Insurers Face (Eventual) Risk Of Planetary Insolvency

Financial—indeed all—markets face no bigger risk than this

Pricing planetary risks is an embryonic science (JE via Artiphoria)

I have tracked the insurance and reinsurance sectors for decades—often seeing it as a leading indicator of financial market interest in issues like climate chaos. And I’m often struck at how quickly hard-won lessons from the past are forgotten in the scramble to present-day business.

So, for example, I chaired for many years The Environment Foundation, whose funding came from a social tithe charged on the business done by people in the Lloyds Insurance Exchange involving selling so-called environmental impairment liability insurance to businesses facing risks associated with asbestos, contaminated land and radioactive materials.

We did great work, including launching a legal challenge to the UK Charity Commission to force them to accept that sustainable development could—indeed should—be a charitable objective. We won, but I was always acutely aware that many of those who had invested in the syndicates that had underwritten the insurance policies had pretty much lost the shirts on their backs, literally.

Invisible lubricant

Still, through all its ups and downs, insurance remains “the invisible lubricant of the economy,” as Sandy Trust puts it in a new post for the Institute and Faculty of Actuaries. He is a former Chair of the IFoA Sustainability Board and Group Director of Organisational Risk at M&G.

He notes that, “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.”

Without insurance much of today’s global economy would quite literally grind to a halt. So what if there was an existential risk to the insurance and reinsurance sectors? You would imagine that both insurers and insured would be racing around trying to solve the problem. Some are, no question, but the evidence suggest that many are still asleep at the wheel.

Insured losses double

The question Trust asks is: Could climate change outpace the available insurance solutions? And, spoiler alert, he says it is quite likely to do so. The risks are growing all the time:

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.

Trust points out that major reinsurers and market brokers “produce significant analysis on insured and economic losses each year, showing a steadily increasing trend in damages.” Headlines include:

· $2 trillion of economic losses in the decade 2014 to 2023

· $83 billion of global economic losses due to natural disasters in Q1 2025, 36% higher than the mean since 2000

· $368 billion of economic losses in 2024, 14% above the 21st century average

· $34 billion of loss events in 2024, double the average of $16 billion

· a 5% to 7% trend in increasing insured losses

Swiss Re estimates insurance sector assets of about $1.8 trillion, with re-insurance capital of $500 billion. Trust concludes that 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:

· economic (uninsured) losses as much as triple insured losses

· physical infrastructure damage

· natural carbon sinks degradation

· impacts on businesses, homes and livelihoods.”

“The math breaks down”

“If the frequency of extreme weather events continues to rise,” warns the Zurich Insurance Group, “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 paint a still starker picture, 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.

Mitigating the great climate change risk transfer

Trust’s post covers good deal more ground, but concludes by saying that, “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.”

Building toward a conclusion, the post argues:

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.