The Un-insurability Crisis Is Upon Us – 3 Possible Scenarios for What’s Next
This article by Rupert Read and Andrew Hoffman first appeared on Resilience here.
What does a post-1.5°C world mean for the insurance sector, their customers, investors, and the economy as a whole? This question has suddenly hit the news, as insurers begin to withdraw from some prominent places, and insurance insiders begin to break cover, as reported by the New York Times, just last week: https://www.nytimes.com/2025/04/10/climate/climate-change-economic-effects.html.
New research by the Climate Majority Project, working with a set of insurance insiders working safely within the veil of anonymity, looks at this question and set out three possible scenarios. The one towards which we are currently headed is dire, unless new policies and strategies are instituted that rethink and rework the risk landscape.
Insurance is the canary in the climate coal mine
The insurance sector is dealing with the realities of a climate-changed world with higher payouts from more extreme weather events and more assets in harm’s way by raising premiums and reducing coverage to manage losses. As this continues, with an increasing number of regions becoming ‘ uninsurable‘, Federal Reserve Chair Jerome Powell has warned that insurance companies pull out “of coastal areas [and] areas where there are a lot of fires” the loss of available insurance means that “there are going to be regions of the country where you can’t get a mortgage” in “10 or 15 years.” This would be devastating to individual homeowners and to the economy at large as property values drop and governments take in less tax revenue for schools, police and other basic services. Günther Thallinger, Chairman of the Investment Board of multi-national insurance company Allianz SE warns that this represents “a systemic risk that threatens the very foundation of the financial sector.”
In its 12th national report, “Property Prices in Peril,” First Street — the analytics firm behind the climate risk rating attached to leading real estate listings – estimates the impacts of climate damage could reduce unadjusted U.S. real estate values by $1.47 trillion over the next 30 years:
The future of insurance in three possible scenarios:
One problem with the current risk landscape is that the climate scenarios employed by insurers typically under-value qualitative systemic shifts in the market and therefore underestimate the medium/long-term economic risks and exposures. The work of the Climate Majority Project is intended to apply the latest climate data and analysis as a way to see insurers as a key part of a broader effective response.
At present, the insurance sector is withdrawing coverage from risky areas in order to maintain solvency in the face of regulatory constraints that restrict their ability to alter their pricing and coverage models to adequately cover evolving risks. But if we think about using policies to reduce the overall risk landscape, we can reduce these financial pressures on insurance companies while protecting homeowners and the real estate sector. By analyzing the possible futures before us, these tools come into greater focus.
The following three scenarios are based on (1) the extent of climate breakdown and (2) the insurance sector’s embrace of transformative adaptation: in which they work creatively with governments and other actors to establish more resilient building and zoning standards and more generally to undertake bold, strategy-led efforts to adapt to climate impacts (N.B. With the world already moving past 1.5°C, there is no longer a low climate breakdown scenario, only medium or high).
- Scenario 1: The Great Abandonment
In this future, insurance companies maintain a singular focus on short-term profitability and, in the face of the increased frequency of 1,000 year events, chronic secondary perils, and resistant state regulators, insurers are driven to exit markets chaotically, sparking widespread unaffordable prices and leaving customers behind while offloading systemic risks to taxpayers. Continued un-mitigated disasters trigger a cascade of financial crises as state-backed insurance programs, municipalities, and mortgage lenders require bailouts. The customer is abandoned while leaving insurers with a rapidly dwindling business. Previously privatized profits are now socialized as widespread losses, potentially leading to state insolvency.
- Scenario 2: The Future is Triage
In this future, insurers embrace transformative and strategic adaptation as core to their survival to remain relevant and address customers’ increasing risks, yet due to minimal government action on decarbonisation and on building resilience, exposed regions still see significant insurance-withdrawal. But some regions become “ruggedized” through the adaptation programs of insurer-led public private partnerships. Insurers and the communities they serve may be beleaguered, but many find a way to adapt and survive.
- Scenario 3: Breakthroughs for Resilience
In this future, future-ready insurers spearhead policy-reform in strategic adaptation and decarbonization across the markets they serve. This leads to political breakthroughs helping stabilize protection gaps for most regions, enabling managed retreat away from high exposure areas, and rapid growth of insurance coverage and investment in climate-adaptive food systems, water cycle restoration, and new low-carbon technologies.
What would the signs look like that we are turning towards a better scenario?
Elements of The Great Abandonment are upon us. But there are signs of change that may yield a different future where the “new normal of risk” requires deeper changes in how we adapt strategically to a rapidly changing climate in order to build long-term resilience.
Moving towards The Future is Triage or Breakthroughs for Resilience requires changes in how we build, where we build and why we build. Such changes would include:
- More robust zoning laws to limit development in exposed places that insurance providers are finding harder to properly cover at a reasonable price-point.
- New building codes that mandate resilient buildings and communities like those found at Babcock Ranch, which is built to withstand more than 150mph hurricane force winds, uses preserved wetland to reduce flood surges and employs solar farms and underground transmission system to maintain reliability.
- When areas are devastated by extreme weather events, new zoning laws that condition claim payments with moving to safer ground or ‘building back better’ to a building standard that mitigates medium-term risks.
- New regional or city level laws that mandate water cycle restoration and landscape-based water retention in urban areas and surrounding watersheds, including many aiming to become ‘Sponge Cities’ to prevent flash floods (and extended droughts).
- New approaches to insurance coverage that offer multi-year coverage, rather than the standard 12-monthly-renewal and reward investments in broad scale adaptation and resilience that create incentives for insurers to help “ruggedize” buildings and entire neighborhoods.
- Mandates for flood insurance as only about 4% of homeowners nationwide have flood insurance even though 90% of catastrophes in the U.S. involve flooding.
- Finally, as certain cities and regions become seen as “climate havens” where weather impacts are less and local communities are more resilient, preparations must be made to anticipate and plan for population growth and development.
Insurers must embrace their role as a sentinel
If current trends continue, the future will be defined by private insurers no longer offering coverage in risky locations, forcing government-backed insurers of last resort to step in. As payouts mount, we will likely face wider financial instability. To avoid this fate, it is critical for insurers to play a different role in a post-1.5°C world, one that is less reactive and more proactive, working with policy-makers to change the overall risk landscape.
Insurers should, through their disclosure and lobbying power, play a key role in achieving a safer and more resilient world. Through disclosure, they can share their vast knowledge about the financial risks of a climate changed world. Through lobbying, they can advocate for a suite of laws and policies that make the world more insurable in the face of the ever-mounting risks. The new normal of offering insurance in a post 1.5C world requires this new role if we are to realize a better scenario than the one we are presently embarked upon.
Justin D’Atri, Climate Coach at the education platform Adaptify U and Sustainability Transformation Lead at Zurich Insurance Group, contributed to this article.
