Climate risks are ‘redrawing the boundaries’ when it comes to how the insurance and reinsurance markets are managing losses, a new report by the Stockholm Environment Institute has found.
According to the report, Insurance and reinsurance under climate stress: managing systemic risk in global supply chains, in recent years, insured catastrophe losses have grown by roughly 5% to 7% per year in real terms, with insurers increasingly retreating from areas and sectors linked to high climate risks.
Supply chain impact
“Climate shocks are now driving supply-chain shocks, cascading through interconnected networks rather than remaining isolated disasters,” commented Dr. Mikael A. Mikaelsson, policy fellow at the Stockholm Environment Institute (SEI). “As local weather extremes ripple through interdependent systems, they can quickly become global shortages and delays that threaten economic security.”
The report points to the 2021 floods in Germany and Belgium, and 2022 droughts in southern Europe as having a ‘paralysing’ effect on supply chains, manufacturing networks and agricultural output. While insurers and reinsurers normally absorb these shocks, they are being tested by the ‘growing complexity, frequency, and severity of climate hazards’, the report notes.
The report draws on interviews with experts from leading European insurance and reinsurance bodies to assess how the sector is responding, and notes that traditional approaches to the diversification of risk are becoming less effective.
Systemic climate risk
“Climate risk is becoming systemic faster than insurance systems can adapt – and when losses can no longer be diversified, insurance stops working as designed,” Mikaelsson added, noting that financial responsibility for said risks is increasingly shifting towards governments, businesses, and households, putting additional pressure on public and private budgets.
The report also notes that short-term underwriting cycles and annual repricing are preventing the insurance market from supporting long-term adaptation, since the focus on immediate solvency and profitability conflicts with the multi-decadal nature of climate risk.
In addition, the sector’s reliance on historical data and fragmented risk metrics undermines insurers’ ability to anticipate systemic exposure.
“Insurance alone cannot manage systemic climate risk. Without stronger adaptation, better data, and coordinated public–private governance, risk transfer will increasingly fail where resilience is needed most,” said Mikaelsson. Read more here and here.
