Posted on: Oct 31st, 2021

Building Climate Resilience in Cities Through Insurance

As climate risks escalate and climate-related hazards become more frequent and costly, cities ought to increase their focus on ex-ante preparedness and resilience. Indeed, cities are often at the frontline of response to climate-related hazards because of their geography – often in low-lying coastal areas – and their concentration of population, infrastructure, and assets. Economic losses from climate-change related hazards are trending upwards. From 1980 to 1990, an average of 149 climate-related disasters occurred annually, posting economic damage estimated at about USD 14 billion each year. Between 2004-2014 this number had more than doubled, averaging 332 disasters and USD 100 billion in damages each year (UN FAO, 2016) with 2010 – 2019 being the costliest decade for natural, weather-related disasters (AON, 2020). At the same time, the global insurance protection gap is widening, meaning we are collectively underinvesting in climate-risk protection.

Cities can play a key role in closing the global protection gap by acting as insurance consumers and funding risk reduction, as stewards of risk reduction and management through policy and planning, and as promoters of knowledge about risk and insurance provision within the urban ecosystem. Insurance plays a crucial role in transferring and mitigating risk, but the benefits of climate-risk insurance for cities go beyond increasing financial and fiscal resilience to climate-related risks. Insurance can increase risk awareness, provide incentives for risk mitigation, and support economic growth and capital mobilization. Still, cities continue to underutilize insurance, with few including insurance components in their resilience strategies.

Indeed, increasing insurance penetration in cities has been a challenge due to factors such as the short-termism of insurance products, difficulty of incorporating future climate change into catastrophe models, lack of insurance knowledge and training for government officials, limited data availability on existing risks and vulnerabilities, as well as financial, legislative behavioural, and political barriers.

To address these, this report recommends to:

  • Increase investment in risk assessment and technical capacity building to use risk assessments effectively.
  • Provide incentives to local governments for the assessment of these risks and understanding the broader landscape of risk management plans.
  • Address implementation barriers.
  • Develop an effective resilience plan for the city along with the insurance industry.
  • Engage the insurance sector around urban needs, capacities, and data.

The combined impacts of Covid-19 and the current onslaught of climate shocks and stressors emphasizes the need for protection systems for the future – where people are better protected from extreme risk. Insurance is a part of that protection system in cities to respond to climate risks as extreme heat and other urban climate shocks and stressors force us to build protection systems for the future.