The insurance industry underpins modern economic stability, enabling households and businesses to transfer risk and recover from disasters. Yet climate change and ecosystem degradation are rapidly eroding this foundation. Global temperatures surpassed 1.5°C above pre-industrial levels in 2024, measured against the 1850–1900 baseline that serves as the scientific benchmark for industrialisation-era warming. The Paris Agreement identified this threshold as the ceiling beyond which climate risks escalate sharply, and scientists had long treated a sustained breach as a critical inflection point. While a single calendar year above 1.5°C does not technically constitute a permanent exceedance of the Paris target, which refers to long-run averages, the 2024 figure confirmed that the world is rapidly closing in on that boundary. This warming is driving continued increases in extreme weather events, while the destruction of natural buffers amplifies exposure. Together, these dynamics are escalating economic losses, straining insurers’ capacity to provide affordable coverage, and widening the global protection gap to unsustainable levels.
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Nature as the First Line of Defense
To understand why insurance markets are under such stress, it helps to start with what has been quietly disappearing from the risk equation: functioning ecosystems. Natural ecosystems provide critical protective services that reduce insurable losses. As David Kuhn, Director of Adaptation and Resilience Partnerships at World Wildlife Fund U.S., explains, “forests help slow the pace of water movement, which reduces the risk to extreme flooding events. In that, they also help retain water for drier episodes. Coastal ecosystems like mangroves and coral reefs act as natural barriers against storm surges and coastal flooding.” Healthier ecosystems, he notes, perform these functions even better.
The numbers bear this out. Kuhn mentions that, “coastal wetlands in the U.S. provide an estimated 23.2 billion dollars in storm protection services every year — and I would say that’s an underestimate. During Hurricane Sandy in 2012, they prevented 625 million dollars in flood damages alone. And that’s just one of many ecosystems, and one of many services that ecosystems provide.” Inland systems contribute too: forests and wetlands regulate water flows and absorb excess rainfall, effectively functioning as natural infrastructure against extreme weather. Through these functions, ecosystems directly reduce disaster relief and infrastructure costs, making their conservation not just an environmental imperative, but a financial one.
Yet these systems are rapidly disappearing. Around half of the earths mangroves are at risk of collapse by 2050, the world lost roughly 10% of its remaining wilderness since the 1990s, and the IPCC projects that between 70 and 90% of coral reefs will be lost at 1.5°C of warming, rising to 99% at 2°C. Climate change and ecosystem degradation reinforce each other in a dangerous feedback loop: rising temperatures degrade ecosystems, which amplify the impacts of extreme weather, which generate higher losses and further strain the insurance system. The industry is, in effect, being asked to price risks that nature used to absorb for free.
A Growing Protection Gap
The insurance protection gap, defined as the difference between total economic losses from disasters and insured losses, has widened dramatically. According to Swiss Re’s sigma reports, the global protection gap for natural catastrophes has averaged approximately 60% over the past decade, meaning only 40% of economic losses are covered by insurance. In 2024, natural catastrophe losses totaled USD 318 billion globally, but only 57%were insured, leaving a gap of USD 181 billion. What these numbers often do not include are secondary effects such as loss of nature or income, making the real gap considerably larger than what is captured.
Regula Hess of WWF Switzerland explains, “not all insurance gaps matter equally. The most relevant gaps are those where there is both high risk of climate-related hazards and there is a large protection gap. What is especially challenging at this time, is that perils and hazards are moving more and more towards this corner, a development which policymakers often are not aware of.” The risks most in need of coverage are precisely those becoming hardest to insure.
This gap is particularly severe in emerging markets. Munich Re data for 2025 shows that while North America covered 70% of overall disaster losses through insurance, the share drops to just 12% in APAC and below 12% in South America. Africa and South America face the steepest gaps: less than one-third of losses on the continent were insured, and in South America the uninsured share exceeded 88% of total losses. These figures underscore a persistent structural divide: the regions most exposed to climate-related physical risk remain the least equipped to transfer it.
Where the Pressure is Felt
Across sectors, insurers are either withdrawing or repricing risk in ways that have real consequences for households, businesses, and governments. In commercial real estate, high-tide flooding along Southeast Atlantic and Gulf coasts has increased 400 and 1100%, respectively, since 2000, while wildfire risk has fundamentally altered property markets in vulnerable regions. A stark example of this is California, which has experienced most of itslargest wildfires on record since 2017, and major insurers including State Farm, Allstate, and Farmers have responded by limiting or withdrawing coverage entirely. Commercial property owners in the highest-risk states have seen premiums more than double over the past five years, according to Deloitte.
