Broker WTW is to create a new insurance “wrapper” which will open the door for greater private sector investment in climate adaptation with the backing of the US government.

The business has revealed it is to receive funding from the US Agency for International Development (USAID) to develop a climate-resilient insurance solution that aims to unlock climate adaptation investment from the private sector.

“With USAID funding, WTW will design a pilot facility enabling the US Development Finance Corporation (DFC) to offer a parametric insurance solution (Resilience Wrapper) that protects its direct loans to private enterprises from climate-related shocks,” WTW explained. “Following a triggering event, such as a cyclone, flood, or drought, the subsequent loan repayment will be covered by the insurance payout.

The World Economic Forum said The cost of adaptation in developing countries is expected to reach $300 billion per year by 2030. By contrast, global adaptation finance flows were only $46 billion in 2020, of which only $28.6 billion went to developing countries.

“Developing countries are more seriously impacted by climate change,” It added. “The world’s 55 most climate-vulnerable economies have already lost 20% of their GDP. There is a clear need for increased climate adaptation finance, especially in developing countries.

“The private sector can help meet this investment gap. Currently, only 1.6% of all adaptation funding comes from private investment — making climate adaptation an untapped opportunity.”

It continued: “The market could be worth $2 trillion per year by 2026, and the need for adaptation solutions will grow as climate impacts become more prevalent.

“Climate risks will impact virtually every industry: real estate assets will be damaged; agricultural productivity will decline; financial institutions will have to grapple with higher risk and even access to the internet could be in danger.

“Damages from climate change-related events, such as wildfires, water shortages and greater intensity storms, are likely to total in the billions per event — this is why the adaptation market is valuable.”

WTW explained the Resilience Wrapper protects the borrowers’ debt servicing obligations from the most impactful climate risks, ensuring that they can remain operational and avoid default following a shock event.”

Simon Young, senior director, Disaster Risk Finance & Parametrics, WTW, explained: “Vulnerability to climate change and disaster risk can have a direct effect on the cost of borrowing, particularly in lower-income countries. This adds additional pressure on debt servicing capacity and increases the likelihood of debt default, which can lead to credit rating downgrades.

“With USAID funding, the WTW parametric solution will be a game changer for building the financial resilience of communities to extreme weather events by helping to unlock much-needed private sector investment in critical adaptation projects in climate vulnerable countries.”

The broker added the scheme will support the President’s Emergency Plan for Adaptation and Resilience (PREPARE), the short-term catalytic funding was awarded through the USAID Climate Finance for Development Accelerator’s Adaptation Finance Window initiative. The initiative utilises catalytic grant funding to de-risk the development and scaling of private sector-led climate adaptation approaches in frontier and emerging markets; it also includes an investment from the USAID Enterprises for Development, Growth, and Empowerment (EDGE) Fund.

Gillian Caldwell, USAID chief climate officer, explained: “A disaster can bankrupt a business overnight. Innovations like the WTW Resilience Wrapper make communities better equipped to withstand disaster by supporting the local companies they depend on, while incentivising lenders to work in places they might otherwise consider too risky for investment. I commend WTW’s leadership in this area as it signals both the need and the opportunity for greater private investment in resilience.”