Impacts of Climate Change through the Insurance Market

A recent analysis by Marsh, the insurance broking and risk management firm, on behalf of TheCityUK, the industry-led body representing UK-based financial and related professional services, examined second and third order effects of climate change. Their report – “Mind the Protection Gap” – looked at the climate change risk to capital markets and the consequent need for resilience financing.

This is another interesting example of how thinking through downstream effects of change can highlight potentially dramatic outcomes. SAMI is very familiar with this approach - we use Futures Wheels to understand how consequences of actions flow from the action itself to its intended – and often unintended – consequences.

The main thrust of Marsh’s argument is:

• Climate hazards are intensifying and becoming less predictable

• So insured losses will continue to rise

• And an increasing proportion of economic activity and value is left uninsured or underinsured

• The effects of this spread into lending, investment, asset valuations, and public finances

• Reducing bankability and investability across the real economy and becoming a challenge to capital formation, economic recovery and long-term growth.

Uninsurability therefore moves beyond an individual problem into a systemic one.

The UK is particularly at risk to these forces because of its position as a leading global centre for insurance and capital markets. Underinvestment in resilience risks reinforcing a negative loop in which rising losses weaken insurability.

The report argues that adaptation and resilience should be treated as core economic infrastructure, and their costs are essential for the effective functioning of capital markets in a climate-constrained world.

Climate change risks

Climate catastrophes are steadily increasing as this chart shows:

Number of reported natural catastrophes worldwide

(Marsh analysis of Munich Re NatCat service data)

In the US, in 2024, there were 27 confirmed weather/climate disaster events with losses exceeding $1 billion - the 1980–2024 annual average is 9.0 events.

As hazard, exposure and vulnerability levels rise and uncertainty in forward-looking models persists, the availability, affordability and adequacy of capital is likely to come under strain. Historical evidence indicates that when insurance markets weaken, the impact affects wider financial and capital markets and threaten financial stability more broadly. Insufficient resilience increases losses and uncertainty, which further strains insurability and tightens conditions in the wider financial market, limiting the availability of the financing needed to manage risk.

“Insurance only works while extreme weather remains a risk. Where it becomes a near certainty, insurance becomes unaffordable and potentially not available”

Increasing frequency and severity of climate risks means the price required to create a functioning risk transfer pool can reach the level where the costs of transferring risk outweigh the gains - insurance effectively becomes unaffordable.

Moreover, there is the growing difficulty of predicting physical climate risk. Past losses based on past climate are a weak indicator of future risk exposure to the impacts of a warming world; feedback loops and potential tipping points are creating further uncertainty.

Compounding perils, for example heat, drought and wildfire, or repeated storms hitting the same region in a short period, create loss patterns that are harder to diversify and more capital-intensive to insure.

The protection gap can be considered as the shortfall between the total economic value exposed to physical climate hazards and the portion of that value effectively transferred to risk-bearing mechanisms such as insurance. A widened protection gap means an increased share of climate-driven loss, volatility and uncertainty retained on balance sheets. By transferring risk back onto balance sheets and into lender and investor exposures, protection gaps amplify systemic risk, impair recoverability after events, and can materially alter capital allocation decisions and market liquidity.

Climate protection gaps drive wider capital markets stress

Where insurance is unaffordable or unavailable, this increases the cost of debt.

Uninsurability can also transmit into equity markets by increasing the cost of equity and constraining access to capital. This combination of debt and equity pressure can ultimately affect asset valuations, causing economic activity to slow.

The Financial Stability Board’s (FSB) 2025 climate vulnerabilities framework explicitly recognises that weakening insurance coverage propagates risks to lending markets, potentially leading to broader pullbacks in lending that are highly detrimental to economic activity.

Adaptation and resilience are hard to finance

Despite the UK’s adaptation financing needs being estimated at £11bn per year, and the UN Environment Programme (UNEP) expecting that developing countries alone will need more than $310bn per year in total by 2035 to cover adaptation and resilience costs, current funding is trivial.

Why? When one study suggested that “every $1 spent on climate resilience and preparedness saves communities $13 in damages, clean-up costs and preserved economic activity”?

The problem is that the benefits are avoided losses rather than the creation of new, positive cash flows. Avoided loss is inherently counterfactual: it depends on what would have happened without the intervention. And investment appraisal and capital allocation frequently discount long-term avoided losses heavily.  Underinvestment can shift an increasing share of losses onto public finances through disaster relief and reconstruction, raising fiscal stress.

Responses and recommendations

The report is not uniformly gloomy, and does offer some suggestions for responses and ways of reducing the problems.  But the fundamental conclusion is that insurability is not simply a sectoral issue, but a foundational concern for bankability, investability, and orderly economic activity.

It is highly instructive to see how climate change impacts can ripple through our highly inter-connected financial systems, producing impacts and effects one would not have expected. This is central to the futurists’ work, looking at second- and third-order impacts of change and it is good to see it applied rigorously here

And there’s more

This analysis is worrying enough. But if we combine other risks with generic climate change, the challenges intensify. The 2026 El Niño is forecast to be exceptionally strong, with models projecting a 63% chance of sea surface temperatures passing the 2.0°C threshold. Historic models show that intense El Niños can cause up to $5.7 trillion in global income losses. Analysis by the EU Joint Research Council identifies hot-spots of temperature and water-related anomalies and extremes in America, Africa, Asia, and Oceania varying according to the intensity of El Niño. It also points to nonlinear response to a possible unprecedented event in regions such as Europe, where warmer conditions may occur in autumn and intensify in spring 2027. And all of this will cause losses, that companies and individuals will seek to recover through insurance. As Marsh’s report makes clear, that recovery may soon not be available.

One route forward

Initiatives such as Humanity Insured attempt to address the problems that Marsh identifies. Humanity Insured attempts to solve the risk that climate impacts drive people into poverty by paying a large portion of insurance for the most at-risk. Their aim, “By 2030, we will make £2 billion in insurance coverage accessible to protect 30 million people, helping them build resilient futures and stay out of poverty”, using premium payments gathered from charitable donations and industry support, provides one route forward. It is not enough. But it is a start.

Written by Huw Williams, SAMI Principal

The views expressed are those of the author(s) and not necessarily of SAMI Consulting.

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Image by Mohamed Hassan from Pixabay