Instrument Overview

Insurance cover can be applied to components of a project or the entire project to protect parties from various risks, including political and security risks and financial risks.  It does not prevent risk but provides financial protection upon the occurrence of a covered event, enabling investment in high-risk contexts. International financial institutions can play an important role in catalyzing private sector investment by covering such insurance costs, which may sometimes be prohibitively expensive [1].

Why it matters for cities

Risk insurance enables municipalities to access financing that may otherwise be unavailable. Beyond strengthening financial and fiscal resilience, it also enhances risk awareness, incentivizes risk mitigation, and supports economic growth and capital mobilization. As cities engage in urban planning and zoning to manage land use and development, insurance products can support these efforts by providing coverage for construction projects, ensuring that developers and municipalities are protected against potential risks during the building phase.

Key features

The risk insurance landscape for cities is diverse and includes various products [2].

• General insurance provides overall coverage for property, assets, and liability.
• Parametric insurance offers predetermined payouts for immediate disaster responses.
• Disaster liquidity products, like Catastrophe Deferred Drawdown Options (CAT DDO), provide immediate liquidity through contingent financing.
• Government-owned insurance schemes offer property catastrophe insurance, and risk pooling initiatives unite public entities for collective insurance purchase, enhancing overall resilience.

How It Works

Cities can play multiple roles that can be divided into ‘cities as providers’ and ‘cities as stewards.’ As providers, city governments can primarily purchase insurance as policy holders. As stewards, cities and/or parallel subnational governmental authorities can manage risk through policy, planning, and regulation, and convene and build stakeholder coalitions to encourage insurance provision [3]

Key stakeholders in the insurance industry include insured individuals and entities, risk managers, insurance companies, agents/brokers, regulatory authorities, reinsurers, policyholders, legal advisors, and investors/shareholders. City governments can implement policies, incentives, and regulations that encourage the use of these insurance products. The principle of risk pooling underlies insurance, where many entities contribute premiums to a pool. Because cities are densely populated areas with numerous businesses, infrastructure and residents, they can benefit from risk pooling as it helps distribute the financial burden of unexpected events [2].

Benefits & Challenges for Cities [1]

Benefits

• Enables private sector confidence in contexts of higher political insecurity or commercial risks.

Challenges

• Local law may limit the extent to which reinsurance can be used.

Use Cases

Philippine City Disaster Insurance Pool [4]

Philippine cities often face significant challenges in securing adequate resources for post-disaster operations, including rapid access to funding to support early recovery efforts such as the restoration of critical infrastructure, delivery of services, and support of livelihoods. Delays in early recovery increase the impact of disasters on local and national economies, as well as on the economic and social welfare of those affected. The Philippine City Disaster Insurance Pool (PCDIP) has been developed to address this need for rapid access to early recovery financing. As such, PCDIP directly supports the second (local) of the three tiers of disaster risk financing under the government’s 2015 Disaster Risk Financing and Insurance Strategy.

The Philippine Department of Finance led the design of PCDIP, with technical assistance from the Asian Development Bank (ADB). ADB engaged a consortium of leading national and international experts to design the insurance pool. Legal advice was also secured and relevant national government agencies consulted.

Ten cities participated in the design of the pool. Their selection was based on a range of factors including disaster risk, demographic and economic size, geographic location, data availability, and disaster risk management governance. The relative scale of government and public facilities, and thus of potential post-disaster levels of expenditure, was also considered. Two cities from each of Luzon, Visayas, and Mindanao were selected, together with four cities from Metro Manila. The cities comprised of Bacolod City, Baguio City, Butuan City, Caloocan City, Dagupan City, Davao City, Iloilo City, Marikina City, Parañaque City, and Quezon City. Once implemented, the pool is expected to expand to cover additional cities.

To support the optimal design of PCDIP, these cities were engaged in a number of activities :

• Exposure data collection: To inform an understanding of the disaster risks faced by each city and potential post-disaster financing requirements, an exposure dataset of public and private “vertical assets” was developed with the support of each city, describing all buildings within the city boundaries but excluding roads, railways, and underground infrastructure. This database was used as an input to the Risk Management Solutions Philippine earthquake and typhoon risk models to quantify the level of risk faced by each city.
• Needs assessment: Existing disaster risk financing arrangements in each city were mapped and combined with outputs of the risk models to determine levels of additional financial support required by each city to meet early recovery spending needs following earthquakes and typhoons of varying severities.
• Capacity building: Two national workshops were held to inform the design of PCDIP and secure feedback on the proposed structure. A three-part capacity development program was also provided to each city to secure a deeper understanding of disaster risk financing and enable city officials to make informed decisions on participation in PCDIP.

When to Use It

Risk insurance products should be used when cities face the potential for high-impact, low-frequency events—such as natural disasters, political instability, or other systemic shocks—that can cause major financial disruptions. These instruments are particularly valuable in the following contexts:

• Pre-disaster planning
• Infrastructure development
• Urban resilience strategies
• Budgetary risk management
• Private sector engagement
• Post-disaster financing gaps
• Insurance market development

Risk insurance products are best used as part of a layered risk financing strategy, combining them with contingency funds, budget reallocations, and international assistance to create a comprehensive financial resilience system.

References

[1] https://citiesclimatefinance.org/financial-instruments/instruments/risk_insurance_products

[2] https://ccfla-netzerobuildings.org/database/instrument/risk-insurance-products

[3] Building-Climate-Resilience-in-Cities-Through-Insurance.pdf

[4] Philippine City Disaster Insurance Pool: Summary

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