Trump may not believe in climate change, but the insurance industry does
By Andrew Hoffman, Rupert Read, originally published by Resilience.org
This map shows all census tracts within the U.S. categorized into one of five classifications related to climate risk.
What does a post-1.5°C world mean for the insurance sector, their
customers, investors, and the economy as a whole? This question has suddenly
hit the news, as insurers begin to withdraw from some prominent places, and
insurance insiders begin to break cover, as reported by the New York Times,
just last week: https://www.nytimes.com/2025/04/10/climate/climate-change-economic-effects.html.
New research by the Climate Majority Project, working with a set of insurance
insiders working safely within the veil of anonymity, looks at this question
and set out three possible scenarios. The one towards which we are currently
headed is dire, unless new policies and strategies are instituted that rethink
and rework the risk landscape.
Insurance is the canary in the climate coal mine
The insurance sector is dealing with the realities of a climate-changed world with higher payouts from more extreme weather events and more assets in harm’s way by raising premiums and reducing coverage to manage losses. As this continues, with an increasing number of regions becoming ‘ uninsurable‘, Federal Reserve Chair Jerome Powell has warned that insurance companies pull out “of coastal areas [and] areas where there are a lot of fires” the loss of available insurance means that “there are going to be regions of the country where you can’t get a mortgage” in “10 or 15 years.”
This would be devastating to individual homeowners and to the economy at large as property values drop and
governments take in less tax revenue for schools, police and other basic
services. Günther Thallinger, Chairman of the Investment Board of
multi-national insurance company Allianz SE warns that this represents “a
systemic risk that threatens the very foundation of the financial sector.”
In its 12th national report, “Property Prices in Peril,” First Street — the analytics firm behind the climate risk rating attached to leading real estate listings – estimates the impacts of climate damage could reduce unadjusted U.S. real estate values by $1.47 trillion over the next 30 years.
EDITOR'S NOTE: Cathy and I were notified in January by our long-time insurer that because of climate risks, they would no longer cover us. We live within 1.5 miles of the coast. It took three months and a much higher premium to secure a new carrier. This problem is real, is happening in Charlestown and it's happening now. - Will Collette
The future of insurance in three possible scenarios:
One problem with the current risk landscape is that
the climate scenarios employed by insurers typically under-value
qualitative systemic shifts in the market and therefore underestimate
the medium/long-term economic risks and exposures. The
work of the Climate Majority Project is intended to apply the latest climate
data and analysis as a way to see insurers as a key part of a broader effective
response.
At present, the insurance sector is withdrawing coverage
from risky areas in order to maintain solvency in the face of regulatory
constraints that restrict their ability to alter their pricing and coverage
models to adequately cover evolving risks. But if we think about using
policies to reduce the overall risk landscape, we can reduce these financial
pressures on insurance companies while protecting homeowners and the real
estate sector. By analyzing the possible futures before us, these tools come
into greater focus.
The following three scenarios are based on (1) the extent of
climate breakdown and (2) the insurance sector’s embrace of transformative adaptation: in which they work creatively
with governments and other actors to establish more resilient building and
zoning standards and more generally to undertake bold, strategy-led efforts to adapt to climate impacts
(N.B. With the world already moving past 1.5°C, there is no longer a low
climate breakdown scenario, only medium or high).
- Scenario 1: The Great Abandonment
In this future, insurance companies maintain a singular
focus on short-term profitability and, in the face of the increased frequency
of 1,000 year events, chronic secondary perils, and resistant state regulators,
insurers are driven to exit markets chaotically, sparking widespread
unaffordable prices and leaving customers behind while offloading systemic
risks to taxpayers. Continued un-mitigated disasters trigger a cascade of financial
crises as state-backed insurance programs, municipalities, and mortgage lenders
require bailouts. The customer is abandoned while leaving insurers with
a rapidly dwindling business. Previously privatized profits are now socialized
as widespread losses, potentially leading to state insolvency.
