Why and How the Fund for Responding to Loss and Damage Should Support Risk Finance
The Policy Moment
The Barbados Implementation Modalities (BIM) under the Fund for Responding to Loss and Damage (FRLD) mark a pivotal stage in shaping how the fund delivers on its mandate. With the first call for proposals open until 15 June 2026 and initial approvals expected at the ninth Board meeting in July 2026, countries are now developing submissions that will set the direction for FRLD operations.
The Secretariat has emphasized a “learning by doing” approach to understand countries’ Loss and Damage priorities and identify the most effective interventions. This moment presents a strategic opportunity to embed risk finance as a core component of national strategies—complementing adaptation, disaster risk reduction, and humanitarian response—so countries can respond to escalating climate impacts with greater predictability and speed.
Beyond Ad-Hoc Relief: The Power of Rapid Liquidity
Risk finance is not new in Loss and Damage discussions. The FRLD’s Governing Instrument already implied that the fund may deploy a range of tools—including insurance mechanisms, risk-sharing arrangements, and pre-arranged finance—designed to complement domestic resources while respecting debt sustainability. The FRLD High-Level Dialogue has also underscored the importance of such instruments in providing rapid liquidity after climate shocks, reducing the severity of impacts on people and economies.
The strength of risk finance lies in its ability to shift countries away from ad-hoc post-disaster appeals toward structured, predictable, and country‑owned financial systems. Mechanisms such as insurance, regional risk pools, and contingency funds ensure swift disbursements when disasters strike, and can be activated repeatedly within the national system.
While several countries have begun exploring risk finance options, early-stage tasks—such as designing products, establishing governance structures, and securing initial capital—remain resource-intensive. BIM is well placed to provide the catalytic support needed to overcome these barriers.
The Loss and Damage Protection Gap
Despite its potential, significant affordability challenges limit access to insurance and pre-arranged finance. Insurance premiums are risk-based; therefore, countries and communities with the highest climate exposure face higher costs, reducing coverage when it is most needed. This reinforces the protection gap: the most vulnerable populations have the least access to financial protection.
Rising climate risks are also reshaping the broader insurance market—reducing incentives for reinsurers to participate, increasing expected losses, and challenging the long-term viability of purely private insurance solutions. Closing this affordability and access gap aligns directly with the FRLD’s mandate to support recovery from climate‑related losses and damages. By helping countries secure pre‑arranged finance that reaches vulnerable and high‑risk communities, the fund can reduce repeated pressure on humanitarian and development budgets and enable faster, more resilient recovery after disasters.
What BIM can Support: A Systemic Approach
The BIM can address market constraints in ways that support risk financing accessibility for the most vulnerable communities. Grants can be deployed flexibly for:
initial capitalization of national or regional risk finance mechanisms;
premium support and targeted subsidies to make coverage affordable for vulnerable groups;
product and system design, such as developing triggers, payout modalities, and data systems;
risk layering strategies that allocate risks efficiently across public and private actors; and/or
institutional capacity building to strengthen governance and implementation
To date, major climate funds such as the Green Climate Fund, have largely prioritized risk reduction and early warning systems. Their support for insurance has focused primarily on market development and institutional capacity building, with only limited direct financing of premiums. Global and regional initiatives such as the Global Shield against Climate Risks and regional disaster risk finance programs have contributed to expanding insurance solutions, but significant gaps remain. For example, 62 percent of global economic losses from naturally induced catastrophes are uninsured, and in Africa only 0.5 percent of losses are covered. In 2022, just 2percent of the USD 76 billion in crisis-related financing was arranged in advance.
The BIM can complement these efforts by addressing the most persistent constraint: affordability, especially for vulnerable households, small producers, and climate-exposed sectors. Lessons from the Global Shield against Climate Risk's In-Country Process underscore the importance of inclusive national coordination, integration with public financial management systems, and the catalytic role of regional risk pools in delivering rapid payouts. However, affordability constraints persist—particularly for vulnerable populations—creating a clear space where FRLD’s grant-based support can close remaining protection gaps while reinforcing systemic resilience.
Scaling Predictable Protection: A Strategic Pillar of the BIM
The question for the FRLD is no longer whether insurance and risk finance should be supported, but how it is structured to ensure sustainability and additionality. Premium and capital support can make coverage affordable in the short term and enable countries to adopt risk finance mechanisms early. However, these interventions must be embedded within broader systemic reforms. This includes strengthening regulatory frameworks, improving climate and loss data systems, enhancing reinsurance capacity, and embedding risk finance within social protection and disaster response systems.
Applicant countries should therefore demonstrate how proposed risk finance instruments align with national loss and damage strategies and connect to existing systems; such as social protection, risk information, and emergency response frameworks, while showing how the BIM support complements other funds and initiatives, addressing their specific loss and damage challenges.
Through such an approach, BIM can help move the global community toward a future where vulnerable countries are protected not only after disasters occur, but before impacts escalate, strengthening resilience and safeguarding communities at the forefront of climate impacts.
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