Insurance-backed debt could unlock billions
By Jorge Gastelumendi Tue, Feb 10, 2026
I spent years watching climate finance conversations stall over the same impasse: Developing nations need immediate disaster-response funds, but aid arrives too slowly and reconstruction debt compounds these countries’ vulnerability.
But insurance-backed debt mechanisms finally offer a circuit breaker.
These mechanisms are already making headlines. KfW, Germany’s development bank, recently piloted shock-resilient loans while Enosis Capital and AXA XL just announced a three-billion-dollar pipeline of debt-for-nature deals.
Unlike traditional mechanisms, climate-responsive tools such as shock-resilient loans or debt-for-nature swaps generate liquidity. Traditional mechanisms penalize missed payments based on an assumption of stable income; these new tools are designed for countries that may need to unexpectedly redirect financing amid climate uncertainty.
Companies can lead on climate financial innovation
These tools can ease fiscal pressures on governments facing unprecedented and increasingly intense climate shocks and disasters. When drought levels trigger parametric insurance covering loan payments, governments can instead use their budgets for healthcare or education instead of emergency reallocations. When debt-for-nature swaps reduce borrowing costs, marine protected areas receive sustained funding rather than symbolic designation without enforcement.
This isn’t just financial engineering; it’s infrastructure that determines which countries can afford climate resilience and which ecosystems get saved. When parametric insurance kicked in for Sahel nations facing drought—automatically covering loan payments—these countries maintained credit access instead of spiraling into a fiscal crisis after a climate shock.
But there is friction: Insurance markets remain reluctant to offer these models in some regions; legal frameworks don’t accommodate these novel structures; and political risk perceptions can still price out vulnerable nations.
Still, there is reason to hope. Private insurers are finally engaging beyond pilot projects. As they do so, a market infrastructure has begun to emerge that could operate at scale. Deals such as those from Enosis Capital and AXA XL are being struck more quickly and becoming standard practice. This matters because climate finance needs more speed and higher volume.
Insurance-backed debt can unlock hundreds of billions and also deliver both speed and volume for climate finance while building the capacity of countries to absorb future shocks.
That’s tangible progress worth scaling.
Climate terms worth knowing
Parametric insurance
pays automatically when predefined triggers occur—such as heat waves rising past temperature thresholds—in contrast to traditional mechanisms that require damage assessments.
Shock-resilient loans bundle climate finance with insurance. When disasters strike, insurers temporarily cover debt payments, freeing government resources for emergency response.
Debt-for-nature swaps replace government debt with cheaper loans and invest the money saved on interest to fund environmental projects, all while lowering a country’s overall debt.
What’s the way forward?
The insurance sector must standardize mechanisms to reduce the multiyear deal timelines. They also should invest in technical assistance to educate finance ministries about these tools while offering transparent, tiered pricing that makes coverage accessible to the most vulnerable nations. Governments, for their part, should mandate that new climate projects include shock resilience features. Governments should also invest in the weather-monitoring and data infrastructure that enables the accurate detection of triggers related to parametric insurance.
The fundamental shift required is treating these mechanisms not as innovative pilots to celebrate but as standard infrastructure for climate-vulnerable borrowing—embedded systemically across sovereign debt and development finance rather than deployed as occasional experiments.
Jorge Gastelumendi is the senior director of the Atlantic Council’s Climate Resilience Center. He formerly served as chief advisor and negotiator to the government of Peru, playing a critical role during the adoption of the Paris Agreement in the government’s dual role as president of COP20 and co-chair of the Green Climate Fund’s board.
