Developing economies continue to face a substantial financing gap that threatens progress towards sustainable economic growth and development. According to widely recognised global estimates, achieving the Sustainable Development Goals (SDGs) requires annual investment of around US$4 trillion, yet public budgets and the financial capacity of international development agencies remain well below that level. As a result, critical investments in infrastructure, employment generation and climate adaptation projects continue to fall short of demand.
Against this backdrop, private capital is assuming an increasingly significant role in global development finance. In particular, the insurance industry, with its vast pool of long-term capital, is emerging as an important source of financial support through innovative risk-sharing mechanisms rather than conventional direct investment.
The global insurance market is expanding rapidly and is projected to reach approximately US$9.8 trillion by 2027. Despite this enormous financial capacity, less than one-quarter of insurance-related investment currently reaches developing economies. Investors continue to regard many of these markets as high-risk because of political and economic uncertainty, regulatory complexity, limited project preparation and the mismatch between insurers’ long-term liabilities and the nature of many development projects.
In response to these challenges, a risk-based financing model has gained increasing prominence within the international financial system. Under this structure, insurance companies do not directly finance development projects. Instead, they insure a portion of the credit risk associated with loans extended by multilateral development banks.
The arrangement allows development banks to continue lending while transferring part of the potential credit losses to insurance providers. Should borrowers default, insurers compensate an agreed share of the losses. This enables development banks to preserve regulatory capital and deploy it across a significantly larger portfolio of development projects. In practical terms, each dollar of insurance capacity can leverage roughly two dollars—or even more—in additional development lending.
One of the leading examples of this approach is the International Finance Corporation’s (IFC) Managed Co-Lending Portfolio Programme for Financial Institutions. Through this programme, insurance companies provide credit protection on loan portfolios extended to financial institutions in developing countries, enabling the IFC to expand lending without proportionately increasing its capital requirements.
In 2023, the programme secured approximately US$3.5 billion in credit insurance capacity. This is expected to support nearly US$7 billion in additional lending over the coming years, significantly increasing the availability of finance across multiple developing markets.
The economic impact of this financing model is already becoming evident. More than 70 financial institutions have benefited from the programme, facilitating increased financing across projects in 27 countries. Of these, 24 are classified among the world’s poorest and most vulnerable economies.
The expanded access to finance has particularly benefited small and medium-sized enterprises (SMEs), women-led businesses and agricultural enterprises. Lending to these sectors has increased by between 20 and 40 per cent, providing greater access to capital for businesses that traditionally struggle to obtain financing through conventional banking channels. Increased investment in these areas has the potential to strengthen local economies, stimulate employment and support broader financial inclusion.
Many analysts describe this development as a “quiet revolution” in international development finance. Rather than relying solely on additional public funding or direct investment, the model mobilises private-sector capital by redistributing financial risk among development banks, insurance companies and institutional investors. This creates a new framework in which public and private financial institutions work together to increase lending capacity without requiring equivalent increases in capital.
Nevertheless, important questions remain regarding the long-term sustainability of the model. A key concern is determining where the ultimate financial risk ultimately resides—whether with developing countries, multilateral development banks or insurance companies themselves.
The framework also faces several external challenges. Political instability, global economic slowdowns and increasingly frequent climate-related shocks could reduce insurers’ willingness or capacity to underwrite credit risk. Moreover, development projects often generate relatively modest financial returns despite delivering substantial social and economic benefits, raising questions about whether insurers will remain committed to supporting such investments over the long term. Balancing commercial profitability with developmental impact therefore remains one of the central challenges of the model.
Climate finance represents another area where insurance-backed lending could play an increasingly important role. Global climate investment needs are estimated at approximately US$1–2 trillion annually, creating significant demand for innovative financing mechanisms capable of mobilising additional private capital. At the same time, financial inclusion remains below 50 per cent in many developing regions, highlighting the need for financial structures that can bridge persistent funding gaps and expand access to credit.
However, regulatory barriers and policy constraints continue to limit the scale of capital flows into many developing markets. Addressing these obstacles through improved regulatory coordination, stronger institutional capacity and better project preparation will be essential if insurance-backed lending is to achieve its full potential.
Insurance-supported lending is therefore evolving beyond a financial innovation into a structural shift in global development finance. If the model continues to expand over the next decade, it could substantially increase investment in infrastructure, climate resilience and SME financing across developing economies. Its long-term success, however, will depend on robust risk management, effective policy coordination and the ability to deliver sustainable financial returns while meeting development objectives.