Municipal resilience bonds for earthquake risk reduction: a financing model for Istanbul’s infrastructure

Earthquakes lead to significant economic and social risks. As one of the world’s most densely populated cities, Istanbul faces both high earthquake risk and ageing infrastructure, while municipal budgets and conventional (re)insurance continue to prioritise post-disaster recovery over preparedness. This study proposes the innovative application of a Municipal Resilience Bond (MRB) to finance pre-disaster preparedness and evaluates its potential value for Istanbul, Turkey. The study integrates three objectives: (i) a compound Poisson loss process for earthquake frequency and severity calibrated to Turkish Catastrophe Insurance Pool records (1141 events, 2000–2024) and indemnity data; (ii) a Vasicek interest rate model to simulate the dynamic interest rate; and (iii) a payoff structure that links resilience bond triggers to magnitude bands with an effectiveness parameter (ξ). The framework quantifies how an upfront “rebate” generated by modelled risk reductions can be recycled into priority retrofits and lifeline infrastructure, thereby aligning the incentives of municipality, (re)insurer, and investor incentives while expanding Istanbul’s capacity for pre-disaster mitigation. This approach can be generalised to other catastrophic events and cities, offering a data-driven bridge between catastrophe risks and resilience finance to accelerate adaptation while maintaining capital market discipline.