Scaling up disaster risk protection that works - and endures

How can we deliver more fiscal resilience to governments after natural catastrophes? What lessons do successful sovereign risk pools offer? Can we marry proven risk-transfer mechanisms with existing sovereign financing instruments for greater certainty? Governments face increasingly complex weather and infrastructure challenges while managing their debt burdens. It's time to shift our focus to scalability and replicability in disaster risk protection for sovereigns to protect more people when it matters most.   

Swiss Re has delivered public sector risk-transfer solutions since 2011, with more than 1,000 transactions in 80-plus countries. Working with governments, industry and multilateral partners, our Public Sector Solutions team and underwriters across Swiss Re Group have helped governments respond to earthquakes, typhoons, hurricanes, droughts, floods, heat and other perils, producing success stories in the US, Latin America, the Caribbean, Europe, Africa, and Asia Pacific.

Sovereign disaster risk transfer has been among insurance's most innovative areas. We've combined parametric solutions and insurance-linked securities (ILS) with data and modelling breakthroughs that solve underwriting challenges for underserved regions or difficult-to-insure risks. Diversification makes insurance viable; scalability and replicability can unlock more impact, with more risks covered in more places.

Despite steady gains, we still face a sobering reality: many natural catastrophe-related risks remain un- or insufficiently insured, forcing vulnerable individuals, communities and governments to absorb disasters on their own. One storm, earthquake or drought can erase years of progress, increase debt burdens and delay government investments, particularly in emerging markets and developing economies (EMDEs).

Challenges have also intensified, with more frequent, intense weather-related perils. Average economic losses from natural catastrophes are rising by 3-4% annually and hit USD 318 billion globally last year, driven by factors including population growth and urbanisation. A full 57% was uninsured, leaving a protection gap of USD 181 billion. Impacts are often disproportionately higher in EMDEs, but the protection gap remains massive even in the United States and Europe.

As we take stock of the last 15 years of hard work, there is much to build on. Sovereign disaster risk protection has come a long way. Now, by focusing on key priorities like speed, standardisation, scalability and replicability, I'm convinced the next generation of projects can deliver an even more meaningful impact for governments and their constituents. Sovereign risk transfer can become even more effective, protecting more people and providing more resources for recovery.

Over the years, we've learned that complex, bespoke approaches can be challenging, especially when focused on small pilots and rather unique risk management challenges. Regional, larger-scale solutions are more efficient with standardised contract structures and risk metrics – for catastrophes, agriculture, infrastructure or heat – enabling faster deployment and greater diversification.

We should also move more swiftly from the design phase of solutions to actual risk-transfer that helps communities when catastrophes hit. Rather than splitting design and execution into separate steps, a consolidated RFP process covering both has great potential to accelerate projects, boost their commercial appeal, and increase stakeholder buy-in.

For example, Morocco's parametric earthquake cover stands out. Once the legislative framework for the country's disaster risk insurance was in place, the programme's design and placement in the re/insurance market in 2019 took just four months. The approach proved itself in 2023, when the fund paid USD 275 million to support residents after a powerful earthquake near Marrakesh.

Similarly, catastrophe bonds that support Chile in the event of an earthquake are further testimony that even technically complex products can be deployed in the market swiftly once necessary approvals are granted and funding is made available.

We should also avoid resource-intensive micro-pilots, focusing instead on scalable programmes with robust commitments from governments and donors to support long-term premium payments. Pilot-like elements can help fine-tune projects, but these shouldn't hinder large-scale implementation. Too often, pilots and funding end just when a disaster strikes, leaving communities without the proven umbrella of insurance.

Long-term funding means insurance can fulfil its purpose. Disasters are unpredictable; policyholders may wait a few years for an initial payment to occur. Without the support of sustained funding, shifting political priorities could mean a programme’s premature end. Focusing project development on economies where institutions are conducive to longer-term approaches is also important. This means countries with risk financing strategies, capacities, legislation and budget allocations in place or underway. Put simply, successful insurance requires a certain level of infrastructure and regulation.

For nations with more fragile institutions or economies, however, there are also innovative approaches to help them, including enlisting multilateral organisations or NGOs as stable risk-transfer partners. This year, for instance, Swiss Re worked with the World Food Programme and the Insurance Development Forum (IDF) on drought insurance for Syrian farmers that's already paid out USD 7.9 million in relief.   

We also shouldn't ignore public-private partnerships for high-income economies, either. Swiss Re has partnered with state and local governments and others on parametric insurance for perils including earthquakes, hail, storm surges, and flooding. One example is our work with Fremont, California, creating a first-of-its-kind parametric insurance policy to accelerate recovery from destructive flooding. There are similar opportunities in the Americas, Europe and APAC.

It's essential to align with existing engagements of multilateral institutions like the International Monetary Fund and World Bank, to ensure that disaster risk protection aligns with a country's broader fiscal needs like debt rescheduling or adaptation to extreme weather. A recent Bridgetown Initiative-IDF paper that addressed this point is essential reading for anyone interested in sovereign disaster resilience.

Moreover, we should learn from successful risk pools in developing fiscal resilience, with considerations like embedding disaster risk transfer in vehicles like the IMF Catastrophe Containment & Relief Trust, the IMF Resilience & Sustainability Trust and other loan mechanisms. Some vehicles already can be leveraged for disaster risk financing strategies, but sovereign borrowers too rarely make use of them.  

Scale could also be achieved by including disaster protection within sovereign loans by default, with governments able to "opt-out and explain" should they have existing disaster protection outside of the loan. Development and commercial banks that fund properties and infrastructure also have a keen interest in protecting these assets from hazards.

Many of these ideas reflect approaches our community has discussed in various forms and venues before. The timing is right to reconsider them now. Extreme weather is hitting more frequently and growing more severe, in emerging and developing economies.

Against this backdrop, long-term insurance programmes can be a catalyst in narrowing the finance gap – the shortfall between money available and what's needed – to address intensifying weather impacts. This has already prompted debt-deferral clauses to support governments with disaster recovery, giving them longer to pay their loans when, for instance, a hurricane hits. Funds for debt payments can be immediately diverted to recovery efforts. Many governments still face challenges even with these clauses, whereas pre-agreed risk transfer could remove the need for debt deferral in the first place.

Furthermore, the pandemic saddled emerging and developed countries alike with fiscal and budget constraints likely to be exacerbated by the next extreme event. It just makes sense, for everyone, to integrate long-term disaster recovery strategies into their wider fiscal frameworks to better manage future shocks. 

As the sovereign risk transfer market matures, it also generates more appetite for impact investments. Reinsurers, insurers and ILS investors are seeking opportunities that are well-diversified from other risks. Disaster recovery fits here nicely.

After 15 years of this important work, what remains critical are the longstanding partnerships between governments, re/insurers like Swiss Re, financial institutions, donors, and multilateral organisations. This cooperation remains essential to scaling up sovereign risk transfer programmes that work even more effectively to build resilience that endures.