Climate spillover effects for reinsurance should concern regulators, say experts

As extreme weather events intensify across the globe insurance losses have also increased, raising concerns among reinsurance experts about spillover effects from the insurance industry, especially as the Trump administration in the US has taken an increasingly aggressive stance against any climate change policy or regulation.

“We’re marching towards an uninsurable future, not only in the United States but globally,” said Dave Jones, former California insurance commissioner and director of climate risk initiative at the Center for Law Energy and the Environment at UC Berkeley Law.

Insurance losses from extreme weather events have skyrocketed in the last 40 years, costing a total of US$6.9tn, according to Munich Re. The share of losses from weather-related events is also increasing, accounting for 90% of US losses in 2024.

Extreme weather events not only include hurricanes and wildfires, but also severe convective storms, or atmospheric rivers, which cause heavy rains to sit in one place for an extended period of time, compounded by extreme wind which damages roofs as well as flooding. These types of events are increasing across both the US and Europe and are expected to cause hundreds of thousands of dollars in insured losses.

And it could continue to get worse, as climate scientists warn of potential climate tipping points.

“There’s no get out of climate change free card in the United States, or globally,” said Jones.
Potential spillover effects from climate change

Reinsurance plays an important role in the insurance sector, being essentially insurance for the insurers. Increasing climate risk means reinsurers may rethink insurance coverage, which could impact affordability for insurance firms and their customers with wider economic implications, the Financial Stability Institute has warned.

The International Association of Insurance Supervisors (IAIS) has also highlighted concern about growing climate events.

“The concentration of risk in a small number of reinsurers and jurisdictions has prompted questions regarding the potential impact on system risk and the associated potential threats to financial stability,” the agency wrote in its 2024 global insurance market report.

The impact of climate change on the severity and frequency of extreme weather could also create spillover effects, as insurers increase premiums and withdraw coverage, IAIS warned. It could fall on governments to provide financial support and could also have broader implications for the financial sector, IAIS wrote.

Many of the largest reinsurance firms are located in Europe and Bermuda so much of that risk could be concentrated in certain areas, even though reinsurers tend to diversify their risk.

Reinsurers are aware that climate change is increasing extreme weather events and they are responding in the same way as insurance companies – by increasing prices.

“Reinsurers are rational economic actors, and they’re responding to the same losses that the direct writers are responding to, and they’re seeing the losses from climate driven extreme and severe weather related events go up, and so they’re increasing price, they’re reducing coverage,” said Jones.

Some reinsurers even have policies that curtail reinsurance for some fossil fuel projects. But the fossil fuel industry can still receive support from insurers as the policies usually only apply to single-site insurance rather than company-wide contracts, said Abhijay Sood, financial sector senior research manager at ShareAction.

The nonprofit found many insurers are phasing out coal and some other unconventional extractions. And while many offer insurance for activities that support a green transition, less than a third have policies that encourage mitigation or adaptation.

“The details on all of these issues leave something to be desired, but the fact that reinsurers for the most part are already considering climate change to some degree suggests that more can be done to properly cost risks and mitigate against the impacts of climate change,” said Sood.
Closing the reinsurance protection gap

Just as climate change is creating an insurance gap in various countries, the reinsurance sector is also facing an increasing insurance protection gap.

The insurance industry also has a role in helping mitigate the climate insurance gap, said Marina Baldissera Pacchetti, a climate science philosophy research fellow at University College London.

“[Insurance firms] want to portray themselves as playing this fundamental role in the sustainability of financial structures. If that’s the role that they want to play, then they also need to take some responsibility in this insurability gap,” she said.

While some companies already do that, insurance and reinsurance companies “are there to make a profit, to generate capital, to then reinvest that capital and keep their business model going”.

That objective could conflict with the values of others such as those who can’t be insured, she added.

“From my perspective, there should be a lot more explicit consideration of whose interests and whose values are being represented in this discourse [around the insurance gap].”

Sood said the state should play a role in making sure that coverage is provided.

“However, it is important that solutions are designed equitably such that they do not simply allow reinsurance firms to make all the profit and leave all the costs to ordinary taxpayers.”
Some regulators are taking note of climate risks while others ignore them

Insurance regulators in some jurisdictions are aware of the losses and are taking note, said Jones. While there is no indication that extreme weather impacts in places like the US are creeping into other markets, “there’s no question that insurance regulators, central banks [and] governments ought to be paying careful attention to the potential for contagion from direct insurance losses to reinsurers, and then through that to various capital markets,” he said.

And even as European and Asian regulators are taking note of the insurance affordability gap, the US seems to be ignoring the problem.

Federal regulators have “been directed, pressured, ordered by the President of the United States to stop paying attention [to climate change] … this is a big problem because we need more, not less, financial regulator attention,” said Jones.

This is also having a “chilling effect” on what public commitments reinsurers and insurance firms are making, said Sood.

“Those within organisations working on these areas are also encountering more internal resistance than they were two or three years ago, whereas others seemingly instrumentalise developments in politics as a reason not to take action. Progress is still possible but it’s more challenging than it was before,” he said.

Like banks, many reinsurance and insurance firms have left voluntary net-zero commitment groups such as the Net Zero Asset Owners Alliance. Some have cited legal and regulatory concerns as the reason for withdrawing.

For Sood, the increasing politicisation of net-zero policies means rethinking how these risks are presented, such as through local environmental concerns. For example, “making the case that deforestation, species loss and flood risk in particular areas can be reduced if reinsurers act more responsibly. It is in everyone’s long-term interest that they do so, including their own.”