Collapse of stability

Insurance is more than just a financial product; it is a cornerstone of modern economic stability. It backs housing markets, enables mortgages, supports business continuity, and cushions entire communities in times of crisis (5). However, as climate change intensifies insurers worldwide face losses from increasingly frequent and severe natural disasters (10). This is eroding the traditional insurance model and pushing entire regions towards "uninsurability". This article focuses on home and property insurance, where climate risk is already reshaping markets. In Europe alone, insured losses from natural disasters averaged €45 billion annually over the last five years (11).

The climate insurance protection gap – the difference between economic losses from climate disasters and the amount covered by insurers – is widening (3). The Geneva Association reports that climate-related losses could reach hundreds of billions annually by the end of this decade (10). In some vulnerable regions, up to 60% of damages remain uninsured, shifting risk to homeowners and government funding (11).

To understand how fragile systems become under stress, we can look at Australia, Florida, and California – frontline regions where insurance retreat is already happening. This year alone natural disasters have cost the US more than $162 billion, mostly covered by insurers (20).

Why insurers are withdrawing

The core challenge is the rising unpredictability and scale of climate losses. Extreme weather events are more intense and more frequent, moving beyond the historical data that insurers depend on (11). As a result, insurers face claims costs that pressure their financial viability (9). National Oceanic and Atmospheric Administration (NOAA) historical data shows that since 1980, the U.S. has sustained $2.9 trillion in weather- and climate-related losses (adjusted for inflation), with the last ten years marking the most costly period on record (14). This rapid escalation mirrors patterns in other countries, where disaster costs are rising faster than insurance systems can adapt (4).

As claims multiply and costs surge, insurers are raising premiums, but even this response is proving insufficient. For many homeowners, especially in high-risk zones, rising costs are insufficient to cover losses (9). Some are priced out entirely or face exclusions for flood or wildfire coverage (6). A parliamentary inquiry in Australia revealed instances of homeowners seeing flood insurance premiums double or rise to tens of thousands of dollars, effectively making insurance inaccessible for entire regions (15). As insurers withdraw or tighten coverage, the consequences fall through real estate markets, making mortgages harder to obtain and properties harder to sell (24).

The human cost

Insurance withdrawal has many human and social consequences. In regions losing coverage, property owners face not only financial losses but also psychological stress and uncertainty (5). The burden falls on lower income households that can’t insure or move to lower-risk regions (13). This creates an inequality, where wealthier households are more likely to invest in resilience measures or simply move, while vulnerable groups face insecure housing, and long-term financial strain.

Loss of insurance also impairs community resilience by limiting resources available for rebuilding and adaptation (11). Climate risk and insurance challenges exacerbate existing social inequalities, requiring holistic policy responses (23).

Australia: a case study of climate risk and insurance challenges

Few countries illustrate the problem more starkly than Australia, where wildfires and cyclones collide with a fully privatized insurance market. Australia’s landscape faces multiple climate threats: wildfires, heatwaves, riverine, and coastal flooding (7). Climate change is amplifying these hazards: average land temperatures have risen by 1,47ºC since 1910, with longer and hotter heatwaves, and sea levels have already risen by 25 cm since 1880, heightening risks for coastal communities (22).

Historically, Australia has relied on a fully privatized insurance market, with no national government flood insurance scheme (8). This has left households highly exposed to premium volatility in hazardous areas. In many northern and coastal regions, homeowners are already paying some of the highest insurance premiums in the developed world, with costs often exceeding mortgage repayments (26).

Following the black summer wildfires of 2019-2020 and floods in 2022, insurers have increased prices significantly (22). Some insurers have stopped offering new policies in parts of northern Queensland due to cyclones and flooding risk, leaving homeowners dependent on a shrinking pool of insurers (27). Reinsurers have raised their prices for Australian insurers, resulting in cost pressures for consumers (11).

Government intervention

Recognising the mounting affordability crisis, the Australian government launched the Cyclone Reinsurance Pool in 2023 (8). This scheme, administered by the Australian Reinsurance Pool Corporation, allows insurers to transfer their most expensive cyclone related risks to the government. This means the state helps cover part of the cost of cyclone damage so that insurers can keep offering policies, at lower prices, specifically for households and small businesses in cyclone-prone regions. However, broader reforms to address flood and bushfire insurance remain contested.

