Executive summary

Wildfire and flood risks are accumulating faster than existing financing structures can absorb. While insurers use catastrophe bonds to transfer risk, they lack mechanisms to fund mitigation. Governments currently carry residual liabilities informally and unpriced, often budgeting for recovery rather than prevention. The proposed architecture reprices catastrophe bonds using government credit enhancement. A government takes a defined first-loss position using discounted zero-coupon collateral, lowering the coupon investors require. The spread between the insurer’s premium and the lower coupon funds landscape-scale mitigation, such as watershed restoration and fuel reduction.

Introduction

Natural assets like forests and floodplains can maintain themselves once restored past a critical degradation threshold. However, restoring this capacity requires large, concentrated upfront investment. Current financial systems are built for assets requiring perpetual maintenance (grey infrastructure) rather than self-sustaining natural infrastructure. The report argues for a mechanism that converts future avoided losses into present financial value, acknowledging that climate disasters have become systemic crises due to decades of deferred investment.

The three-way responsibility problem

No single actor—homeowners, local governments, or insurers—is behaving irrationally, yet their collective decisions have created a failing system. In California, major insurers like USAA and State Farm have withdrawn from high-risk markets. Consequently, California’s FAIR Plan saw its exposure reach $750 billion by March 2026. After the 2025 Palisades and Eaton fires, the Plan exhausted its reserves and assessed member insurers $1 billion to cover losses, illustrating how the insurer of last resort can inadvertently drive up market-wide premiums.

The collapse mechanism

Uninsurable properties quickly become unmortgageable. In Quebec, Desjardins announced in 2024 it would no longer issue mortgages for homes in 20-year flood zones. This chain of events leads to collapsed liquidity, falling property values (a 5-15% discount in repeat-flooding areas), and an eroded local tax base. While Australia’s A$10 billion Cyclone Reinsurance Pool reduced premiums, it lacked a phase-out date tied to risk reduction, unlike the United Kingdom’s Flood Re scheme, which was designed to expire once flood defences improved.

The government backstop doom loop

Governments primarily play reactive roles as insurers of last resort and infrastructure rebuilders. Between 2020 and 2024, only 1.9% of FEMA’s $158.9 billion disaster funding went to hazard mitigation. In British Columbia, the 2023 wildfire season cost $966 million against a budgeted $204 million. This imbalance is exacerbated by the ‘wrong pocket problem’, where the entity paying for prevention is rarely the one capturing the resulting savings in disaster-relief budgets.

The case for nature as infrastructure

Natural infrastructure runs on an opposite cost curve to grey infrastructure. Seawalls and levees require increasing maintenance over time, whereas restored ecosystems begin maintaining themselves. Research indicates that nature-based measures offer benefit-cost ratios above 3.5, with coastal wetland restoration returning roughly $7 for every $1 spent. A 2026 UC Davis study found that fuel treatments reduced the likelihood of fire spread by 13% and spared more than 4,000 structures, saving $3.75 for every $1 spent.

Why existing capital structures don’t solve the problem

Current models fail due to several gaps: governments struggle to prioritise long-term resilience over immediate needs like schools; individual insurers cannot fund landscape-scale work on public lands they do not control; and catastrophe bonds typically only move risk without reducing its probability. Previous attempts, such as the 2015 RE:bound program, failed to scale due to the difficulties in precisely modelling mitigation effects and a single-project focus that was too small to adjust insurance premiums.

The resilience-financing architecture

The proposed solution places a Special Purpose Vehicle (SPV) at the centre. The insurer pays a risk-based premium into the SPV. The government purchases a discounted zero-coupon sovereign instrument (similar to a Treasury STRIP) and pledges it to the SPV as first-loss collateral. This allows the SPV to issue bonds to investors at a lower, credit-enhanced coupon. The captured spread between the premium and the coupon is directed to a mitigation fund for front-loaded investment in years one to five.

The case for each participant

Governments convert uncapped contingent liabilities into capped, priced positions using discounted collateral; a $250 million face-value instrument might cost only $160 million over 10 years at 4.5%. Institutional investors gain a government-supported, diversifying asset with an impact story. Insurers benefit from a more stable, insurable book of business in areas they might otherwise be forced to abandon due to escalating physical risks.

Governance: separating roles that must not be merged

To ensure credibility, four independent roles are required: the Financing SPV (financial functions only), the Technical Risk Committee (owns models and prioritises treatments), the Independent Program Administrator (manages delivery on the ground), and the Independent Verifier (reports directly to investors and government to certify completed work). This separation prevents conflicts of interest and ensures that capital-market incentives do not influence project selection.

Risk quantification: what can be assured, and what can only be estimated

The architecture distinguishes between measurable metrics (delivery and physical condition) and modelled estimates (hazard reduction and financial risk). Disbursements from the mitigation fund are tied to observable actions, such as hectares treated or structures hardened. Repricing at subsequent bond issuances is based on hazard and financial metrics modelled by the Technical Risk Committee.

Stress testing the architecture

The architecture is weakest in its early years when collateral has accreted least and risk is highest. Two models were examined: Scenario A (a multi-series rolling program) and Scenario B (a milestone-based step-down coupon). Scenario A delivers more total funding over 15 years ($485 million on a $500 million issuance) but carries renewal risk. Scenario B provides higher issuance certainty by fixing the 15-year schedule at the outset.

Instrument design: triggers, waterfall, and outcomes

The structure uses conventional indemnity triggers. In the event of a loss, the waterfall order is: 1. Insurer Retention (deductible), 2. Government Collateral, 3. Investor Principal, and 4. Above Structure Limit. If no catastrophe occurs, the government receives its collateral back at full face value, and the term concludes with enhanced natural capital and permanently reduced future risk.

From architecture to pilot

A pilot deployment should aim to prove the functional plumbing of the architecture—governance, cash flows, and collateral management—rather than large-scale risk reduction. Success requires government finance officials to reallocate existing mitigation funding into collateral for the SPV. Because conditions such as retreating insurance markets and underfunded public mitigation programs are widespread, a proven pilot can be replicated across multiple jurisdictions.