Abstract
Escalating climate-driven extreme weather events are increasing insured and uninsured losses worldwide, placing structural stress on insurance markets and, by extension, the broader financial architecture that depends upon risk pricing and capital protection. This paper examines emerging evidence suggesting that continued warming beyond 2–3°C above pre-industrial levels may render large classes of physical assets partially or wholly uninsurable. Because insurance underpins mortgage markets, infrastructure finance, and long-term capital investment, systemic insurance withdrawal could propagate instability throughout modern market economies.
1. Introduction
Modern capitalism depends on risk transfer mechanisms. Insurance allows individuals, firms, and governments to manage uncertainty, enabling long-term investment, credit expansion, and asset valuation. As climate change accelerates, physical risks—including extreme heat, wildfire, flooding, sea-level rise, and hydroclimate volatility—are increasingly challenging actuarial foundations.
2. Climate Risk and Insurance Market Withdrawal
Major insurers have warned that continued warming may produce conditions under which traditional insurance models no longer function in high-risk regions. If expected losses exceed affordable premium levels, private insurance markets withdraw.
- Reduced issuance of new policies in wildfire-prone California
- Premium spikes in hurricane-exposed coastal regions
- Rising reinsurance costs following repeated billion-dollar catastrophe years
When climate risks become highly correlated and geographically concentrated, diversification assumptions weaken and actuarial pricing becomes unstable.
3. Financial Interdependence and Systemic Exposure
Insurance underpins mortgages, infrastructure finance, agriculture, transportation, and trade. If insurance becomes unavailable or unaffordable, cascading effects may include declining real estate values, reduced credit issuance, municipal bond stress, and broader financial tightening.
4. Warming Trajectories and Nonlinear Risk
Current policy trajectories are broadly consistent with warming outcomes in the range of approximately 4–7°C by 2100. At higher levels, damages increase nonlinearly, particularly when interacting with feedback mechanisms such as ice-albedo loss, permafrost carbon release, forest dieback, and ocean circulation changes.
Although extreme high-end projections represent tail risks, financial markets must account for fat-tailed uncertainty distributions when pricing long-term assets.
Projected Temperature Ranges by 2100
- Rapid decarbonization / Low emissions pathway: ~1.5–2°C
- Current policy trajectory (if emissions plateau but are not deeply reduced): ~2.5–4°C
- High-emissions pathway with reinforcing feedbacks and tipping cascades: ~4–7°C
Earth System Response Regimes
- Linear physics: ~3–5°C
- Full feedback participation: ~6–9°C plausible
- Runaway transition: >10°C over centuries (Hothouse pathway)
5. Limits to Adaptation
Adaptation capacity is constrained by financial, geographic, and physiological limits. Floodplain urbanization, extreme heat thresholds, and compound disaster events illustrate boundaries beyond which adaptation becomes prohibitively costly.
6. Insurance as a Leading Indicator
Insurance markets act as early-warning systems. Withdrawal from high-risk areas signals projected losses exceeding viable returns. As warming approaches 3°C, structural insurability challenges become significantly more likely.
7. Public Health and Economic Feedbacks
Climate risk extends beyond property damage. Heat stress, wildfire smoke exposure, disease vector expansion, and extreme precipitation events increase healthcare costs and reduce labor productivity, creating feedback effects within economic systems.
8. Policy Implications
- Rapid decarbonization
- Climate-resilient infrastructure investment
- Risk-based land-use reform
- Insurance market restructuring
- Climate stress testing for financial institutions
9. Conclusion
Insurance markets are among the first financial sectors to directly price climate risk. Rising premiums and regional withdrawal suggest growing structural stress. The trajectory of global warming will determine whether insurance remains a functional risk-management tool—or becomes an early casualty of systemic climate instability.
Based on our original research Insurance Collapse (2025)