Other efforts include: the Disaster Ready Fund allocates up to AUD 200 million annually to community-level risk reduction projects, such as flood levees and evacuation infrastructure (16; 17). They have also introduced incentives to stimulate property upgrades: some insurers now offer discounts for cyclone-resistant roofs or flood proofing measures, with limited success due to high upfront costs (13). Apart from this, they have started many public-private partnerships, where they are looking to co-design insurance mechanisms with industry. particularly for high-exposure zones, to maintain coverage without unsustainable public spending (24).

Similar approaches are visible in Europe. The United Kingdom’s Flood Re scheme provides a government-backed reinsurance pool for high-risk properties (4), while The Netherlands has national flood risk pooling arrangements designed to spread losses across society (19).

While these interventions maintain critical coverage, they carry risks of moral hazard – reducing incentives for risk reduction – and often mask the true economic costs of climate change (16). As Petra Hielkema, chair of the European Insurance and Occupational Pensions Authority, notes, “If insurers don’t cover damage, the costs fall on consumers and then governments. A broad societal dialogue is urgently needed on cost-sharing.” (16)

Homeowners tend to underestimate their risk, an optimism bias that delays adaptation and preparedness (13). Politically, decisions around who bears climate costs are difficult. Should taxpayers, insurers, fossil fuel companies, or homeowners shoulder the burden? The answers remain deeply contested, yet urgency is rising as losses mount.

The growing risk of uninsurability

The insurance council of Australia warns that without significant investment in adaptation, as many as 1 in 25 Australian properties could become effectively uninsurable by 2030 (22). As coverage becomes unaffordable and even unavailable, property values in high risk zones could collapse and mortgage lending may contract (25).

The prospect of managed retreat, by relocating communities from high-risk zones, is politically sensitive. However, recent extreme events have forced the issue onto the agenda (7). Without decisive action, Australia’s climate exposed regions risk falling into a cycle of repeated disaster losses, rising premiums, and potentially even complete insurance withdrawal.

NOAA’s projections indicate that, without significant adaptation, both the frequency and cost of extreme weather will continue to climb fast, with billion-dollar disasters becoming a near-annual occurrence in many regions – what we’ve already been seeing in North America and also visible in Australia and other affected regions (14; 11).

What’s next?

Without coordinated action, insurance retreat could destabilize housing markets and financial systems globally (10). What happened in Florida and Queensland will happen in the Netherlands, Japan, and the Mediterranean – not if, but when (4). Reform insurance regulation to incentivize resilience and risk based pricing (22). Public funding mechanisms to support high-risk zones without encouraging dependency on governments (10). And climate levies on polluters to fund adaptation and risk sharing. The EU and member states are increasingly engaged with these challenges, recognizing insurance as a critical component of climate adaptation.

Building resilience requires blending private insurance markets with public investment and social policy (4). Combining risk based private premiums with public reinsurance and guarantees (10). Expanding flood defenses, promoting fire-resilient construction, and applying water-sensitive urban design, etc. (12). Plan and fund relocation with community involvement and compensation, if necessary. Improve transparency so consumers, brokers, and policymakers understand hazard exposure (26) Incentivize homeowners and businesses to invest in resilience through insurance discounts and public grants (23).

Conclusion

The cornerstone is cracking, and Australia shows what happens when it falls. Australia’s unfolding insurance crisis is a forerunner for a global challenge: as climate change intensifies, insurance markets are recalibrating, and retreating from the most exposed regions (7). This is the start of the true economic costs of climate change through extreme weather. NOAA’s historical and projected data confirm that these risks are growing faster than many insurance and adaptation systems can respond to (14).

The path forward is clear, but it needs rapid action. By accelerating adaptation and resilience measures, reforming financial structures to maintain access to coverage, and integrating climate risk into policy design, the insurance market can endure climate risks (24). Failure to act will not only leave properties uninsurable but also create many risks for vulnerable communities (20). Australia’s experience shows that even wealthy, well prepared nations are not immune. Global coordination, by combining emissions reductions and developing more resilient infrastructure, is essential to prevent a future where the uninsurable becomes the norm rather than the exception. Shall we?

This article is part of The Outside World, ftrprf’s very own research center.

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