Climate disasters are driving insurance losses up 7% annually, threatening to make vast areas uninsurable. Sandy Trust explores the looming ‘great risk transfer’ from insurers to society.
Insurance is the invisible lubricant of the economy. Insurance facilitates risk taking and innovation, enabling economic growth and stability. It allows individuals and businesses to take on calculated risks, knowing they are protected against potential financial losses, thus supporting economic activity.
In this article we explore the:
Analysis shows that in the decade since the Paris Agreement, insured losses from natural catastrophes have nearly doubled. They’ve jumped from $77 billion (adjusted to 2024 price terms) in 2015 to $145 billion in 2024, according to Swiss Re Institute data.
The current annual rate of increase of 7% is equivalent to a doubling every decade. If this rate doesn’t increase further, average annual losses could amount to $270 billion by 2035, with a 1-in-10 chance of annual insured losses exceeding $300 billion this year.
Major reinsurers and market brokers produce significant analysis on insured and economic losses each year, showing a steadily increasing trend in damages.
Headlines include:
Swiss Re estimates insurance assets of about $1.8 trillion, with re-insurance capital of $500 billion. That means the market should be able to continue covering insured losses in the near term.
However, a 7% upward trend implies a doubling every decade (if that rate doesn’t itself increase). And behind the numbers is a tale of wider socio-economic impacts with:
Zurich Insurance Group states: “If the frequency of extreme weather events continues to rise, premiums for natural catastrophe insurance will need to increase to reflect the additional risk. This, in turn, will affect the level of protection that individuals and businesses are willing and able to purchase, with potential consequences for the overall functioning of the market.”
Others put it more starkly, with one insurance executive stating, “We are fast approaching temperature levels – 1.5°C, 2°C, 3°C – where insurers will no longer be able to offer coverage for many of these risks. The math breaks down: the premiums required exceed what people or companies can pay. This is already happening. Entire regions are becoming uninsurable.”
The implications are not trivial. If homeowners cannot insure, they may not be able to secure mortgages, or the state may have to step in to provide insurance at loss-making prices. Impacts of this might cascade through society, with serious implications for individuals, businesses, their locations and their cost bases.
The potential for this issue to become a systemic risk is clear: it is effectively a great risk transfer from the insurance sector to individuals, companies and states.
As a recent paper points out, it is not just the mega-events but also the cumulative impact of ‘little floods everywhere’ which will hit society, as small changes in individual disaster probabilities can compound into systemic risk.
For example, consider an increase in flood probability in a particular location from 0.1% to 0.2%. While this may not seem significant, if you have 100 communities, the probability that at least one experiences flooding nearly doubles from 9.5% to 18.1% annually. More critically, “the chance that two or more communities are flooded in the same year nearly quadruples, from 0.46% to 1.74%.” This mathematical reality means societies must prepare for multiple simultaneous disasters rather than isolated events.
The research further demonstrates that “the chance of three or more floods increases by a factor of 7, the chance of four or more floods increases by a factor of 15, and so on.” These compounding probabilities create scenarios where multiple “1000-year floods” could occur in rapid succession, overwhelming both insurance capacity and societal response mechanisms.
With regards to flood, studies show that:
In other words, precisely this kind of compounding risk is found in more complex models.
These findings align with the broader pattern of climate impacts materialising sooner than expected and at lower temperatures than estimated. The severity and frequency of extreme events are unprecedented and beyond model projections.
The consequences of this are likely to be felt not just by those in flooded communities. Insurance premium increases may impact everyone purchasing insurance. And the cost of supporting impacted communities may start to eat into state budgets for other services, such as health or education.
As the research states, “Climate change is not just a story of floods, of course. The combination of increased flood risk and increased risk of high temperatures and drought will expose vulnerabilities in electricity supply and transmission infrastructure, road and rail systems, healthcare systems, and more besides. Any one event may not be catastrophic for a whole country, but if different aspects of the system are being hit by more and more crippling events, in diverse locations, with increasing frequency, then our ability to respond will diminish and the costs to society could grow substantially.”
This raises important questions:
The World Meteorological Organisation forecasts a 70% chance that the 5-year average warming for 2025 to 2029 will be more than 1.5°C. 12 month average temperatures have exceeded 1.5°C above pre-industrial level and the rate of warming has increased to around 0.3°C per decade. Simple mathematics implies temperatures over 2°C in the 2030s, with research by the actuarial profession warning 3°C is possible by 2050.
A number of factors may act to further accelerate warming including:
On top of that is the very real concern that we have significantly underestimated how sensitive the Earth is to greenhouse gases. This is a topic we will be publishing research on later this year. Taken together, all these factors imply that the rate of warming may accelerate even more in the coming decades unless radically different action is taken.
This supports the answer to the first important question. The trend is almost certain to continue and likely to accelerate, with the significant consequences for the insurance business model and society outlined above.
Idiosyncratic financial institutions have limited influence over systemic risks. Rational decisions from insurance companies in relation to increasing risk will see premium increases followed by insurance withdrawal. The insurance sector as a whole can highlight and communicate this risk. But to build resilience and mitigate the risk will require co-ordination between public and private sectors, informed by clear-eyed and realistic risk assessments that highlight the potential severity of the consequences.
There is a rapidly closing window of opportunity to change the trajectory of rising climate impacts and significantly mitigate risks via rapid decarbonisation. It will be overwhelmingly positive economically to do so.
Risk assessment shows that every tenth of a degree counts, with temperature increases driving highly non-linear risk above 1.5°C, including more frequent and severe weather extremes, as well as increasing the chance of triggering climate tipping points.
However, rapid decreases in greenhouse gas emissions, including methane reduction pledges, could still halve warming rates over the next 20 years.
Governments can act to deliver this by changing the economics of both renewables and fossil fuels. Given the risks associated with temperatures above 1.5°C, ongoing fossil fuels subsidies is an unwise allocation of capital.
Governments can also catalyse structured activity to reduce vulnerability, including increasing adaptation planning, and finance can further help societies reduce vulnerability and adapt to the increasingly severe risk profile expected.
