Why Insurers Are Worried About the Weather

Over the past few decades, America has been facing a growing frequency of extreme weather events, with hurricanes, uncontrolled wildfires, sudden floods, and prolonged droughts.

And all of this is no longer the exception but rather part of a new climate pattern. For insurers, this new scenario is not just a reason for attention — it’s a growing source of concern.

Take a look at how climate change is completely reshaping the insurance industry, especially in the areas of home, agricultural, and commercial property insurance.

An Unprecedented Increase in Losses

According to the National Oceanic and Atmospheric Administration (NOAA), in 2023 alone, the U.S. recorded 28 natural disasters with damages exceeding $1 billion each — a historic record.

Insurers base their models on static forecasts and calculated risks, which are becoming increasingly disrupted.

In states like Florida and California, the situation has worsened so much that some insurers have decided to stop issuing new policies in regions considered high risk.

Hurricanes, Fires, and Floods: Today’s Main Villains

In coastal regions of America, such as Texas, Louisiana, and Florida, there’s a higher incidence of strong hurricanes and heavier rainfall, events that cause immediate damage to homes.

In addition, there are indirect effects such as the displacement of people, loss of productivity, and reconstruction of public infrastructure.

On the other hand, the American West is battling increasingly devastating wildfires, which not only consume entire forests but also reach densely populated urban areas.

Flooding has also become a chronic problem in various parts of the country, with losses mounting in many states.

The Numbers Don’t Add Up

The biggest challenge for insurers is dealing with unpredictability, since the traditional risk pricing model no longer seems sufficient to handle such extreme events.

For insurers, the biggest challenge is indeed managing the unpredictability. The model—

Additionally, there is an ethical and commercial dilemma: raising prices to balance out risk could make insurance unaffordable for millions of Americans.

On the other hand, keeping prices low could lead to insurer insolvency in the face of large-scale catastrophic events.

The Impact on the Consumer

The effects of the climate crisis will be easily felt by consumers, with rising premiums for home insurance.

In high-risk areas, such as those near fire or flood zones, some insurers simply refuse to renew contracts, leaving homeowners without coverage.

In addition, the number of denied claims has increased. With the frequency of extreme events, many insurers are revising policy terms, adding exclusion clauses for certain climate-related risks.

The Industry’s Response

To try to adapt to this new scenario, many insurers may invest in more advanced climate forecasting technologies and partnerships with weather data companies.

Others are restructuring their portfolios, diversifying risks, and creating specific products for natural disasters.

There is growing pressure to take a more proactive role in risk mitigation, especially by encouraging disaster-resistant construction, offering discounts for properties with preventive measures, and even collaborating with local governments.

Furthermore, insurers are being called to play a more active role in the ESG agenda (environmental, social, and governance), with investors demanding climate responsibility and adaptation to ongoing changes.

The Future of Insurance in a Time of Extreme Weather

The insurance sector may undergo a major structural transformation, especially if climate events continue to intensify.

A greater presence of the federal government may emerge, acting as a guarantor of extreme climate risks, particularly in areas where the private sector no longer has interest or capacity to operate.

Another possibility is the creation of consortia among insurers to share risks in specific regions.

Everything points to the fact that the climate will not return to what it once was, and the insurance industry must evolve quickly to fulfill its central role of providing financial protection in the face of the unexpected.

Policyholders need to invest in knowledge, especially to find better options for smarter construction and purchases.

Knowing and understanding the legislation can help a lot in finding good business opportunities and doing your part when it’s time to buy insurance for what matters most in life.

Written by

Gabriel Gonçalves