It will be interesting to observe which natural disaster emerges as the biggest challenge for insurance companies in the coming years. Hurricanes, wildfires, tornadoes, flooding, and earthquakes all pose significant risks. It seems like your geographic locations may no longer be a key factor.
Storms, Floods, and Fires: A Shifting Landscape of Risk for Insurers The insurance industry is bracing for a future where a confluence of increasingly frequent and severe natural disasters, supercharged by climate change, will continue to drive up losses.1 While hurricanes and earthquakes remain significant threats capable of causing catastrophic single-event losses, severe convective storms (SCS) – encompassing tornadoes and hailstorms – along with widespread flooding, are emerging as the most consistent and rapidly growing concerns for insurers globally.2 Wildfires also represent a quickly escalating peril, particularly in vulnerable regions.
Global insured losses from natural catastrophes are on a steady upward trajectory, projected to reach approximately USD145 billion in 2025, continuing a long-term annual growth trend of 5-7% in real terms.3 Alarmingly, industry experts warn of a 1-in-10 probability of a "peak loss year" exceeding USD300 billion. This surge is largely attributed to the increasing frequency and intensity of extreme weather events linked to climate change, coupled with growing urbanization and rising property values in hazard-prone areas.
Severe Convective Storms (SCS): The New Dominant Peril
Once considered "secondary perils," severe convective storms have recently become the costliest category of natural disaster for insurers. In both 2023 and 2024, global insured losses from SCS surpassed USD50-60 billion annually.4 These storms, which include devastating tornadoes, hailstorms, and straight-line winds, are becoming more frequent and intense.5
A key challenge with SCS for insurers is the difficulty in diversifying this risk through traditional catastrophe reinsurance programs. This often means insurers must retain these substantial losses on their own balance sheets, posing an existential threat to the solvency of some companies. The U.S. has been particularly hard-hit by SCS, but other regions are also experiencing record losses.
Flooding: A Persistent and Expanding Threat
Flooding, driven by more extreme rainfall events, rising sea levels, and overflowing rivers, is another major and growing concern for the insurance industry.6 It causes widespread damage and significant insured losses globally. The increasing risk of flooding is leading to predictions that hundreds of thousands of homes in some countries could become uninsurable by 2030. Canada, for example, saw its costliest year on record for natural catastrophes in 2024, heavily impacted by floods, alongside hailstorms and wildfires.7
Wildfires: An Escalating Danger
The threat from wildfires has intensified dramatically in recent years, particularly in regions like California, but also impacting areas in Canada and other parts of the world.8 Climate change is a significant factor, creating hotter and drier conditions that extend wildfire seasons and increase their severity.9 Devastating wildfires have resulted in tens of billions of dollars in damages and economic losses, putting immense pressure on insurance availability and affordability in affected areas.10 In some instances, insurers have been forced to limit coverage or withdraw from high-risk markets altogether.11
Hurricanes: A Perennial Peak Peril
Major hurricanes continue to pose a significant threat, capable of causing tens of billions of dollars in insured losses from a single event.12 For instance, Hurricanes Helene and Milton in 2024 were cited as major contributors to that year's high insured losses. While the frequency of all hurricanes may not be increasing, there is evidence that the intensity of the strongest storms is rising due to warmer ocean temperatures, a direct consequence of climate change.13 The potential for a single powerful hurricane striking a densely populated coastal area remains a peak concern for the industry.
Earthquakes: A Steady, Unpredictable Risk
Unlike weather-driven events, earthquake risk is not directly influenced by climate change. However, it remains a constant and significant peril, particularly in seismically active zones like California, Japan, and other regions along tectonic plate boundaries. The earthquake insurance market is experiencing growth, driven by increasing awareness of seismic risks and the general rise in natural disaster frequency.14 A major concern for the industry is the "protection gap" – the difference between economic losses and insured losses – which can be substantial after a major earthquake, especially for "grey swan" events whose full economic impact is difficult to quantify beforehand.15
The "Uninsurable Future" and Industry Response
The escalating losses from these natural disasters are forcing a reckoning within the insurance industry. Insurers are responding by:
- Raising Premiums: Costs are increasing for policyholders, sometimes dramatically, especially in high-risk areas.16
- Reducing Coverage: Insurers may limit the types of damage covered or offer lower coverage amounts.
- Exiting High-Risk Markets: In some extreme cases, insurers are ceasing to offer new policies or are not renewing existing ones in the most vulnerable regions, leading to an "insurance crisis" where coverage becomes unavailable or unaffordable.17
This trend is creating "insurance deserts" and increasing reliance on government-backed "insurer of last resort" programs, which themselves face growing financial pressure.18
Going forward, the insurance industry faces the immense challenge of managing these evolving risks. This will involve leveraging advanced climate and catastrophe modeling, innovating with new risk transfer solutions like parametric insurance, and advocating for greater investment in risk reduction and climate adaptation measures to build more resilient communities. However, the overarching trend indicates that storms, floods, and fires, amplified by a changing climate, will be the dominant drivers of natural disaster losses for insurance companies in the years to come.
Gemini |
