Insurance is a key risk transfer tool that can strengthen municipal financial resilience to climate change as part of a broader risk management strategy. It can provide municipalities with crucial post-disaster liquidity, helping them respond to and recover from climate-related disasters without severely disrupting public finances, essential services, and development priorities. By doing so, it reduces the need for reactive municipal budgetary allocations and emergency borrowing following disasters. Despite this potential and municipalities’ roles in disaster response and recovery, less than 10% of climate-related losses in emerging markets and developing economies (EMDEs) are insured.

Several interconnected barriers hinder the uptake of municipal climate risk insurance in EMDEs. First, many municipalities lack the fiscal space to afford insurance premiums. Meanwhile, insurance markets for municipalities are often financially unviable for insurers due to fragmented demand and limited scale. Further, municipalities often have limited capacity for risk layering and integrating insurance into their risk management strategies. Additionally, policy and regulatory frameworks in many EMDEs do not adequately support municipal risk insurance markets, leading to higher premiums and greater uncertainty for both cities and insurers (see Annex 2 for details on these barriers). Building on CCFLA’s previous work, this paper examines climate risk insurance for municipalities, covering insurance products that protect municipalities against physical climate-related hazards such as floods, storms, heatwaves, and droughts (CCFLA 2021).

Specifically, the research and consultations underpinning this paper identified parametric insurance as an entry point for addressing the barriers in EMDE city contexts. Parametric insurance is a risk transfer arrangement that provides pre-agreed payouts when a specific hazard threshold, such as rainfall intensity, wind speed, or temperature, is reached (CPI 2026, 2025). It enables faster payouts, simpler product structures, and coverage tailored to municipal financial capacities rather than underlying asset values. Compared to traditional indemnity products, parametric insurance generally requires simpler claims assessment processes and can be implemented in contexts where data and regulatory environments are still developing.

Beyond risk transfer products, the insurance industry can provide risk data and underwriting expertise that help cities assess and reduce climate risks, build long-term resilience, and facilitate investment. While recognizing these broader roles, this paper focuses on how to scale risk transfer with parametric insurance and strengthen financial resilience for cities that currently lack access to insurance. CCFLA’s previous research examines the insurance industry’s wider roles as risk experts and institutional investors (CCFLA 2021).

This discussion paper aims to advance concrete actions and implementation pathways that enhance the financial viability and affordability of parametric insurance and accelerate its uptake in cities worldwide. It begins by examining the role of insurance in strengthening municipal climate resilience. It then maps the existing ecosystem of actors supporting municipal climate risk insurance uptake and analyzes key barriers and enablers shaping municipal climate risk insurance markets to identify collaboration gaps. Building on these analyses, the paper outlines three priority actions for insurers and municipalities to promote the affordability and financial viability of municipal parametric climate insurance, as well as the consultative research process used to identify these activities.