Introduction

Insurance is a critical risk transfer tool that strengthens municipal financial resilience to climate change as part of a broader risk management strategy. It provides municipalities with post-disaster liquidity, helping them recover from climate-related disasters without disrupting public finances, essential services, or development priorities. This reduces the need for reactive municipal budgetary allocations or emergency borrowing following disasters. Despite this potential, less than 10% of climate-related losses in emerging markets and developing economies (EMDEs) are insured.

The research identifies parametric insurance as a key entry point for EMDE cities. Parametric insurance provides pre-agreed payouts when specific hazard thresholds, such as rainfall intensity, wind speed, or temperature, are reached. This model enables faster payouts, simpler product structures, and coverage tailored to municipal financial capacities rather than underlying asset values. This paper aims to advance concrete actions that enhance the financial viability and affordability of parametric insurance for cities worldwide.

Municipal climate risk and the role of insurance

Climate change is escalating physical risks in cities, where the concentration of population and infrastructure amplifies losses. One in five people in cities, or more than 800 million people, are exposed to extreme flood risk, with exposure heavily concentrated in Asia and small island states. A survey of 1,005 cities, states, and regions in 2025 found that over 60% face significant climate-related hazards. Globally, 57% of economic losses from natural disaster events in 2024 were uninsured, with this gap exceeding 90% in EMDEs. For example, in Peru, 92% of public assets lack insurance coverage.

Municipalities are often the first responders to disasters, but rising physical risks weaken their ability to execute this mandate. Fiscal shocks in the form of increased recovery costs and diminished tax bases can cause broader financial challenges, such as the loss of creditworthiness. In South Africa, local and regional governments suffered credit downgrades following severe water scarcity. Without the safety net of insurance, recovery often requires reallocating funds away from long-term development. During the 2018 floods in Kerala, India, 95% of the estimated USD 4.4 billion in economic losses were uninsured, forcing the state to consider new taxes and budget reprioritisation.

Mapping the existing municipal-insurance ecosystem

The report mapped 16 programmes supporting climate risk insurance in EMDEs. The analysis revealed a structural gap in sustained collaboration between municipalities and insurers. Only 5 of the 16 mapped programmes engage directly with municipal governments, and only 3 focus on multistakeholder coordination, none of which directly include municipalities. Most initiatives concentrate on insurance implementation (product delivery) or technical assistance rather than collaborative coordination. Parametric insurance is the dominant focus, featuring in two-thirds of the implementation-focused programmes.

Action area identification

Four thematic action areas were identified to address the collaboration gap:
1. Data, risk modelling, and planning: Addressing poor data quality and modelling uncertainty.
2. Financial viability and affordability: Overcoming premium constraints and fragmented municipal demand.
3. Governance and regulations: Clarifying institutional mandates and adapting procurement processes.
4. Capacities and product-market fit: Improving insurance literacy and technical capacity.

Following a multistakeholder workshop in April 2026, ‘financial viability and affordability’ was prioritised as the area with the greatest potential for near-term collaborative action to advance municipal climate risk insurance.

Priority action area: financial viability and affordability for parametric insurance

Municipalities in EMDEs often cannot afford insurance premiums sustainably, even when supportive governance is present. Fiscal constraints limit demand, which in turn reduces insurers’ willingness to offer municipal products. Parametric insurance is recommended because it provides rapid post-disaster liquidity and payouts tailored to municipal financial capacities. Three priority actions are proposed for insurers and municipalities:

Firstly, supporting affordable premiums by building evidence for the fiscal and resilience case for municipal premium support. This involves developing policy briefs and case studies to mobilise support from national governments, donors, and development finance institutions for subsidies and concessional finance.

Secondly, strengthening risk-layering capacity to help cities determine which risks to retain and which to transfer cost-effectively. This includes developing training curricula for municipal officials on assessing risk layers and the role of parametric insurance within broader disaster risk financing strategies.

Thirdly, improving enabling environments by diagnosing legal, policy, and procurement barriers. This action suggests developing a shared, evidence-based reform agenda to provide legal certainty, clarify municipal authority, and reduce transaction costs for both cities and insurers.

Conclusion and next steps

Insurance is a vital tool for managing climate-related financial risks, but its uptake in emerging markets remains low. Supporting greater uptake requires collaborative efforts to overcome barriers and strengthen enablers. This paper invites further discussion between city and insurance industry stakeholders on how to clarify implementation pathways and expand the use of parametric insurance. Deeper engagement can support broader improvements in data sharing, risk pricing, and increased investment in urban climate resilience. The issues raised and the three priority actions presented will require further development with CCFLA members, key stakeholders, and funders.