When black swans turn into gray rhinos: part 3

In this blog series we discuss climate related risks on the spectrum of well established, known, quantifiable risks (‘white swans’) to the extreme, unknowable risks (‘black swans’). In between we find risks that are highly probable, high impact in potential, but are often ignored. These are the ‘gray rhinos’. 

In the third part of our swan blog series, we look at the non-financial policyholder risks of climate change.

Introduction

As climate change continues to reshape our environment and economies, it becomes increasingly important to consider how policyholders may respond to its impact. 

By ‘policyholder behaviour’, we mean any decision to initiate, modify, cancel, or claim on an insurance contract – or even the choice to do nothing. This behaviour is dynamic and psychologically complex, influenced by evolving perceptions, emotions, and external conditions. 

Crucially, historical responses to extreme events – such as the COVID-19 pandemic or major natural disasters – may offer some, but limited, insight into future responses to climate-related disruptions. 

This is because such extreme events are expected to become more frequent, creating cascades of impacts. A sequence of events formerly considered out of range (black swans) could become emerging white swans or even gray rhinos.

In this article, we delve into how climate change may trigger shifts in policyholder behaviour, and what insurers can do to anticipate and adapt to these emerging patterns. We distinguish between the behaviour of prospective policyholders (that is, demand for life insurance in general), and behaviour of existing policyholders (that is, withdrawals, early or late retirement, pension commutation).

Demand for life insurance

Due to the complex and potentially opposing nature of climate change impacts, its influence on demand for life and health insurance is uncertain. It could have unexpected impacts on new business plans and business mix. Consequently, insurers may need to reassess their business strategies, including product features such as guarantees, bonus philosophies, and other design elements.

Factors potentially increasing demand for life insurance include:

• Emergence of new diseases: climate change may give rise to new illnesses or health conditions, prompting demand for innovative insurance solutions or broader coverage under existing plans. For example, warmer temperatures are leading to new mosquito-borne illnesses by allowing pathogens that carry them to move into habitats that were previously too cold for them. One such example is the spread of ‘flesh-eating bacteria' or Vibrio vulnificus’ in the eastern coast of US.
• Higher prevalence of existing diseases: rising temperatures have been linked to an increased risk of certain conditions, such as cardiovascular diseases. As awareness of these risks grows, consumers may seek more comprehensive life and health insurance coverage. 

Factors potentially decreasing demand include:

• Rising inflation and reduced disposable income: climate change can have inflationary effects. For example, erratic rainfall may disrupt agricultural production, driving up food prices. Combined with a higher interest rate environment (including more expensive mortgages), this could reduce consumers’ discretionary spending power, leading to lower demand for life and health insurance products.
• An increase in premiums driven by rising mortality rates could make life and health insurance less affordable and depress demand. For example, according to the AQLI 2025 report by the Energy Policy Institute at the University of Chicago, residents in Delhi are losing 8.2 years of life expectancy due to high smaller particle matter pollution. The elevated risk may prompt insurers to raise premiums, potentially pricing out large segments of the population. On a longer-term basis, improved air quality from reduced fossil fuel burning may improve life expectancy, raise premiums and reduce demand for longevity products such as annuities. 
• Shifts in regulatory regimes that require more comprehensive coverage or impose limitations on the use of climate-related factors in underwriting health risks, especially for vulnerable populations, increase the risk of higher premiums and trigger a spiral of reduced demand and anti-selection.

Behaviour of existing policyholders

Climate change may also influence policyholder behaviour with respect to existing products, including withdrawals, timing of exercising options, for example early or late retirement, and pension commutation. 

On the one hand, increased awareness of climate-related risks may reduce lapses as policyholders recognise the growing importance of protection. On the other hand, financial strain – such as the need to prioritise essential household bills – may increase lapses, surrenders, premium holidays, or partial withdrawals.

Potential product-specific impacts:

• Individual annuities: while there are no withdrawal options, climate-related inflationary pressures and affordability concerns could affect the timing and lead to early or late retirement.
• Bulk purchase annuities: individual policyholders may, before the pensionable age, transfer their accumulated pensions to another provider on guaranteed rates. Volatility of interest or inflation rates may lead to these reflecting generous terms and incentivisation for more individual policyholders to leave, magnifying both cost strains and loss of annuity business.
• Term insurance: policyholder options are likely to have minimal impact, as surrenders are generally not permitted due to low reserves, although higher mortality due to heatwaves and other severe weather events would increase liabilities.
• Universal life: there is significant risk of anti-selective withdrawals due to the flexibility of these types of products and the guarantees attached. For example, no lapse guarantees may unexpectedly become valuable if the fund returns are poor in a scenario where market values adjust quickly and materially to a new climate baseline scenario.
• Unit-linked or savings products: these have a higher risk of surrender, as surrender values can be substantial and there are substitute products. In periods of inflation or financial stress, policyholders may be incentivised to surrender or withdraw funds to meet short-term liquidity needs. There could also be increased risk of anti-selection. As an example, in a high greenhouse gas scenario, increases in mortality can be exacerbated if there are increased lapses if only higher risk lives remain in the portfolio.

Conclusion

Climate change could have a wide range of impacts on policyholder behaviour, whether demand for life insurance, withdrawals, or policyholder choices around pensions, and these remain highly uncertain both in frequency and severity. 

The behavioural responses are intertwined with wider climate-driven changes in mortality, morbidity, financial pressures, and affordability, creating a complex and interdependent set of risks. 

While these can be described qualitatively, accurate modelling or quantification remains challenging: for now, significant aggregations of risk are likely to be in black swan territory. There is no clear best estimate to include in technical provisions or stressed assumptions for SCR calculations. In the ORSA, we would expect that these impacts are qualitatively analysed as part of a specific business scenario. 

Going forward, insurers must remain agile, continuously reassessing their assumptions about policyholder behaviour including potential future changes in demand, adapting product design, pricing, and risk management practices. 

Actively scanning the horizon in the mist of changing policyholder behaviour may bring a gray rhino into view. Being forewarned, a crash can potentially be either avoided or its impact softened.

Read more in the series

Part 1

Part 2