Climate Change Drives Up Business Insurance Costs and Squeezes Market Stability

Insurance affordability—especially within the property and casualty insurance sectors—continues to deteriorate significantly for companies exposed to the growing volatility of climate and weather-related events. For instance, in California, numerous insurers have ceased offering new policies or have outright canceled existing coverage in areas designated as high wildfire risk zones. This challenging situation has been further intensified by regulatory agencies approving catastrophe models that validate premium increases for locations classified as high-risk, thereby imposing additional financial burdens on the already strained policyholders in those vulnerable regions.

Similar patterns are developing on a global scale as well. In Australia, insurers are expecting significant premium hikes in the aftermath of devastating bushfire losses comparable to those experienced in Los Angeles, combined with an overall trend of worsening natural disasters. This reality highlights the critical and urgent need for comprehensive, systematic resilience planning to better prepare communities and businesses for the mounting climate-related risks ahead. Likewise, in the United States, the frequency and severity of hailstorms have increased dramatically over the past five years, forcing insurers to raise premiums across both commercial and residential insurance portfolios to manage the escalating risk exposure effectively.

Businesses facing these mounting challenges must take proactive steps to adapt, mitigate their risk exposure, and develop robust strategies to safeguard their operations:

Meanwhile, regulators and financial overseers are sounding alarms that the rising costs associated with climate-driven insurance could pose significant threats to the overall stability of the financial system. This risk becomes particularly acute if major catastrophic losses exceed insurers’ reserves and their ability to absorb such financial shocks, potentially triggering broader economic disruptions and financial instability with far-reaching consequences.