Insuring the uninsurable: Climate risk and role of insurance industry

The unprecedented landscape of risks connected to climate change creates serious challenges for the insurance industry as well as vulnerable communities

Climate change has undeniably arrived. 2024 was the warmest year on record, and most likely the first calendar year with a global mean temperature of more than 1.5°C above the 1850-1900 average according to the World Meteorological Organization. In fact, the last 10 years from 2014 to 2024 are the 10 warmest years on record, marred by increasingly frequent and intense extreme weather events as well as long-term changes to the planetary climatic system.

According to recent estimates, 2024 saw between $ 368 billion and $ 402 billion in economic damages from extreme weather and climate events, with at least 60 individual billion-dollar economic loss events. Overall, global losses exceeded $ 300 billion for the ninth time in a row and were significantly higher than the long-term average for previous decades (AON Climate and Catastrophe Insight 2024/Gallagher Re Natural Catastrophe and Climate Report 2024). In addition, there are uncounted amounts of non-economic losses and damages (for example, to health, wellbeing, cultural heritage, or security) and damages connected to slow-onset processes such as sea level rise or changes in disease vectors.

This unprecedented landscape of risks creates serious challenges for many actors at all levels, including the insurance industry. New approaches to risk assessments and management are essential to survive and thrive in a more uncertain and volatile environment of compound, cascading, or covariate risks. However, there remains a hard question waiting for an answer: Are some risks simply uninsurable? And if so, how can we protect those communities and industries that are exposed to them?

Managing climate risks through insurance

Out of the economic losses outlined above, less than half—approximately $ 154 billion—were insured. The resulting gap between insured and uninsured losses is often called the “protection gap,” which is particularly high in developing countries such as Sri Lanka, where insurance penetration is low and there is a lack of tailored, accessible insurance products to protect against climate risks.

Climate risk management is a key challenge for the 21st century. This includes understanding and evaluating the potential impacts of climate change across all sectors but also reducing vulnerability through more holistic and interconnected risk reduction and prevention. Climate insurance and related risk transfer schemes can play a crucial role as part of such a comprehensive framework, as well as incentivise other measures such as the ones mentioned above. However, it should be noted that not all risks and hazards are suitable to be covered by insurance.

Climate insurance describes a broad range of instruments for financial risk transfer that provides protection against risks arising from extreme events connected to climate change. These instruments are in different stages of maturity around the world and include, for example, classic indemnity-based insurance, parametric insurance, microinsurance, takaful, sovereign risk pools, bundled or hybrid insurance schemes (for example, credit-linked or bundled with agricultural inputs), weather derivatives, catastrophe bonds, or early action mechanisms. They are operated by governments (for example, Sri Lanka’s long-running crop insurance scheme) or the private sector and distributed through traditional as well as new digital or mobile channels. For the design and implementation of effective insurance mechanisms, traditional challenges include the availability of historical and up-to-date weather data; technical and institutional capacities; delivery mechanisms; an enabling policy environment; and financial resources. However, with the advent of climate change, an additional challenge emerges as certain areas are in danger of becoming increasingly uninsurable as potential damages rise and historical data may no longer be sufficient to accurately evaluate risks.

Becoming uninsurable

The insurance industry has a long history and deep expertise in risk assessments, analytics, and the modelling of extreme events and their impacts. If insurers are halting coverage in high-risk areas and render these households, businesses, and assets increasingly uninsurable, the implications could be severe.

For example, the unavailability of insurance as part of risk management can deepen existing inequalities, as those who are unable to move and lack adequate resources to protect themselves will become even more vulnerable. In other places, entire communities may be forced to move away and leave their lands, livelihoods, assets, and ways of life behind without compensation. In response, some governments are using public insurance programmes to cover high-risk areas that private insurance companies are leaving behind. While this can provide a safety net, they also raise questions about long-term sustainability and moral hazard, as they may inadvertently encourage continued settlement and development in highly climate-vulnerable regions.

In a warming world, the insurance industry stands at a crossroads. By embracing innovation, fostering partnerships, and aligning with global climate processes, insurers can help bridge—and not widen—the existing protection gap and enhance resilience at all levels. However, insurance can only be a part of a comprehensive risk management framework, and the collaboration of different actors is needed to address issues surrounding soaring climate risks and “uninsurable” locations.

Between the public sector, private sector, and civil society, collective commitment to addressing the root causes of climate vulnerability is vital to create a sustainable future for all. By taking proactive steps now, the insurance industry can help to turn the tide and transform a global challenge into an opportunity for universal long-term resilience and the protection of climate-vulnerable communities, industries, and countries.

(The writer works as Director: Research & Knowledge Management at SLYCAN Trust, a non-profit think tank. His work focuses on climate change, adaptation, resilience, ecosystem conservation, just transition, human mobility, and a range of related issues. He holds a Master’s degree in Education from the University of Cologne, Germany and is a regular contributor to several international and local media outlets.)