The Growing Financial Losses of the Insurance Industry:
Society’s “Canary in the Coal Mine” with Respect to Climate Change
The death of a caged canary in a coal mine was once an indicator of impending doom. Before mine safety technology and procedures were developed to detect the build-up of dangerous gases such as carbon monoxide inside the mine, underground miners would take a canary inside a cage down into the mine each work day. The mine workers use caged canaries to determine the safety of air. If carbon monoxide, hydrogen sulfide, methane, or excessive carbon dioxide filled up the work area, the bird would fall from its perch in response to the contaminated air, signaling to the workers to evacuate the mine for fear of being the next victim. Fortunately, in today’s properly vented mines, this technique is no longer required. However, there is still a modern day variation of the threat posed by excessive carbon dioxide in the air, in this case the Earth’s atmosphere. That threat is climate change. And now that we are in the early stages of a rapidly emerging climate crisis, the insurance industry is among the first victims to appear. In short, the immense economic costs borne by the insurance industry as a result of a recent cascade of climate-related disasters is a signal to the larger society of an approaching danger, and that we are all at risk. In this manner, insurance companies now act as society’s canary in the metaphorical “climate mine”.
The insurance industry is facing unprecedented challenges due to climate change and related extreme weather emergencies. It is estimated that 95.5 percent of the US population, or 315.6 million Americans), reside in counties that experienced a weather-related disaster over the last five years, according to Environment America. In the United States, there were 27 individual weather and climate disasters with at least $1 billion in damages in 2024. This is second only to the record-setting 28 events that occurred the year before in 2023. These disasters combined to kill 568 people and cost approximately $182.7 billion. This total places 2024 as the fourth-costliest on record, trailing only 2017 ($395.9 billion), 2005 ($268.5 billion) and 2022 ($183.6 billion). If we add the 27 disaster events of 2024 to the record that begins in 1980, the country has sustained 403 weather and climate disasters (for which the individual damage costs reached or exceeded $1 billion). The cumulative cost for these 403 events exceeds $2.915 trillion. These extreme weather events are further magnified by environmental degradation, inadequate infrastructure, and the lack of emergency preparedness – all of which are being magnified by the current dismantling of major federal agencies and programs.
The escalating severity and frequency of climate-related disasters is reshaping the greater insurance landscape, affecting insurance policy affordability, accessibility, and market stability. It therefore provides a window for seeing the systemic economic impacts of climate change on vulnerable populations and the broader society. The insurance industry was built up systematically using risk evaluation and historical data relating to area-specific environmental hazards, meaning insurance companies now house some of the best climate modelers in the world. Today, the investment and risk decisions insurance companies’ make function as an early warning system for the probability of devastating environmental disasters and their subsequent economic and social impacts.
Insurance: Investing in its Own Demise
Insurance is a necessary safety net for protecting homeowners and businesses alike against the severe financial losses and ruin that result from natural disasters. As climate change exacerbates natural disasters,
Average home insurance prices in the United States have been skyrocketing, increasing 24 percent from 2021 to 2024.
Insurance companies adjust their pricing and plans based on the location of the home seeking coverage and its susceptibility to environmental destruction. For example, states that are more prone to climate-related natural disasters, such as Louisiana, California, and Florida, are seeing some of the highest claims in insurance history, with the highest average claim frequency (the number of claims that are filed within a certain timeframe) at 13.7 percent. In California specifically, many large insurers like State Farm hiked up post-wildfire insurance rates by 22 percent. In short, the insurance industry is passing along the increased costs of insurance claims (and then some) onto their policy holders.
The major uptick in the costs of insurance policies for homeowners, disguised as compensation for extreme weather events and damages, have resulted in record financial gains for many insurance companies, which grossed $88 billion in profits for the industry in 2024 (a 126 percent increase from the year prior, 2023).
Analysts suggest that one reason for this immense profit increase might be that insurance companies have been consistently over-reserving, in other words, insurers have been setting more money aside to pay for losses. In the past, when those losses failed to materialize, companies would pocket the extra money and begin the cycle all over again. This then begs the question; if insurers are perfectly capable of supporting the economic repercussions of current climate disasters - and not only that, raking in the dough while they do it - why has insurance become so unaffordable and hard to come by?
The insurance industry is made up of many financial layers; the most prominent of these are reinsurance companies. Reinsurance companies are the backbone of the insurance world, acting as the “insurers of insurance companies” as well as the driving force behind many of the actions of the industry. Armed with some of the best climate scientists in the world, reinsurers are able to dictate what companies will and will not cover based on predicted weather events. Despite the havoc climate change has wreaked on the industry, insurance companies remain some of the biggest investors in fossil fuel corporations via the stock market. As of 2024, U.S. insurers held fossil fuel-related assets worth more than $500 billion; the top 16 insurance companies in the country accounted for holding over 50 percent of these investments. Insurance companies are, quite literally, investing in the very activities that exacerbate climate risks and threaten their own industry.
