Climate risks outpacing insurers’ projections

Climate change is accelerating faster than anticipated by insurers’ risk models, actuaries warn, raising red flags for the insurance industry.

A new analysis by the UK Institute and Faculty of Actuaries (IFoA) with the University of Exeter finds that climate risks are building up more quickly than governments, financial institutions, and insurance markets have prepared for.

Current climate models underestimate the pace of global warming and its financial fallout, the report argues, due to factors like the loss of aerosol-induced cooling (a 'hidden sunshade' from pollution that has so far masked about 0.5°C of warming) and evidence that the Earth’s atmosphere is more sensitive to greenhouse gases than previously thought. 

Together, these factors suggest that global temperatures could reach the critical 2°C increase well before 2050. This would bring forward the timeline for severe physical climate impacts that drive insurance claims, potentially straining reinsurance capacity.

Implications for insurance availability and affordability

Such faster-than-expected warming has serious implications for insurers. The report warns that an uptick in the frequency and severity of extreme events – from hurricanes and wildfires to floods and heatwaves – will put increased pressure on insurance claims and premiums. In other words, disasters that insurers once expected to occur rarely are happening more often, causing larger losses.

A consequence is that insurance cover could become unavailable or unaffordable in high-risk regions sooner than anticipated. If certain areas face continual catastrophes (for example, repeated wildfires or floods), insurers may retreat due to unsustainable losses. This trend is already evident: in California, for instance, several major insurers stopped offering home insurance in wildfire-prone areas. State regulators eventually intervened with new rules to maintain coverage in these high-risk zones. Such dynamics foreshadow a growing 'protection gap' where climate-exposed communities struggle to obtain affordable insurance.

Rising catastrophe losses

Escalating climate losses also threaten insurers’ financial stability and business models. Over the past decade, insured losses from natural catastrophes have trended sharply upward. According to Swiss Re, global insured catastrophe losses exceeded $100bn annually for six consecutive years, a historically unprecedented run of high losses. Such repeated heavy payouts raise concerns as to whether insurers have set aside enough capital and priced risks adequately. In response, many insurers have raised premiums and tightened coverage terms in disaster-prone markets. 

However, actuarial experts caution that simply charging higher premiums may not be a sustainable solution if losses continue to outpace predictions – exorbitant rates can drive customers away or make insurance impractical. The report describes a worst-case scenario dubbed “Planetary Insolvency,” where compounding climate shocks erode global economic activity and overwhelm financial safety nets like insurance.

Conclusion: Adapting to the new climate reality

To avoid these dire outcomes, insurers must adapt swiftly and integrate climate foresight into their strategies.

Actuaries and climate scientists are urging the industry to update its catastrophe models and stress-testing to reflect emerging climate data. Insurers may need to build larger buffers and recalibrate underwriting for a future where, for example, “once-in-a-century” storms happen far more frequently.

Some insurers and reinsurers have begun advocating for risk prevention measures – Swiss Re’s chief economist emphasises “strengthening prevention, protection and preparedness” as essential to protect lives and property in the face of rising losses. By encouraging risk-reducing practices (and even helping fund them), insurers can lower future claims while fulfilling their role as societal “shock absorbers.”