Supply chain insurance faces parallel stress. The 2011 Thailand floods illustrate the mechanism clearly: seven major industrial estates were inundated, 804 factories halted operations, and the disruption caused a 30% global shortage of hard disk drives, with prices for desktop drives rising between 80 and 190%. Production losses in transport machinery reached 84% compared to the prior year, and recovery times varied sharply depending on supply chain design — Toyota needed 42 days to partly resume operations, while Honda, whose factory was directly inundated, required 174 days. Yet of the $46.5 billion in total economic losses, only around $10–15 billion was insured. The damage did not stop at the factory gates — it propagated through just-in-time supply networks across Asia, Europe, and North America, demonstrating how underinsurance at a single geographic node can compound losses far beyond the immediate disaster zone.
Agricultural insurance faces its own existential pressures. Traditional actuarial models assume stable historical climate distributions, an assumption that no longer holds. Anthropogenic climate change has already reduced global agricultural productivity growth by 21% since 1961, equivalent to losing seven years of productivity gains. Maize yields could decline by up to 24% by end of the century under high-emissions scenarios. In 2019, preventplanting (PPL) claims in the US exceeded USD 4.2 billion, the highest in program history. In 2022, a Kansas heat wave killed at least 2000 cattle in a single week, illustrating how acute weather events increasingly translate into insurance exposure that existing actuarial models were not designed to price.
Yet withdrawal need not be the only response. Dave Jones, Director at the Center for Law, Energy & the Environment (CLEE) at UC Berkeley, led a partnership between The Nature Conservancy, Willis Towers Watson, and CLEE, to design, structure, price and place what he describes as, “the first ever insurance product which was priced and underwritten taking into direct account landscape scale forest management,” covering the 6,500-home Tahoe Donner community in Northern California, where other insurers had stopped writing policies. By incorporating the wildfire risk reduction resulting from the community’s 1,500-acre ecological forest management program — using thinning and prescribed fire to reduce wildfire severity — the partnership secured USD 2.5 million in coverage, a 34%premium reduction, and an 89% reduction in the deductible. “The bigger outcome,” Jones notes, “was that the insurance was written at all.” The case illustrates a broader principle: where insurers price nature-based risk reduction into their models, coverage can be made available and more affordable in areas otherwise deemed uninsurable.
Why the Market Cannot Fix This Alone
The scale of these pressures raises a natural question: why can’t private insurers simply reprice and absorb the risk? Jérôme Crugnola-Humbert, independent consultant and former director of Sustainability Services at Deloitte, explains that the pace of change is the core problem: “the losses from extreme weather events have been growing at around 5 to 7% a year in real terms. As a result, past data no longer reliably predicts future risks, which challenges accurate pricing.” This is compounded by a legacy problem: decades of underpriced coverage actively enables development in high-risk zones, meaning today’s exposure is partly a product of the market’s own past failures.
But Crugnola-Humbert points to a deeper structural problem: private insurance markets are primarily driven by micro-economic incentives. “For insurers, it’s a rational short-term response to raise premiums and do more risk selection to protect their balance sheets. But the total result of all these business decisions widens the protection gap and leads to a suboptimal collective outcome at the macro level. It’s a classic case of gradual market failure in slow motion.”
He also highlights a regulatory blind spot: historically, insurance supervisors have focused on the solvency of individual companies rather than on protection gaps and the systemic risks they create, with climate and nature considerations only beginning to be integrated into supervisory guidance in recent years. The consequence, he warns, is that insurance markets are leaving an increasing share of risk and losses to be picked up by households, companies, governments, and taxpayers.
The pace of change suggests that current insurance market stresses represent not a temporary disruption but a structural transition. Climate change systematically erodes the geographic diversification that makes insurance actuarially viable. When multiple regions face simultaneous catastrophes, the independence assumption underlying risk pooling breaks down. The consequences then cascade outward: to households losing coverage, to asset owners facing stranded investments, to governments borrowing to finance disasters, and to taxpayers absorbing the risks. Addressing these challenges will require coordinated action across multiple domains: ecosystem restoration to rebuild natural resilience, policy reform to manage the protection gap, innovation in risk transfer mechanisms, and systematic integration of climate and insurance considerations into investment decision-making.
How effectively investors, insurers, policymakers, and societies navigate this transition will significantly influence both climate adaptation outcomes and broader economic resilience in the coming decades.
