Financing City Resilience — The Role of Insurance

Twenty years after Hurricane Katrina, the biggest obstacle for cities seeking to build resilience is a lack of joined-up thinking and financial incentive structures. Resilient infrastructure projects take time, and multi-year initiatives don't always align with public and private sector time horizons.

"The recent restoration of the collapsed I-95 highway bridge in US illustrates that it is possible to move faster when there is urgency," says Daniel Murphy, risk and resilience specialist at the World Economic Forum. "However, in the public sector, the multi-year election cycle complicates matters, while the private sector is usually driven by quarterly results.

"This misalignment signifies that neither the public entities nor private entities are truly designed for long-term thinking," he adds.

Building resilience with a new claims mindset

Financing continues to be a crucial lever for building resilience and driving wider adaptation. However, insurability is becoming a challenge in many regions that are exposed to natural hazards. "Insurers want to stay in markets that are profitable and sustainable," says Murphy. "Communities just want to be safe and insurable."

These goals aren't at odds if investments in building long-term resilience are made in areas most exposed to extreme weather. Ultimately, investment involves a shared responsibility, with the right incentive structures in place.

The insurance industry invests heavily in risk engineering, climate science, catastrophe modelling and other sources of data and analytics that are essential to effective resilience planning. There's a noticeable shift toward protective financing and risk consulting, where risk and data insights are used to improve the underlying risk.

Hurricane forecasting: Then and now

While wind often grabs the spotlight, it's water-related hazards such as storm surge and inland flooding that drive the greatest threats to life and property. Since 2005, advances in climate forecasting have greatly improved storm prediction and preparedness. These insights now guide emergency response and insurance efforts, improving readiness and speeding up recovery.

The National Hurricane Center (NHC) produces forecast graphics that often include "cones of uncertainty," which represent the probable path of the storm center based on current data and modeling. The shaded zones in the graphic illustrate how this cone has narrowed over time — a reflection of improved forecasting accuracy. According to the National Hurricane Center, the width of the cone at Day 3 and Day 5 has been significantly reduced since 2005, allowing for more precise predictions of storm landfall.¹ This increased precision has saved lives and enabled emergency managers and insurers to better position resources in advance.² However, while track forecasting has improved, storm intensity forecasting still lags behind.

Put simply, these insights are used to offer practical advice on how to mitigate the impact of extreme weather losses, through reinforcing and retrofitting properties, for instance.

This industry advice, alongside the growth of innovative risk transfer solutions such as parametric insurance, is designed to build resilience, reduce loss severity and target the ever-expanding "protection gap" between economic and insured losses.

Whether dollars are spent on retrofitting a property's roof so it can better withstand a storm or incorporating resilience measures into restorations after a property damage claim, decisions made now can positively change the impact of future losses and, therefore, resulting insurance costs.

Some carriers have gone a step further to incentivize investment in resilience, offering premium discounts or lower deductibles to customers who take significant measures to protect their property and assets, such as strengthening homes and businesses to the IBHS FORTIFIED code.³ FORTIFIED is a voluntary construction and re-roofing program that strengthens homes and commercial buildings against high winds, hail, hurricanes and tornadoes.

The appeal of parametric insurance

Complementing traditional indemnity models is the growing popularity of parametric insurance, where rapid pre-agreed claims payouts are triggered based on the event parameters, rather than the extent of damage, as determined by loss adjusters in the field. Instruments such as catastrophe bonds offer a means of relief. For instance, Mexico's catastrophe bond program offers rapid relief funding after major storms if a payout is triggered .⁴

For governments, businesses and communities, the speed of settlement can translate to faster recovery and the flexibility of fund reallocation.

In areas such as New Orleans, where storms are common, hotels and restaurants face the frequent challenge of having to close due to weather alerts. "Business owners can then end up with weeks' worth of revenue lost for storms that sometimes didn't cause any physical damage," explains Doug Mills, senior vice president of Operations at New Orleans-based Gillis Ellis & Baker, a Gallagher company.

"Parametric insurance is increasingly being offered as a risk financing tool risk management solution to get the business back and running," he says. "The benefit to clients is that it offers an instant cash injection, regardless of whether there has been a physical loss."

Despite their promise, however, gaps remain in the application and scalability of parametric tools. Risk modeling in the global south is still limited, and many frontline communities lack access to affordable coverage. The challenge isn't just in designing the appropriate risk transfer mechanism but also in improving access to data.

Resilient solutions, like incorporating elevations in flood-prone areas or introducing nature-based solutions (NBS), currently fall outside the bounds of most traditional insurance coverage, even where there is a clear "resilience dividend."

