Making climate insurance work: potential approaches to fund premium support

Stable and reliable funding for premium support is key to helping the most vulnerable countries manage the growing financial risks of climate change.

From heatwaves in the Sahel to an early hurricane season in the Caribbean, and a series of extreme typhoons in the Philippines, 2024 saw a record number of ‘unprecedented’ climate events. In a world of accelerating climate impacts, financial assistance to reduce the cost of climate-related insurance – also known as premium subsidies, or support – is more critical than ever.

Yet historically, donor funding for premium support has been characterised by short-termism, uncertainty, and unpredictability. Premium subsidies have often been ad hoc and fragmented: funded from unspent annual budgets, emergency allocations, or short-term initiatives lacking a clear long-term vision. While donors have stepped in with urgent support – for instance, the African Risk Capacity through the African Development Bank’s ADRiFi programme, and the Pacific Catastrophe Risk Insurance Company through the Global Shield Solutions Platform – these interventions largely remain temporary stopgaps.

This subject was front and centre of a panel discussion I attended on premium support for climate and disaster risk insurance, organised by the Global Shield Solutions Platform at the Frankfurt School of Finance and Management. In the forum, we explored two questions: why is it so challenging to find long-term funding for premiums – and what could donors be doing differently?

Roadblock to reliable finance of premiums

A key reason premium subsidies struggle to attract secure funding is due to concerns among donors. Many donors worry about the long-term sustainabilityof premium support, and that premium support might become an open-ended financial commitment without a clear exit strategy. Some hesitate due to the uneven demonstrationof disaster risk management commitments by recipient countries, fearing that subsidies might inadvertently reduce incentives for broader resilience investments.

This creates serious operational challenges. When future support is unpredictable or conditional, recipient governments often struggle to integrate insurance premiums into multi-year budgets. Insurance pools face instability as country participation fluctuates with changes in donor funding. Short-term subsidies often fail to demonstrate the real value of insurance, as countries may not experience payouts during brief coverage windows. Meanwhile, fragmented donor approaches lead to uneven support, causing critical gapsin some regions and inefficiencies in others.

A long-term vision for premium financing

Premium subsidies are essential to making climate risk insurance accessible for the poor and vulnerable countries. But without reliable, long-term funding, their full potential cannot be realised.

Donors face several possible options. These options are neither mutually exclusive nor exhaustive, but together could provide a solid foundation for shifting premium support funding: from ad hoc interventions to strategic investments in resilience.

1.Dedicated and global mechanisms for funding premium support

By creating dedicated donor mechanisms, or earmarking additional allocations within existing development finance pipelines – such as official development assistance – donors could provide the predictability that premium support critically needs. This could mean setting aside multi-year funding within bilateral agencies and multilateral development banks, or pooled donor platforms that are linked to climate and disaster risk finance, with a clear focus on premium support.

In parallel, it is essential to integrate premium support into global climate finance structures. The newly established Fund for Responding to Loss and Damage, which helps developing countries respond to the impacts of climate change, has already signalled that insurance and risk-transfer mechanisms are eligible for funding. Allocating a portion of the Fund’s resources to sustained premium support could embed insurance more firmly within broader loss and damage strategies.

Similarly, adaptation-focused funds such as the Adaptation Fund and the Green Climate Fund could introduce targeted financing windows to subsidise climate risk insurance, helping to anchor premium support as a core part of long-term resilience financing for vulnerable countries. Although some concerns remain whether rising premiums due to climate change impacts are the most effective use of limited funds and whether a direct funding support to countries would be more impactful.

2. Reprioritising allocations of disaster aid

Perhaps the most thought-provoking solution is to reimagine how we use existing humanitarian and disaster aid funding. In 2023, official development assistance directed to low- and middle-income nations for ‘post-disaster emergency response and reconstruction’ reached $17.5 billion. What if just 1% - approximately $175 million – were allocated annually to premium support instead of purely ex-post disaster response? Spread over multiple years, this amount could sustain substantial premium subsidies and provide stable protection for dozens of vulnerable countries.

Importantly, this approach need not mean cutting humanitarian assistance, but rather strategically pre-allocating a small portion to ensure quicker, more predictable disaster responses through insurance mechanisms. Humanitarian organisations rightly guard budgets for lifesaving interventions after disasters. Yet evidence consistently suggests that if chosen carefully, investing earlier through pre-arranged insurance mechanisms can lead to faster, cheaper, and more effective responses. A nuanced approach, blending pre-arranged finance with ongoing humanitarian commitments, could gradually build confidence among humanitarian donors that this strategic reallocation enhances – not diminishes – their critical mission.

3. Harnessing carbon finance

One particularly innovative approach could be to leverage carbon markets. As global carbon markets expand, can we utilise a fraction of their revenue to subsidise premiums? Mechanisms could include a dedicated levy on carbon credits, which may create a consistent, scalable funding stream for premium support. While this is more complicated to operationalise than other options, integrating mitigation finance with adaptation needs through such methods would represent a forward-thinking solution, providing both stability and scalability.

Making climate insurance work for everyone

Each of the above options has potential to provide predictable, long-term support to premium subsidies. This in turn should allow premium support to move beyond short-term grants, and avoid constant competition with shifting humanitarian or development priorities.

Yet whether the international community can grasp these opportunities, and genuinely commit to multi-year premium support, has yet to be seen. Doing so will require collective imagination, innovation, new partnerships, and a willingness to rethink the traditional funding paradigms for climate resilience.