The insurance industry in the U.S. is regulated by the National Association of Insurance Commissioners, which is an organization made up by the chief insurance regulators from each state, who together develop nationwide insurance models, laws, and regulations. On a global level, insurance is regulated in a similar fashion, where the International Association of Insurance Supervisors set a general standard for insurance practices and take charge of insurance practice oversight. Despite the ever increasing need for insurers in their critical economic roles in state and global financial systems, insurance regulators across the United States have not implemented a consistent or robust approach to confront climate related risks. Insurers continue to base their decisions on their own proprietary statistics and modeling while providing little public insight into how these assessments are climate conscious and what affects these outcomes will have for consumers.
A Risky Future for an Imperiled Industry
At the same time the industry profits from fossil fuel investments, it is raising costs and premiums or withdrawing coverage altogether in high-risk areas as climate disasters intensify. The rising costs and reduced availability of insurance coverage disproportionately affect poor and low income individuals, who are unable to afford the skyrocketing prices on the private market, where claims in disaster-prone states have increased more than 50 percent from the years 2018 to 2022. This leaves the most vulnerable communities exposed to disasters without a financial safety net, deepening cycles of poverty, inequality and under-disinvestment. Furthermore, companies are pulling out of markets entirely in areas that are prone to catastrophes, once again exacerbating financial and environmental impacts on the communities most at risk.
Public systems for flood insurance, most notably the National Flood Insurance Program, only cover certain areas of the country. One would think these designated areas would be better protected than those living in uncovered areas. However, the cost of rebuilding in such covered areas is usually extremely high and typically borne by us… the taxpayers… not the insurance companies. The program is currently $27 billion in debt. The systemic strain on public resources to cover uninsured losses puts additional pressure on taxpayers and government resources, diverting funds from essential services to disaster recovery. Addressing these inequities requires a reevaluation of how the insurance industry operates, including stricter regulations on fossil fuel investments and the creation of affordable, accessible insurance programs to safeguard vulnerable populations.
Returning to the opening metaphor, the current level of risk posed to lower income communities by today’s climate catastrophes are a canary - a harbinger of the future climate risk of all communities globally. These devastating crises manifest across different types of climate disasters, each carrying significant human and financial costs. The European Central Bank has identified climate-related risks as the key driver of risk for the greater European banking system, stating that, “institutions should take a strategic, forward-looking and comprehensive approach to considering climate-related and environmental risks.” Furthermore, the Bank of England has stated that climate change itself will likely have serious implications, causing a cascade of instability within the financial system - such as on corporate institutions and individual households failing to obtain or repay loans.
Market and Regulatory Paths Forward
Both the cost and availability of insurance poses significant consequences for local governments whose tax bases are reliant on property values. Despite the immense effects that this climate/insurance crisis has on government funds, instead of forging new solutions fitted to address this unique issue, most governments are relying on old programs designed to allocate these losses more widely. Some of these outdated programs include state governments’ Fair Access to Insurance Requirements (FAIR) plans and the federal government’s National Flood Insurance Program (NFIP), which is itself based on historical climate modeling and over-subsidizes construction and rebuilding after a disaster in high climate risk areas. One thing almost all of these government sponsored insurance plans have in common is that they all seek to act as “insurers of last resort” and provide their coverage on a temporary basis. These initiatives were originally developed to provide coverage for low-income communities in places where private insurers did not offer coverage. In many states now, the highest-risk residential policies end up in residual, unideal government insurance plans because property owners are unable to afford private coverage.
As the current government insurance offerings are less than ideal, the entire commercial insurance market needs solutions that offer more coverage to compensate for worsening climate-related natural disasters. To accomplish such a task and ensure increasing insurance availability and affordability, policymakers must consider solutions that reduce loss risk and protect communities, such as providing better public climate-related risk data and analysis to guide households, insurers, and government actors; and enable a strong financial system that can withstand shocks and serve the economy as a whole, not just the insurers.
The Key Contradictions of the Insurance Industry
The insurance industry is floating in the eye of the climate storm, revealing its prioritization of ever-increasing profits as compared to the global need for human safety and ecological sustainability. These contradictions highlight the systemic issues within the industry and can inform pathways to solutions.
