have good enough risk models so they think they’re buying insurance, but really they’re buying a lottery ticket.”

Read more: Will climate insurance save us or fail us? (Pro)

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Fortune telling

A little over a month after the Fourth International Conference on Financing for Development, or FfD4, experts say that while the talks may not have resulted in solid commitments, the discussions have changed the culture of development for the next 10 years.

Here are key themes they expect to stay atop the development agenda:

• Debt: “Before Sevilla, the debt crisis was a silent one. Now I think nobody can say it’s silent,” said Mahmoud Mohieldin, the United Nations special envoy on financing the 2030 Agenda, during a recent Devex Pro briefing. Experts highlighted new commitments on debt, including an intergovernmental process to build a better debt architecture, alongside calls to strengthen regional institutions and rethink development models as official aid budgets shrink.

• Regionalism: The key to change will be a “rediscovering of regionalism,” with “regions … rediscovering themselves,” said Mohieldin, pointing to Europe, the African Union, and the Association of Southeast Asian Nations, or ASEAN. Philanthropies are shifting too, with Eric Pelofsky of The Rockefeller Foundation describing “a turn — a pivot at Sevilla — towards more self-reliance,” adding, “when the economic situation changes so dramatically, necessity drives change.”

• Offensive blended finance: Convergence CEO Joan Larrea said the next decade will require countries “to play offense as well as defense,” stressing that “we need to make sure that growth happens as efficiently as possible.” She called blended finance an “entry point” to “rally the domestic capital into investing in its own infrastructure, its own economy,” and noted that insurance companies could serve as “advisers to transactions.”

Read: What to expect from the next decade of development finance (Pro)

Chopping block

The U.S. Millennium Challenge Corporation survived the Trump administration’s foreign aid review — but just barely. While the agency remains intact, more than half of its programs, including those in Kenya, the Philippines, Indonesia, Zambia, and Malawi, are slated for cancellation, my colleague Adva Saldinger reports. In a statement, the agency said that its remaining work will align with an “America First” approach, but critics warn the cuts could weaken U.S. influence abroad and hand China an advantage. As the agency’s portfolio shrinks, questions linger about new programs, leadership, and operational priorities.

The MCC board, chaired by the U.S. secretary of state, is expected to make the final call this month on the fate of these programs.

Read: Millennium Challenge Corporation will survive, but many programs might not

Funding insight: MCC in numbers — the grants, countries, and programs at stake (Pro) 

Complex carbons

The Voluntary Carbon Markets Integrity Initiative, or VCMI, has launched a toolkit to help governments navigate international carbon market rules and use them to finance national climate plans. The resource arrives as countries begin implementing Article 6.2 of the Paris Agreement and just weeks before the deadline to submit updated emission-cutting targets.

The tool kit explains when and how to engage with voluntary carbon markets, how to build strong institutional frameworks, and how to ensure environmental and social integrity. Looking ahead, we could see more of a push to integrate carbon markets with agriculture — a sector that accounts for roughly 1 gigaton of carbon dioxide emissions each year. The toolkit could help governments explore how farmers and land managers could tap carbon markets to fund climate-smart practices.

Read: A new how-to guide on carbon markets

Jargon junction: Decoding blended finance

Blended finance is the strategic use of public or philanthropic capital to mobilize private investment for development outcomes. This is typically done with a layered finance structure that “blends” concessional (risk-tolerant) finance with commercial finance to make projects investable.

Think of it like a cake: The bottom layer is the “junior tranche” — the public or philanthropic capital. The top layer is the “senior tranche” — the safer amount that usually comes with a return to attract private investors.

A group of researchers at Amundi, an asset management company, recently published a paper showing that if you minimize that bottom, riskier layer and increase the senior, safer tranche, you can attract more private investors and decrease the amount of public subsidies needed. Paddy Carter, the head of development economics at British International Investment, wrote a helpful blog post explaining how this is relevant for development professionals.

He said that minimizing the risky layer doesn’t necessarily mean minimizing the subsidy, however. Instead, he said the focus needs to be on making sure the private investors “[get] no more of a return than needed to make them willing buyers.” Calculating the perfect size of the junior risky layer is really complicated for development projects, however, because there’s so much uncertainty about the loans and their risks. Instead, we need models and negotiation to get a “good enough” structure to attract investors without giving away too much subsidy.

“Precise numerical subsidy minimisation is difficult in the context of blended finance, but good approximations exist, and we should not let perfect be the enemy of the good in a nascent market,” Carter wrote.

Meal deals

Governments are increasingly taking the lead in expanding school meals, combining creative financing with local food sourcing, climate-smart menus, and cross-country collaboration, according to an interview with Carmen Burbano de Lara, director of the School Meals Coalition.

In 2022, 418 million children received school meals globally, up 30 million since early 2020, alongside a $5 billion rise in investment. Countries such as Ethiopia and Kenya are scaling programs rapidly, with Ethiopia expanding coverage from 1.6 million to 7.5 million children since joining the School Meals Coalition in 2021.

Innovative funding mechanisms, including debt swaps and taxes on public “bads” such as soda and cigarettes, are boosting resources for school meals, while technology such as the World Food Programme’s School Meal Planner Plus app helps governments optimize menus based on local production, nutrition, and cost.

Burbano de Lara calls the effort “probably the most important development success story in recent years,” highlighting how governments, donors, and private sector players are converging to improve child nutrition and stimulate local economies.

Read: National leadership and innovative financing fuel a school meals boom

What we’re reading

China’s overseas lending is shifting: Commercial banks are leading more co-financed deals, green projects are growing, and Belt and Road Initiative countries face both new opportunities and ongoing debt challenges. [Dialogue Earth]

As the Asian Infrastructure Investment Bank turns 10, its accountability for local communities and environmental impacts remains untested, even as it has financed $60 billion in projects worldwide. [Asia Times]

Africa holds 40% of the world’s solar potential and vast climate-smart resources, yet structural barriers in finance keep its clean energy and agriculture ventures trapped at subscale. [Techpinions]