Disaster Risk Finance and Insurance

Natural disasters such as floods, droughts, earthquakes, and extreme heat have become more frequent and bring higher economic costs, due to climate change, urbanization, population growth and growing construction in high-risk areas. An average of more than 400 natural disasters occur worldwide each year, placing millions of people at risk, particularly those living in middle- and low- income countries.

In 2023, these disasters globally claimed 74,000 lives and resulted in $250 billion of losses. These disasters pressured government budgets, disrupting development and investment in long-term resilience.

They destroyed livelihoods, and jeopardized key sectors like agriculture and food production, transport, energy, tourism, and industry. Vulnerable groups, including low-income households, rural communities, and displaced people are disproportionately affected, exacerbating social inequalities and complicating recovery efforts. Across the developing world, nearly one in five people are at risk of disasters from which they will not fully recover.

Insurance could play a greater role in managing the financial impact of natural disasters. It provides financial protection and incentives for adaptation, risk mitigation and preparedness before a disaster. Insurance companies also contribute to capital market development. As institutional investors with assets of almost $40 trillion, they deploy long-term capital in the real economy to support long duration projects, such as for infrastructure projects.

However, in most developing countries the development of insurance markets is constrained due to limited access to data and technical capacity and weak legal and regulatory frameworks, among others. Growing frequencies and scale of disasters impacting availability, affordability, and insurability is a major concern. Developed markets also face issues of growing disaster risks reducing the affordability of insurance or even causing insurer market exits where they are unable to charge risk-based premiums.

The public sector and private sector must work together in developing effective markets to protect vulnerable economies and populations with sustainable and affordable solutions.

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The World Bank Group brings together public and private stakeholders to shift the financing of response from reactive to proactive approaches. Insurance cannot finance all disaster losses, but it can be part of a risk layering approach that allows countries to prioritize the use of different financial solutions where they are most economically efficient, for example disaster funds for smaller losses, contingent loans for medium-sized disasters, and risk transfer for large events at the sovereign level. At the same time, solutions need to be developed for individuals and businesses and integrated into provision of broader financial services.

The World Bank Group offers financing, analysis and research and training to building capacity for developing countries to improve disaster response. We advise governments on the regulatory and enabling environment for insurance and other financing options. Disaster risk financing is a program offered by the World Bank Academy.

The World Bank Group is advising over 70 countries on needed policy reforms, with more than 20 implementing climate-risk strategies based on World Bank assessments. These transform technical data on hazard and exposure into information on the economic and financial costs of disaster events, as well as the associated gaps in financial protection. Governments use this information to decide financial protection policy priorities and assess the best combination of financial instruments to meet them.

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The Financial Protection Forum is managed by the Disaster Risk Financing and Insurance Program (DRFIP). A joint initiative of the World Bank Group’s Finance and Markets Global Practice and the Global Facility for Disaster Reduction and Recovery (GFDRR), DRFIP is a leading partner of developing countries seeking to develop and implement comprehensive financial protection strategies. Since its establishement in 2010, DRFIP has made tremendous efforts in improving the financial resilience of governments, businesses, and households against natural disasters.

Established in 2006, the Global Facility for Disaster Reduction and Recovery (GFDRR) is a global partnership that helps low- and middle-income countries better understand and reduce their vulnerability to natural hazards and climate change.

Global Index Insurance Facility (GIIF)

The Global Index Insurance Facility (GIIF) facilitates access to finance for smallholder farmers, micro-entrepreneurs, and microfinance institutions through the provisions of catastrophic risk transfer solutions and index-based insurance in developing countries.

GIIF’s regional partners have facilitated more than 13 million contracts, covering over 65 million beneficiaries, with approximately $2 billion in sums insured, reaching over one million people with information and access to index insurance.

GIIF’s objectives are to provide access to financing for people who are vulnerable; to strengthen the financial resilience of people living in poverty against the impact of climate change and natural disasters, and to sustain food production for local communities and larger markets.