Climate risk, insurance, and tourism sector

The tourism sector is highly vulnerable to climatic variations and environmental impacts

The tourism sector forms an important segment of the economy for many countries across the world. With its wide variety of actors—from large corporates to micro-, small-, and medium-sized enterprises—, tourism can create jobs, contribute to the GDP, enhance local infrastructure development, and can help to conserve the environment, cultural heritage, and local communities.

According to the Sri Lanka Tourism Development Authority, Sri Lanka saw more than 2 million tourist arrivals in 2024, a significant increase of 38% as compared to 2023. With tourism arrivals of around 493,000 in January and February, the year 2025 is on track for further grow so far, emphasising the sector’s importance for economic growth and employment opportunities.

However, as many other sectors, the tourism industry is increasingly facing climate-related risks, including extreme weather events, sea level rise, temperature increase, or the degradation of natural ecosystems. Stakeholders across the sector have an opportunity to explore innovative approaches to bolster their resilience across all dimensions, including physical, social, and financial. 

Climate risk and the tourism sector

The tourism sector is highly vulnerable to climatic variations and environmental impacts. It faces a multitude of risks from both sudden-onset and slow-onset impacts, as well as indirect impacts across relevant supply chains. This can disrupt operations, damage property, and erode the natural resources that provide a key attraction for tourists. As coastal destinations and eco-tourism hotspots are particularly vulnerable, even brief disruptions can lead to serious economic implications.

For many tourism businesses—especially small enterprises and informal operators—, the financial repercussions of climate events are magnified by limited access to capital and insurance products. Many businesses lack comprehensive coverage for climate-induced risks, leaving them exposed to losses that can derail their recovery after disasters and impair their long-term growth and resilience. This vulnerability is compounded by the fact that traditional insurance models were not originally designed to address the nuanced challenges posed by climate change, such as compound or cascading events that simultaneously impact multiple sectors and regions.

Sri Lanka’s regulatory frameworks require that registered tourism establishments secure insurance policies covering public liability and workmen’s compensation. However, these policies largely focus on safeguarding physical infrastructure and employee welfare, rather than addressing broader climate-related risks. Recent discussions have highlighted that while a basic level of coverage is in place, it falls short when it comes to specific risks associated with climate change. Challenges related to high premiums, low awareness, complex policy structures, affordability, technical capacity, and available insurance products not only undermine the financial resilience of individual operators but also threaten the broader sustainability of the tourism industry.

Emerging solutions and innovative insurance models

Several potential solutions to bridge the existing protection gap have been pointed out by stakeholders during recent consultations. For example, this includes parametric insurance products, hybrid insurance models, microinsurance, public-private partnerships, and technology-driven solutions.

Parametric or index-based insurance offers payouts based on predefined triggers such as rainfall thresholds, wind speeds, or temperature measurements rather than individual loss calculations. This approach can allow for quicker disbursements while reducing transaction costs and the administrative burden. By tailoring triggers specifically for tourism-related risks—for example, severe storms that disrupt operations or temperature thresholds that impact outdoor attractions—parametric solutions can offer a more agile response to disasters.

In terms of hybrid insurance, integrating traditional indemnity insurance with business interruption coverage can address a wider array of risks, ensuring that both direct damages and subsequent operational losses are covered. For instance, while physical infrastructure may be insured against flood damage, additional coverage for lost revenue during recovery periods can help sustain businesses through prolonged disruptions. 

For MSMEs, entrepreneurs, and community-based tourism operators, microinsurance or group-based schemes can offer a cost-effective alternative to traditional insurance products. By pooling resources and implementing group policies, small businesses can achieve economies of scale that make coverage more affordable. Group insurance reduces administrative costs and simplifies policy management, making it easier for smaller entities to access comprehensive coverage where individual premiums may otherwise be unaffordable.

Moving away from individual products, collaborative frameworks—such as public-private partnerships or blended finance facilities—can de-risk investment and provide an environment that catalyses climate finance and sustainable finance from a variety of sources. Public-private partnerships can facilitate the creation of pooled funds that offer rapid financial assistance in the aftermath of disasters. Additionally, disaster risk reduction financing models can incentivise proactive measures, thereby reducing overall vulnerability and lowering insurance costs.

A strong enabling environment and national system of innovation can further help to capitalise on advances in artificial intelligence, satellite monitoring, and big data analytics, which can transform risk assessments and insurance underwriting. Real-time climate data and predictive modelling enable insurers to offer dynamic pricing based on actual risk levels, leading to more accurate and fair premium calculations. Early warning systems integrated with insurance products can further minimise losses by triggering timely preventive actions, thereby enhancing overall resilience.

To effectively enhance access to climate insurance in the tourism sector, a comprehensive framework that integrates such innovative products with supportive policies is essential. This could include, inter alia, tailored insurance product development, provision of accurate and timely data, strong coordination between relevant agencies, comprehensive risk mapping, capacity-building, public awareness creation, and the integration of climate insurance into national tourism and disaster risk management policies.

The way forward

Enhancing access to climate insurance in the tourism sector is a key component for building long-term resilience. The outputs of recent discussions underscore the importance of a holistic approach that combines innovative insurance solutions with supportive public policies and robust data systems. By embracing tailored products like parametric and hybrid insurance, and leveraging public-private partnerships, the tourism sector can navigate the uncertainties posed by climate change. Moreover, the adoption of technology-driven risk assessments and early warning systems could enable insurers to offer more precise, fair, and dynamic pricing.

Climate change is a global challenge with far-ranging repercussions, but it must be addressed at the local, national, and regional level. Enhancing access to climate insurance in the tourism sector can empower businesses of all sizes as well as the employees and communities that depend on them. Risk transfer instruments and wider risk management frameworks ensure that the sector can act as an engine for green and sustainable economic growth and economic resilience.

(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.)