UNDRR proposes disaster resilience adaptation financing structure, with ILS investment vehicle

The United Nations Office for Disaster Risk Protection (UNDRR) has published details of a proposal for a high-level Disaster Resilience Adaptation Financing (DRAF) structure that features an insurance-linked securities (ILS) vehicle, to support disaster risk insurance coverage and resilience adaptation financing.

In a commentary authored by Alissa Legenza and Shaun Tarbuck, members of the UNDRR’s Investor Advisory Board (IAB), the pair reveal that the DRAF solution offers a dual-vehicle structure, that combines a disaster risk insurance financing vehicle with a tailored debt financing vehicle to address both immediate disaster response needs and long-term resilience adaptation investments.

“This integrated approach allows for targeted capital deployment across varied timescales and geographic scales, from local community projects to large national initiatives,” the pair explain.

Concurrently, details also reveal that the DRAF facility is structured around two primary investment vehicles, one of which is an ILS vehicle, that work in tandem to address specific aspects of resilience financing.

The ILS vehicle offers insurance protection primarily through fully collateralized insurance linked securities products, to provide financial relief in the event of a qualifying disaster.

To collateralize the vehicle’s insurance responsibilities, capital is sourced from private investors looking for returns uncorrelated to traditional financial markets, in return for a risk transfer premium provided by the DRAF sponsor.

Alongside the ILS vehicle, is a debt financing facility that according to UNDRR can be structured with investment tranches, with each one reflecting different levels of risk.

“Investors with varied risk tolerances are thus able to participate according to their preferences, and issuers benefit from tiered access to funds that match the scale and urgency of their resilience projects. Funds from this vehicle are earmarked for resilience-building projects, ranging from infrastructure upgrades to natural disaster preparedness programs,” the proposal reads.

An important detail to highlight is how DRAF’s structure can reportedly provide support for a wide variety of project timelines, accommodating both short-term adaptation efforts and longer-term infrastructure development.

The pair notes that with short-term adaptation financing, for example, a community that’s facing heightened wildfire risk might engage with the DRAF for a three-year term, leveraging a catastrophe bond to secure insurance against wildfire events while utilizing the debt facility for adaptive upgrades.

“In this scenario, the cat bond would deliver emergency funds if a wildfire event triggers a payout, providing immediate liquidity to support relief efforts. Meanwhile, the debt financing could fund proactive adaptation measures, such as upgrading building materials to improve fire resistance, developing defensible space around homes, and implementing community-wide emergency preparedness programs. This structure not only provides short-term financial relief but also fosters tangible resilience improvements that reduce future risk exposure,” the authors explain.

Additionally, for long-term infrastructure projects, such as national or regional resilience projects with larger capital requirements and longer timelines, it is possible that insurance coverage needs may end up exceeding capabilities of the ILS market alone.

According to the authors, in this case, DRAF can offer a solution that integrates ILS capital with traditional insurance and reinsurance programs.

“This blended model is especially valuable for large-scale, high-cost infrastructure projects, where securing consistent protection over extended periods is critical. For instance, a coastal country implementing flood defenses might rely on DRAF for initial disaster coverage and adaptation financing needs. As the project progresses, sometimes over a decade or more, traditional insurance or reinsurance solutions could be layered in to ensure continuous risk coverage.”

Adding: “Using this approach, any potential gaps in insurance funding through the capital markets can be transferred to large insurance and reinsurance companies.”

Details also reveal that DRAF’s design includes specific eligibility criteria and incentives to ensure that participating entities are committed to resilience goals. Cities, communities, countries, and alliances of countries can allegedly qualify for DRAF funding so long as they meet two conditions.

One of these requirements is that participants must purchase insurance protection from the ILS vehicle that’s relevant to their specific risk profile. The authors affirm that this requirement ensures that entities are financially prepared to manage the immediate impacts of a major disaster event, thereby reducing reliance on ad-hoc funding measures that can delay recovery.

As well as obtaining insurance protection, participants must also agree to direct the debt financing toward concrete disaster resilience building initiatives, which can include enhancing the resilience of public assets, such as building flood-resistant infrastructure, developing wildfire buffers, and incorporating resilient design principles into new constructions.

Notably, another key feature of DRAF’s structure is the incorporation of a performance-based incentive.

“If resilience objectives are not met within contractual terms, an enhanced premium rate is activated on the insurance risk transfer premium, increasing returns for investors of the ILS vehicle. This mechanism serves as a financial motivator for issuers to meet resilience milestones and ensures accountability throughout the lifespan of the project,” Legenza and Tarbuck noted.

The pair conclude by stating that the DRAF solution can provide an “inventive approach” to resilience financing, by combining immediate disaster insurance coverage with adaptable debt financing.

“By aligning capital deployment with resilience and adaptation objectives, DRAF empowers communities, cities, and nations to proactively address the impacts of disaster-driven risks. Its flexible structure is designed to accommodate both short-term, community-focused projects and long-term, large-scale infrastructure initiatives, making it a versatile tool in the evolving landscape of disaster resilience financing.”

Concluding: “With its potential to bridge funding gaps, promote resilience-building, and extend support to vulnerable regions, DRAF stands as a promising solution in the global effort to mitigate the adverse effects of major disaster events.”

Also read: Resiliency-focused cat bonds could unlock billions for disaster risk reduction: UNDRR.