Introduction

Insurance plays two roles in climate finance: supporting financial resilience and recovery after climate-related disasters, and managing risks associated with investments in climate resilience and the low-carbon transition. This paper examines the role of public development banks (PDBs) in expanding physical climate risk insurance in emerging markets and developing economies (EMDEs), drawing on desk research, case studies, and over 20 in-depth interviews with PDBs, insurers, policymakers, and secretariat members of public-private insurance forums (p.3).

The climate-related insurance ecosystem in EMDEs

Insurance uptake in EMDEs lags behind other sovereign risk mitigation tools. In 2023, insurance and catastrophe bonds represented less than 30% of pre-arranged risk finance mechanisms used in EMDEs, while contingent disaster loans and grants accounted for 68% (p.4). Global economic losses from natural hazards reached record highs in 2024, with losses exceeding 5% of GDP in 12 countries between 2019 and 2023, and in some cases exceeding 20–50% (p.3). In 2024, reinsurance broker Gallagher Re estimated that only 37% of the USD 417 billion in losses from natural disasters globally were insured (p.4). Total insurance premiums written account for approximately 12% of GDP in advanced economies but only 2% in EMDEs (p.4).

Products suited to addressing physical climate risks in EMDEs

Parametric insurance holds the most transformative potential in EMDEs, offering payouts from as short as 24 hours to 30 days, compared to several months or years for traditional indemnity insurance (p.5). It involves lower administration costs and reduces moral hazard risk, though it introduces basis risk where payouts may not always match actual losses.

Barriers to insurance access and uptake in EMDEs

Five key barriers were identified: (1) a lack of well-developed pipelines of insurable projects; (2) insufficient local capital bases and underdeveloped insurance markets; (3) outdated and fragmented regulatory frameworks; (4) poorly designed public subsidies; and (5) data gaps. Global insurance premiums for natural catastrophes are projected to increase by 50% by 2030, reaching USD 200–250 billion (p.5), likely widening the protection gap further.

Unique positioning of PDBs to expand insurance in EMDEs

Only 7% of insurance and guarantee products in EMDEs have been provided by private insurers (p.7), highlighting the critical role of PDBs. National development banks (NDBs) can convene domestic stakeholders and co-develop locally tailored insurance solutions. Regional development banks (RDBs) can foster cross-border coordination, develop shared regional data infrastructure, and coordinate sovereign risk pools. Multilateral development banks (MDBs) operate at a systems level; for example, the Asian Development Bank’s Master Framework Agreement with ten global insurers mobilised up to USD 2.75 billion of private capital (p.17), and the World Bank issued a USD 150 million catastrophe bond providing Jamaica with financial protection for four hurricane seasons (p.18).

Recommendations and further research areas

Four areas of action are recommended: building an enabling environment for local and regional insurance markets; promoting co-development and co-investment for insurance solutions; providing targeted subsidies alongside technical assistance, including time-bound premium subsidies with clear sunset clauses; and increasing education and awareness regarding insurance solutions among public-sector decision-makers. Areas identified for further research include the regulatory environment enabling NDBs to scale insurance solutions, integrating financial instruments with national climate plans, and insurance for nature and ecosystem-based adaptation.