Insurers Warn: Climate Crisis Risks Uninsurable World and Global Financial Instability

The global insurance industry, a cornerstone of economic stability, is increasingly confronting an existential threat posed by the accelerating climate crisis. Leading insurers warn that rising global temperatures and the ensuing surge in extreme weather events could soon render vast regions uninsurable, exposing the global financial system to unprecedented levels of unprotected risk. This alarming prognosis suggests a fundamental re-evaluation of how societies manage and mitigate the profound economic consequences of climate change, challenging the very underpinnings of traditional risk management and investment frameworks.

• The global insurance industry is facing an existential threat due to the accelerating climate crisis, potentially rendering vast regions uninsurable.
• Allianz warns that the world is rapidly approaching temperature thresholds where traditional insurance coverage for financial services may become untenable.
• Approximately two-thirds of economic losses from natural catastrophes currently remain uninsured, creating a substantial “protection gap.”
• Between 1994 and 2023, inflation-adjusted average insured losses increased by 5.9% annually, significantly outpacing global GDP growth of 2.7%.
• The catastrophe bond market has expanded by 75% since late 2020, reflecting efforts to manage escalating climate risks.

Günther Thallinger, Allianz’s board member responsible for investment management and sustainability, recently issued a stark warning that the world is rapidly approaching temperature thresholds where traditional insurance coverage for financial services, including mortgages and investments, may become untenable. He observed that “entire asset classes” are degrading in real-time as extreme weather events escalate. Thallinger further elaborated that approximately two-thirds of economic losses from natural catastrophes currently remain uninsured, a significant societal problem. This substantial “protection gap” means the financial burden often falls directly on individuals, businesses, and governments, rather than being distributed by insurance mechanisms. He cautioned that a continued increase in this volume of uncovered risk could render the societal situation “unbearable.”

United Nations projections indicate the world is on track for a 2.6-3.1 degrees Celsius temperature increase this century, a level predicted to unleash “catastrophic” global consequences. Scientists consistently emphasize the critical need to limit global average temperatures to below 1.5 degrees Celsius to avert the most severe climate impacts and reduce the likelihood of irreversible “tipping points” in Earth’s major systems.

The Economic Imperative for Adaptation

Amid these grim forecasts, a compelling economic rationale for investing in climate adaptation and preventative measures emerges. Allianz estimates that economic losses from natural catastrophes are typically around 10 times higher than the cost of implementing adaptation strategies, such as resilient infrastructure development. This offers a clear economic incentive for policymakers to prioritize preventative investment. However, Thallinger stressed that continuing with current policies, which project temperature pathways of 2.7 or 3 degrees Celsius, would render effective adaptation “not doable anymore,” citing scenarios such as the insurmountable challenge of protecting Amsterdam from a three-meter sea-level rise.

Other major industry players echo this sentiment. Zurich Insurance Group, Europe’s fifth-largest insurer, assessed global climate resilience, concluding the outlook to be “alarmingly bleak.” Citing events like the Los Angeles wildfires, Zurich underscored the ill-preparedness of even the wealthiest economies for escalating climate risks. Their research further revealed a significant outpacing of global economic growth by insured losses over the past three decades. Between 1994 and 2023, inflation-adjusted average insured losses increased by 5.9% annually, while global Gross Domestic Product (GDP) grew by 2.7% per year over the same period. This signifies that insured losses have more than doubled relative to global economic expansion within this period. Consequently, Zurich warned that premiums for climate risk coverage would need to rise proportionally to reflect heightened risk, potentially impacting the affordability and availability of protection for individuals and businesses, and thereby affecting overall market function.

Challenges for Financial Markets

The increasing severity and frequency of extreme weather events have spurred substantial expansion in the catastrophe bond (CAT bond) market. These financial instruments, designed to provide capital to insurers following major natural disasters, have grown by a significant 75% since late 2020, according to leading global reinsurer Swiss Re. While this growth reflects an industry effort to manage escalating risks, Allianz’s Thallinger cautions that the climate crisis threatens to push the long-standing relationship between increased risk and increased business for insurers to a breaking point. Such a development could have profound implications for broader financial markets.

Steve Evans, editor-in-chief at specialist data provider Artemis.bm, reinforced this concern, asserting that the insurance industry cannot perpetually absorb escalating economic losses from natural disasters without systemic consequences. He warned of a “terrible spiral” where escalating regional impacts drive higher insurance costs, potentially rendering coverage uneconomic for insurers, reinsurers, and capital markets alike. The imperative, he argued, is to integrate robust resilience measures with traditional financial protection, as the current trajectory suggests the financial system’s capacity to absorb climate-driven losses is finite.