The first and most prominent contradiction of the industry is their prioritization of property when lives are threatened. According to research from the Center for American Progress, “rising insurance costs, and reduced availability are market signals of increased physical risks from climate disasters.” Insurance payouts and premiums focus on assets while communities are actively fighting for basic resources, healthcare, and reconstruction of their homes. Responding to climate disasters then is not about a focus on social equity: instead, insurance corporations have put prioritized their profits and industry gains. Their strictly monetary focus creates a disconnect in which protecting property is centralized, while systemic support for human safety and livelihood are sidelined. Insurance companies were designed to assess and price homes, assets, businesses, and risk. However, due to more frequent climate emergencies, especially in certain highly vulnerable areas like coastlines and areas prone to wildfires, companies are drastically increasing costs or outright withdrawing coverage.
The second contradiction in the global insurance industry’s continued and substantial investments in the very corporations that are exacerbating the climate crisis - the oil, coal, and gas giants. This creates a paradox, in which the industry most susceptible to climate consequences heavily invests in fossil fuels to earn profits from the crisis it exacerbates. While in the short term, this may be very profitable in terms of returns to shareholders on the stock market, but over the long term it is not financially sound for the insurance industry. It is certainly untenable to their policy holders and the global climate. By addressing the contradictions of the insurance industry, which currently value profit over preparedness and property over people, the industry can be made into a force for building climate resilience and regrowth (instead of an exacerbator of vulnerability).
Insurance/Private Market Responses:
To quote former California Insurance commissioner, Dave Jones, “we’re marching steadily toward an uninsurable future.” So what can we do to avoid this impending reality? The first and potentially most immediate response for companies would be investing in or subsidizing climate risk prevention with measures such as proper home elevation, steel roofing, roof tie-downs, flame-retardant solutions, and stricter building codes that would decrease the effects of weather emergencies.
Insurance regulators also have a role in ensuring our collective future; this could be accomplished if the National and International Associations of Insurance Supervisors/Commissioners would both monitor and prevent companies from the practice of bluelining. Bluelining is the action of financial institutions when they withdraw services or increase their prices in areas that are considered to be at a high risk of extreme weather events. Insurance regulators should provide companies with guidance and training to help balance climate risk management without denying families access to affordable insurance. This would help to strengthen the ability of low-income and underserved communities to rebuild and recover after climate catastrophes. Additionally, this practice, in a roundabout way, would aid in repairing somewhat historical segregation practices. National census research reports that Black, Latinx, and Native American individuals reside geographically in areas that are 50 percent more vulnerable than areas with other census groups.
In an effort to find viable solutions, the market should move forward with new, innovative insurance structures like parametric insurance. Parametric insurance is designed to accommodate the unpredictability of natural systems under climate change by providing coverage for properties or assets based on the probability of a loss-causing event happening. This differs from the techniques of most operating insurance groups as it predetermines a payout to cover destruction based on predicted weather events instead of indemnifying the actual loss incurred after the event. This type of insurance is beneficial for consumers for many different reasons, including lower administrative costs, tailored coverage, faster payouts, and environmental resilience building. By promoting parametric insurance or even by altering regular forms of insurance to mimic parametric insurance, both the environment and the public would benefit greatly.
Public Policy/Regulatory Responses:
Public policy and regulatory responses to climate/insurance issues start from the most basic of environmental solutions. There are solutions such as building sea walls/rolling easements to prevent flooding, green roofs for stormwater management, flame-retardant treatments and roof design to prevent wildfire damage, and more. Simple preventative architecture can go a long way in protecting assets, finances, and lives from the unjust insurance-aftermath.
Interactions between the public and private sectors are also very important aspects of amending this crisis. Having public/private partnerships emphasizes the need for collaboration between government entities and private insurers. By establishing the shared goal of mitigating the effects of climate change on peoples’ livelihoods, catastrophic losses facing the insurance industry can be shared, and as such, lessen the burden on consumers’ wallets. These partnerships can be done in different ways, through reinsurance programs or government sponsored insurance schemes, further ensuring insurance coverage, availability, and affordability.
Our Path Forward
The canaries in the coal mines were considered to be “the life-saving birds,” giving miners the opportunity to escape the dangers of the mine. The insurance industry, acting as the canary by demonstrating the instantaneous and severe realities of climate change, should be considered a live-saving signal for immediate systemic change. In order to properly combat this ever intensifying environmental disaster, proactive strategies need to be introduced, including the implementation of climate friendly architecture, further regulation of the insurance industry, incentivizing climate consciousness, and new innovations such as parametric insurance. Despite its actions to exacerbate these issues, the insurance industry cannot solve these challenges on its own. Climate adaptation and mitigation require a collective, international effort, in which insurers play a critical role in driving sustainable practices and supporting vulnerable populations. The choices we make today will determine whether comprehensive, affordable insurance remains a tool for shared security, or becomes another casualty of the climate crisis and government neglect.
Disclosure:
This researched opinion piece was written by Rachel Sbar. The author would like to thank Dr. Daniel Faber and Christina Schlegel of the Global Center for Climate Justice for their editorial assistance. These opinions are the author’s own.
