Insurance in the Era of Climate Change
3 big shifts and what they mean for communities
Climate change is impacting communities around the world in both extreme and more subtle ways. Climate science forecasts that these impacts will become amplified and more frequent over timeāeven as society works to reduce greenhouse gas emissions to prevent the most severe scenarios.
The sector perhaps most attuned to these climate risks is the insurance industry whose purpose is to provide individuals and society financial stability in times of catastrophic loss.
Reinsurance: The Best of the Climate Bookkeepers
Reinsurance companies provide insurance coverage to other insurance companies, effectively transferring some of the original insurer's risk. This means Reinsurance companies have been among the first companies to be financially impacted by climate change.
These large, global companies have long been adept at collecting and analyzing weather-related data and they are uniquely positioned to understand the impacts of climate change on their business model. Reinsurance companies are likely the most accurate bookkeepers of the cost of climate change. In fact, in April, Swiss Re predicted global costs for climate disasters to reach $145 billion in 2025, a nearly 6% increase from 2024.
How is the industry responding? To address current conditions, they are increasing premiums and reducing coverage for natural catastrophes. To try to mitigate future risk, they are trying to reduce global greenhouse gas emissions by underwriting green low carbon technologies and phasing out reinsurance of high carbon markets such as oil and gas. Both Munich Re and Swiss Re are phasing down fossil fuel underwriting as a climate risk management strategy.
The Institute for Financial Stability, in its report, Mind the Climate-Related Protection Gap, focused on the mismatch of coverage to risk and advocates for a multi-sector risk reduction approach. The authors offer this framework for reducing and transferring climate risks which includes a large public sector investment in resilience and adaptation solutions.
No True Climate Havens
Each year, more homes in the United States become uninsurable for floods, hurricanes or wildfires. The map below uses data from First Street show that different parts of the US are at risk of unaffordable insurance or non-covered climate-related events. It is clear that no part of the country is truly immune from becoming uninsurable or priced out of insurance.
The most extreme, event-based climate events such as flooding, hurricanes and extreme heat events get the most attention, but climate risks are both acute and chronic, physical and socio-economic in nature. And all types of climate risks have primary and secondary impacts that are rippling through every community on our planet.
Because climate impacts are so diverse and widespread, insurance companies canāt rely as much on their traditional strategy of diversifying their portfolio. This means they are instead reducing coverage and increasing premiums with profound impacts on individuals and communities.
The Center for American Progress highlights the role of government in investing in climate resilience and disaster preparedness and the need for the insurance sector to take these investments into account when providing coverage.
A good example is the National Flood Insuranceās Community Rating System. Local governments can work to reduce and avoid flood damage in their communities and implement proper floodplain management resulting in discounted flood insurance premium rates. More programs like this could be an incentive for communities to improve infrastructure and reduce risks.
Parametric Insurance
Parametric insurance is a relatively new type of coverage also known as index-based insurance. It covers the probability of a loss occurring rather than the actual loss from an event. Typically used in the commercial sector, it will kick in for wind at a pre-defined speed or an earthquake above a specified magnitude.
NPR recently covered how its use is growing in India to broadly to cover individual lost income during heat waves or farmers losses from heavy precipitation. Parametric insurance can be used by whole communities. The Indian State of Nagaland insured its entire population, against heavy rainfall through parametric insurance.
In California, Floodbase is a new insurance program for previously uncovered flood risk that offers parametric insurance to property owners based on measurable weather events.
According to the World Economic Forum, āthese pre-defined triggers and measurable indexes bring more transparency, expedite claims processes and payouts, and reduce administrative and frictional costs.ā
Learn More about Climate Risk
All sectors have an important role in climate mitigation and adaptation and building resilience. Want to learn more about assessing and addressing climate risk? I recommend materials from the Global Association of Risk Professionals. In 2023, I became a certified climate risk professional earning their Sustainability and Climate Risk Certificate. You donāt have to pursue the credential to take advantage of their learning materials. While the course book has a cost, you can view the required readings here.