Will climate insurance save us or fail us?

January 2025 was the hottest on record, capping a year that was the planet’s warmest ever and saw greenhouse gas levels reach highs not seen in millions of years. As climate change destroys homes and displaces millions, many are wondering how to get the private sector to invest in resilient infrastructure if climate disasters can wipe it all out. The tool at the heart of these conversations is — yawn — insurance. Some say, where there’s insurance, there’s a way. After all, when a project is backed by the safety net of insurance, an investor feels safer putting their money into it. “Insurance is one of the core requirements for us to be able to mobilize capital, for us to be able to invest in a project, be it political risk or climate risk or whatever the case may be,” said Wendy Mlotshwa, an ESG specialist in the fixed income team at Ninety One, a global investment manager that partners with the Emerging Africa Infrastructure Fund, or EAAIF, on these projects. But others — both academics and development finance officials —- say that vulnerable countries are paying higher insurance premiums for risks they are not responsible for causing. They also note that some of the innovative tools built specifically for climate disasters are not providing payouts when countries need them the most. Instead, they want to see greater private investment in systemic solutions for resilient infrastructure and accurate data collection so that where insurance is used, it can be based on an accurate assessment of risk. “Insurance and re-insurance [insurance for insurance companies] work best when events are uncertain and infrequent, such as once-in-a-thousand-year events. The rising certainty of more frequent losses is not insurable,” Avinash Persaud, special adviser on climate change to the president of the Inter-American Development Bank, told Devex. “There is also the moral issue that victims would be paying for the actions of others.” Instead, he advocates investing in resilience to make losses "uncertain, infrequent, and insurable again. Only then can insurance step back into the picture.” A bridge over troubled waters One of the key tools for those arguing in favor of insurance is parametric insurance, which is linked to certain climate-related thresholds such as rain volume or wind speed. Once the threshold is reached, the insurance company pays out, whether or not any damage was actually sustained. Parametric insurance is cheaper and easier for insurers because it doesn’t require a full risk assessment. Instead, they only need to model the likelihood that rainfall surpasses a certain depth, for example. No risk assessment also means quicker access to funds for the affected countries, and that insurance companies can’t deny claims based on subjective assessments. In June, the Bridgetown Initiative partnered on a report and proposal with the Insurance Development Forum, a public-private partnership led by the insurance industry and supported by international organizations to roll out projects in lower-income countries. The idea is to use Bridgetown’s influential platform and IDF’s technical expertise in risk assessment to encourage insurers to harness tools such as parametric insurance and increase their engagement with emerging markets. For Bridgetown, the goal is to unlock the capital held by insurance companies — estimated at $40 trillion globally in 2024 — to help bring private investment into climate-vulnerable nations. “Anyone who has large amounts of money, I’m interested in having a conversation around how some of that gets channeled to support resilience,” Pepukaye Bardouille, director of the Bridgetown Initiative and special adviser on climate resilience to the prime minister of Barbados, told Devex. Their report says that insurance plays a “critical role in reducing countries’ exposure to disaster-related fiscal shocks and absorbing economic losses.” It goes on to specifically mention mechanisms such as parametric insurance as helping distribute the cost of extreme weather events and providing access to “rapid liquidity after a disaster.” IDF has the ear of some of the biggest insurance firms: AXA, Allianz, Willis Tower Watson, Munich Re, AIG, etc., all of whom are registered IDF members. As part of their ongoing collaboration, Bridgetown and IDF will improve their access to emerging markets by helping clarify government regulations, increasing their familiarity with risks in a specific country, and providing guidance on which projects are resilient enough to insure, explained Ekhosuehi Iyahen, the secretary-general of the Insurance Development Forum. “There are gains that we can make if we just work with governments a bit closer to figure out the potential shocks and then apply resources beforehand so at the end of the disaster, you're not then scrambling to figure out where the resources are going to come from,” said Iyahen. “This is really important, because the longer it takes to respond to a disaster, the higher the cost. This is a lever to say: How do you actually invest in resilience?” “It’s very important for us to have insurance because it creates an enabling environment for lenders or investors to come into transactions that they would otherwise never be able to invest in,” said Mlotshwa of Ninety One. “But in order for those insurance companies to come in, they also need a level of comfort that certain risks have been mitigated by the lenders. We are well-positioned as a lender to provide long-term capital and provide that comfort.” Parametric paradox But critics say that tools such as parametric insurance don't always fulfill their promise. A house could be destroyed with wind speed up to 89 miles per hour, and if parametric insurance kicks in when it hits 90 miles per hour, the insured could be left in the lurch. “If the insurance is perfectly correlated with the damage, that’s great,” said Ilan Noy, the chair of the department of economics of disasters and climate change at Te Herenga Waka—Victoria University of Wellington in New Zealand. “But we don’t have good enough risk models.” Hurricane María in 2017 caused significant destruction in Puerto Rico. Hundreds of thousands of homes were destroyed, 80% of the island’s crop value was wiped out, and the power grid was demolished. Puerto Rico had parametric insurance, but the policy was triggered by wind-speed levels, and the damage was caused by rainfall and flooding. In the end, the insurance didn’t provide adequate coverage. A similar situation unfolded in Zambia in 2019, when the country experienced extreme drought. Zambia had parametric insurance, but it was dependent on a lack of rainfall. The country experienced just enough rain that year to keep it from qualifying for the payout. Noy also feels that pushing insurance to low-income countries is irresponsible in situations when the cost is high and information on the risk and asset exposure is limited. Persaud of IDB echoed this point, arguing that realistic premiums would be far too high for insurance or reinsurance companies to actually foot the bill. “Donors who support insurance as a mechanism for addressing loss and damage and resilience, who often come from countries with large reinsurers, respond genuinely that they are prepared to offer concessions on premiums,” Persaud told Devex. “The harsh reality is that if loss and damage is $200bn a year in developing countries, and they were fully insured, the annual premiums would be more than $200bn. No donor is footing much of that, that’s more than all the overseas development assistance.” The lottery Insurance companies and some development banks are pushing parametric insurance worldwide. In 2023, the global parametric insurance market was valued at $18 billion. By 2033, it’s expected to rise to $34.4 billion, according to a report by Allied Market Research. The World Bank has also advocated parametric insurance and similar products such as catastrophe bonds, in which vulnerable countries pay a premium for a bond linked to a specific disaster. Catastrophe bonds have also come under criticism, specifically in Jamaica following Hurricane Beryl in 2024. The World Bank had helped to price the country’s catastrophe bond — Jamaica was paying 7% above the U.S. Treasury rate per year — but the storm, which was one of the strongest the island had ever weathered, did not trigger a $45 million payout because the air pressure required for the bond to be paid out was not reached. These bonds are even more contentious than parametric insurance in some ways, because the island had paid a premium. “If I had hair, I would be tearing it out in frustration,” said Noy. “The insurance sector is pushing it 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.” Mlotshwa, the expert at Ninety One, recognizes these concerns, but said parametric insurance has its place. “Parametric insurance has a rigid framework compared to traditional indemnity insurance,” she wrote to Devex in an email. “That said, it … can be effective for covering business interruptions where there was no physical damage and for ensuring high risk assets are hard to insure through conventional means.” She noted that this type of insurance might be more suitable for agricultural or national disaster response and recovery. Iyahen called insurance “one component of a broader, layered financial strategy.” “There’s no magic wand here,” said Bardouille. “But we thought that putting our heads together to figure out how we can bring insurance to the table, rather than shouting at them to go find a table to sit at, would be much more productive.”