The potential to be priced out

While "building back better" is the most cost-effective long-term approach to restoration, many markets lack incentives.

In the absence of clear incentives and broad collaboration, communities could be priced out — not by disaster, but by the anticipation of it. If insurance carriers determine the risk they're assuming is too great for the premiums being paid, they may withdraw capacity altogether.

"Those affected seldom have the luxury of time," emphasizes New Orleans' Deputy Resilience Officer Greg Nichols. "There is instead a need for the insurance sector to zoom in and incentivize hyperlocal efforts of resilience."

The power of public-private partnerships in disaster relief funding

Climate risk is unequally distributed. Vulnerable communities — the least prepared, least insured and least represented — often carry the heaviest burden of this resilience debt.

"This is the time when we have access to the most climate-risk data in history," observes Murphy of the World Economic Forum. "But it's important to recognize that the availability of data can vary greatly depending on the location or type of peril. Regions that most lack data often have the largest insurance protection gaps and are the most vulnerable to climate events."

Risk-pooling schemes

Around the world, public-private partnerships are emerging as critical enablers of climate adaptation and risk financing solutions for communities exposed to extreme weather and have low insurance penetration.

Through these risk pooling schemes, insurers, reinsurers, brokers, development banks and other stakeholders work alongside local governments and non-governmental organizations (NGOs) to support design innovative risk financing solutions. They also create incentives to invest in risk reduction and improve the quality and access to catastrophe risk and claims data.

Examples of catastrophe risk financing initiatives include country catastrophe risk pools, such as the Turkish Catastrophe Insurance Pool (TCIP) earthquake fund and regional facilities. In Africa, the Caribbean and the Pacific, multi-country risk pools have been set up to share risk and tackle the protection gap on a regional basis.

"As reinsurance broker, our role is to structure a program so that each of these reinsurance instruments can be used where they are most efficient, and will trigger payments and provide relief and liquidity to affected populations," says Antoine Bavandi, global head of Public, Parametric and Climate Resilience Solutions practice at Gallagher Re.

Ensuring the funds are channeled to where they're most needed is part of the design.

"It's one thing to make sure that two weeks after an event that a payout hits the bank account of the treasury of the ministry of finance," says Bavandi. "It's another to make sure the money keeps on flowing to beneficiaries in affected areas. It's important to ensure there is transparency alongside the efficiency and timeliness of the payouts."

Financial benefits of a public-private approach

The public-private approach is not only a solution for poorer countries. It can help maintain the affordability of cover in markets where the risks at stake are too challenging for the private market to indemnify on its own.

In the UK, the Flood Re scheme was introduced to ensure that a private flood insurance market would continue to be viable amid more extreme flood events.

In addition to its focus on insurance, the scheme is geared toward improving flood resilience and reducing claims by incorporating the principles of "build back better" during rebuilding and restoration. The scheme offers a financial incentive of £10,000 to policyholders to take these steps to reinforce their properties.

Thinking globally and acting locally

Climate sustainability is often a substantial community effort. Insurers have a role to play in recognizing and rewarding these efforts — an essential part of the positive feedback loop.

The toolbox is expanding with AI now in the picture, supporting everything from predictive weather forecasting to geospatial planning for nature-based solutions.

Yet, if there is one lesson to take from New Orleans' long recovery, it's that while real resilience is hyperlocalized, it's best facilitated by a strong vision and strategy at the local government level. The rebuilding of New Orleans shows that city resilience is a collective responsibility that requires a strong commitment to produce lasting results.

Incentives will remain essential to driving adaptive behaviors, and they are a carrot the insurance industry can continue to offer to maintain more sustainable and insurable markets. "The success of New Orleans can be mainly attributed to the shift in mindset on a local level, where organizations exemplify the successful execution of major initiatives down to the resident level," says Nichols.

"As compared to the current situation of broad-level analysis by an insurer that can overlook important local factors, there is a need for greater emphasis on evaluating how local solutions impact risk."

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Sources

¹"Definition of the NHC Track Forecast Cone," National Hurricane Center, accessed 29 Jul 2025.

²"H1 2025 Natural Catastrophe and Climate Report," Gallagher Re, 16 Jul 2025.

³"Your Family Deserves a Strong Home," FORTIFIED, accessed 7 Jul 2025.

⁴"World Bank Issues $420 Million in Catastrophe Bonds for Renewed Disaster Risk Protection for Mexico," World Bank Group, 17 Apr 2024.