- Scenario
2: The Future is Triage
In this future, insurers embrace transformative and strategic
adaptation as core to their survival to remain relevant and address
customers’ increasing risks, yet due to minimal government action on
decarbonization and on building resilience, exposed regions still see
significant insurance-withdrawal. But some regions become “ruggedized” through
the adaptation programs of insurer-led public private partnerships. Insurers
and the communities they serve may be beleaguered, but many find a way to adapt
and survive.
- Scenario
3: Breakthroughs for Resilience
In this future, future-ready insurers spearhead
policy-reform in strategic adaptation and decarbonization across the
markets they serve. This leads to political breakthroughs helping stabilize
protection gaps for most regions, enabling managed retreat away from high exposure areas,
and rapid growth of insurance coverage and investment
in climate-adaptive food systems, water cycle restoration, and new low-carbon technologies.
What would the signs look like that we are turning
towards a better scenario?
Elements of The Great Abandonment are upon us. But there
are signs
of change that may yield a different future where the “new normal of
risk” requires deeper changes in how we adapt strategically to a rapidly
changing climate in order to build long-term resilience.
RESILIENCE principles from the Institute and Faculty for
Actuaries’ major recent report on Planetary Solvency: Global Risk Management for Human
Prosperity. Their report outlines an effective and realistic global risk
management framework for that addressing the climate, nature, and societal
risks that undermine the ecosystem services upon which life on Earth depends,
threatening human prosperity.
Moving towards The Future is Triage or Breakthroughs for
Resilience requires changes in how we build, where we build and why we build. Such changes
would include:
- More
robust zoning laws to limit development in exposed places that insurance
providers are finding harder to properly cover at a reasonable
price-point.
- New
building codes that mandate resilient buildings and communities like those
found at Babcock Ranch, which is built to withstand more than 150mph
hurricane force winds, uses preserved wetland to reduce flood surges and
employs solar farms and underground transmission system to maintain
reliability.
- When
areas are devastated by extreme weather events, new zoning laws that
condition claim payments with moving to safer ground or ‘building back better’ to a building standard
that mitigates medium-term risks.
- New
regional or city level laws that mandate water cycle restoration and
landscape-based water retention in urban areas and surrounding watersheds,
including many aiming to become ‘Sponge Cities’ to prevent flash floods (and
extended droughts).
- New
approaches to insurance coverage that offer multi-year coverage, rather
than the standard 12-monthly-renewal and reward investments in broad scale
adaptation and resilience that create incentives for insurers to help
“ruggedize” buildings and entire neighborhoods.
- Mandates
for flood insurance as only about 4% of homeowners nationwide have flood insurance even
though 90% of catastrophes in the U.S. involve flooding.
- Finally,
as certain cities and regions become seen as “climate havens” where weather impacts are less and
local communities are more resilient, preparations must be made to
anticipate and plan for population growth and development.
Insurers must embrace their role as a sentinel
If current trends continue, the future will be defined by
private insurers no longer offering coverage in risky locations, forcing
government-backed insurers of last resort to step in. As payouts mount, we will
likely face wider financial instability. To avoid this fate, it is
critical for insurers to play a different role in a post-1.5°C world, one that
is less reactive and more proactive, working with policy-makers to change the
overall risk landscape.
Insurers should, through their disclosure and lobbying
power, play a key role in achieving a safer and more resilient world.
Through disclosure, they can share their vast knowledge about the financial risks of a
climate changed world. Through lobbying, they can advocate for a
suite of laws and policies that make the world more insurable in the face of
the ever-mounting risks. The new
normal of offering insurance in a post 1.5C world requires this new
role if we are to realize a better scenario than the one we are presently
embarked upon.
Justin D’Atri, Climate Coach at the education
platform Adaptify U and
Sustainability Transformation Lead at Zurich Insurance Group, contributed to
this article.
Andrew Hoffman is the Holcim (US) Professor of Sustainable Enterprise at the University of Michigan; a position that holds joint appointments in the Stephen M. Ross School of Business and the School for Environment & Sustainability. Professor Hoffman’s research uses organizational behavior models and theories to understand the cultural and institutional aspects of environmental issues for organizations.
