How Climate Change Is Reshaping Insurance Markets: Costs, Challenges, and Solutions

By Daniel RodriguezLast Updated September 1, 2025

Photo by Dibakar Roy on Unsplash

Introduction: The New Reality Facing Insurance Markets

In recent years, the insurance industry has faced unprecedented challenges due to the rapidly intensifying impacts of climate change. Record-breaking wildfires, hurricanes, floods, and other extreme weather events have dramatically increased both the frequency and cost of insured losses worldwide. This evolving risk environment is disrupting traditional insurance models, prompting companies, homeowners, and regulators to reconsider how risk is measured, priced, and managed. The effects are far-reaching, impacting not only insurance premiums and availability but also the stability of local economies and the financial security of entire communities. [1] [2]

How Climate Change Is Increasing Insured Losses

The growing financial toll of climate change on the insurance sector is undeniable. In 2024 alone, global insured losses from natural disasters reached $140 billion, making it one of the most expensive years in history for insurers. The first half of 2025 continued this trend, with $100 billion in insured losses-a 40% increase from the previous year. [1] [2] These losses are fueled by events such as the catastrophic wildfires in Los Angeles, severe convective storms, and widespread flooding, all of which have become more frequent and severe as global temperatures rise.

Beyond the headline-grabbing disasters, even smaller-scale weather events-like heavy rain and hail-are adding up to significant cumulative losses. [5] The economic cost of weather and climate events in 2024 was estimated at $402 billion, with insurers covering about $151 billion of that total. [1]

Rising Premiums and Insurance Availability

As climate risk grows, insurance companies are forced to adjust how they operate. Many have raised premiums sharply to cover the rising cost of claims. Between 2019 and 2024, average home insurance premiums in the United States increased by 31%-and in the most vulnerable regions, the jump has been even greater. Today, insurance costs can account for 20% of a typical house payment, compared to just 8% a decade ago. [4]

In some high-risk areas, insurers are withdrawing coverage entirely, creating so-called “insurance deserts” where homeowners and businesses struggle to find affordable policies. This not only puts property owners at risk but can also negatively impact local economies, as lenders may refuse mortgages without adequate insurance. [1]

The Role of Catastrophe Modeling and Risk Assessment

Insurance companies have traditionally relied on catastrophe models to estimate the likelihood and financial impact of natural disasters. These models are based on historical data-which is becoming less reliable as climate change accelerates the frequency and severity of extreme weather. As a result, insurers are increasingly investing in advanced analytics and climate forecasting tools to better predict future risks. [3]

However, regulatory policy has not always kept pace with these changes. Many experts argue that new rules and standards are needed to ensure catastrophe models accurately reflect the current and future risk landscape. Until then, insurers may continue to struggle with accurately pricing risk, which could lead to further market instability. [3]

Regulatory Response and Disclosure Requirements

Regulators in the United States are beginning to take climate risk more seriously. For example, insurers with more than $100 million in premiums are now required in 29 states and territories to complete a climate risk disclosure survey based on the Task Force on Climate-related Financial Disclosures (TCFD) framework. [5] These surveys aim to promote transparency and encourage the development of actionable climate transition plans.

However, because insurance regulation is largely state-based in the U.S., not all states have adopted these requirements. This regulatory patchwork can create challenges for insurers operating nationwide. The Ceres report recommends that companies set science-based targets, invest in better emissions measurement tools, and move from disclosure to implementation of climate adaptation strategies. [5]

How Homeowners and Businesses Can Respond

If you are a homeowner or business owner facing higher premiums or difficulty finding insurance, there are several practical steps you can take:

Strengthen property resilience: Upgrade buildings with fire-resistant materials, install flood barriers, and maintain defensible space around property to reduce risk of loss.
Shop around: Compare policies from multiple insurers, including state-backed or FAIR Plan programs, which may offer last-resort coverage in high-risk areas. Search for “[Your State] FAIR Plan Association” for more information.
Document property: Keep detailed records of property, upgrades, and safety measures to support claims and possibly reduce premiums.
Engage with local government: Advocate for improved community resilience, such as better fire breaks, upgraded drainage systems, and stricter building codes.
Monitor regulatory changes: Stay informed about new state and federal programs or requirements by visiting the official website of your state’s Department of Insurance or the National Association of Insurance Commissioners (NAIC).

Industry Innovation: From Risk Transfer to Risk Mitigation

The insurance sector is increasingly moving beyond simply transferring risk to actively managing and mitigating it. Some insurers are partnering with governments and local organizations to support resilience projects, such as flood defenses or wildfire mitigation programs. [2]

Others are developing new products-such as parametric insurance, which pays out based on the occurrence of a specific event (like a hurricane of a certain category) rather than assessed damages. This can provide faster support to policyholders and simplify the claims process. [1]

Challenges and Solutions for the Future

The insurance industry faces several persistent challenges as it adapts to climate change:

Accurate risk pricing: As extreme events become more frequent, insurers may struggle to price policies accurately, leading to market withdrawals or unaffordable premiums.
Regulatory gaps: Inconsistent rules across regions make it difficult for insurers and policyholders to plan for the future.
Protection gaps: In many low- and middle-income regions, a large share of climate losses remains uninsured, highlighting the need for expanded access and innovative solutions. [2]

Potential solutions include:

Enhanced catastrophe modeling: Incorporating the latest climate science into risk models to better predict future loss scenarios.
Public-private partnerships: Collaborating with government agencies to expand coverage options and support disaster recovery.
Community-based insurance: Pooling risk at the local level to make coverage more accessible and affordable.
Regulatory harmonization: Advocating for consistent climate risk regulations across states and countries.

Accessing Resources and Next Steps

Anyone seeking to better understand or manage climate-related insurance risk can:

Contact their state’s Department of Insurance for up-to-date information on available programs, premium relief, and coverage options.
Search for the “National Association of Insurance Commissioners (NAIC) Climate Risk Disclosure Survey” for insights on insurer climate risk strategies.
Consult FEMA’s official resources on disaster preparedness and property resilience by searching for “FEMA building science” and “FEMA disaster assistance.”
Engage with reputable climate research organizations, such as Woodwell Climate Research Center, for educational materials and policy updates.

Staying informed, investing in resilience, and advocating for smarter insurance policies are key steps for navigating the evolving landscape of climate risk. While the challenges are significant, proactive action by individuals, industry, and policymakers can help protect assets and communities against the growing threat of climate-driven disasters.