Financial Storm: How Escalating Climate Events Are Reshaping the Insurance Market

Climate change is unleashing a financial storm that is transforming the insurance industry in unprecedented ways. As wildfires rage, hurricanes intensify, and floods threaten low-lying communities, insurers are grappling with rising costs and unpredictable risks. From soaring premiums to “insurance deserts,” the impact is far-reaching. 

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2024 marked a pivotal moment in the escalating financial toll of climate change, with global insured losses from natural disasters reaching US$140 billion, the third most expensive year on record. This trend underscores the profound impact of climate-related events on the insurance industry, which is grappling with how to balance profitability with the imperative to provide coverage in increasingly vulnerable regions. The recent wildfires in Los Angeles, which have already driven insurance loss estimates to between $30 and $40 billion in early 2025, highlight the growing financial burden on insurers. 

Earth.Org examines the transformative impact of climate change on the insurance market, focusing on recent events and trends.

The Rising Cost of Climate Disasters

Climate change is manifesting through more frequent and severe weather events such as wildfires, hurricanes, and floods. These disasters are not only devastating communities but also straining the insurance sector. For instance, 2024 was marked by significant insured losses, with severe convective storms (SCS) accounting for 41% of global insured losses, totaling $64 billion. The economic cost of weather and climate events in 2024 was estimated at $402 billion, with insurers covering about $151 billion of that total.

The frequency and severity of these events are driving up insurance claims, leading to significant financial strain on the industry. In the US, the number of billion-dollar weather and climate disasters has continued to rise, with 27 such events in 2024 alone. This trend is expected to continue as climate change intensifies, further complicating risk assessment and management for insurers.

Insurers’ Response

In response to escalating climate risks, the insurance industry is undergoing significant adjustments.

Insurers are raising premiums to reflect the increased risk of climate-related events. This is particularly evident in regions prone to natural disasters, where premiums are expected to rise substantially. Stricter underwriting practices are being implemented to manage exposure to high-risk areas, often resulting in reduced coverage or outright denial of policies. Notable examples include major insurers limiting their presence in high-risk regions such as California, creating “insurance deserts” where coverage becomes scarce or unaffordable.

Reinsurance companies play a crucial role in managing the financial risks associated with climate-related disasters. They are adapting by developing new catastrophe modeling systems and innovative insurance products. Global reinsurers are increasingly focused on sustainability initiatives and green investments to mitigate climate risks. For instance, Swiss Re has launched a climate resilience program aimed at supporting communities in developing climate-resilient infrastructure.

Withdrawal From High-Risk Areas

The trend of insurers withdrawing from high-risk areas is becoming more pronounced. In California, for example, several major insurers have significantly reduced their presence or stopped issuing new policies due to the increasing risk of wildfires. The impact of rising insurance costs and policy exclusions is profound for homeowners, businesses, and communities who, as premiums increase and coverage decreases, are left with unaffordable insurance options.

This has led to a surge in demand for government-backed insurance programs like the National Flood Insurance Program (NFIP), which provides critical coverage for flood-prone areas in the US. However, these programs often have limited capacity and may not provide comprehensive coverage, leaving customers unprotected and policyholders vulnerable to financial shocks from climate-related events. 

In Canada, for example, insurers paid out a record-breaking $7.7 billion for extreme weather claims in 2024, including for flooding, wildfires, and hailstorms. This has led to warnings of higher premiums in 2025, adding to already inflated levels endured over the past decade. The reliance on government-backed insurance programs is becoming more common, as private insurance becomes less accessible in high-risk areas.

This situation exacerbates economic vulnerability, particularly in regions already struggling with climate-related stressors.

Regulatory and Market Interventions

Governments and regulators are responding to climate crisis with various interventions. such as new laws and public insurance programs. For example, the U.S. National Flood Insurance Program provides coverage for flood-prone areas, while the UK’s Financial Conduct Authority has introduced anti-greenwashing rules to enhance climate risk management. New laws and public insurance programs are being established to address the growing protection gap, which stood at 60% in 2024 globally. These initiatives aim to ensure that vulnerable populations have access to some form of insurance coverage.

Advances in climate risk modeling are enabling insurers to better assess and manage risks. This includes the development of parametric insurance and catastrophe bonds, which provide payouts based on predefined climate-related triggers rather than actual damage. Innovation in insurance products is crucial for maintaining insurability in vulnerable regions and promoting resilience. For instance, insurers are encouraged to rethink their approach to climate scenario analysis, incorporating tipping points into their models to better predict climate-related risks.

The Future of Insurance in a Warming World

As climate change continues to reshape the insurance landscape, the industry must evolve to remain sustainable. Experts predict that insurers will need to adopt more sophisticated risk management strategies, leveraging technology and data analytics to better predict and mitigate climate risks. There is a growing emphasis on sustainability and green investments within the insurance sector, which could play a critical role in reducing systemic climate risks.

The balance between profitability and providing coverage in climate-vulnerable regions will require innovative solutions and regulatory support. Advancements in artificial intelligence and climate mitigation strategies are expected to play a pivotal role in reshaping the industry, enabling more precise risk assessments and adaptive insurance products. But without proper management of climate risks, the insurance industry is vulnerable to underestimated claims that could lead to its collapse.

Featured image: David Fine/FEMA.