Insurance Industry and Climate Risks: A Growing Concern

Why insurers are withdrawing from climate vulnerable areas

Insurance companies across the UK and US are pulling out of high-risk regions. Consequently, homeowners in California and Florida now struggle to find affordable cover. This retreat follows decades of premium collection in these same areas. Meanwhile, the same insurers continue to profit from fossil fuel investments worth hundreds of billions.

The pattern reveals a fundamental contradiction. Insurers have understood climate risks for fifty years. However, they failed to adjust their business models accordingly. They invested policyholder premiums in coal, oil and gas assets. Now, as climate disasters intensify, they are abandoning the communities most affected.

This withdrawal creates what analysts call insurance deserts. These are areas where traditional cover becomes unavailable or unaffordable. The burden then shifts to state-backed schemes and public funds. Essentially, taxpayers now underwrite the risks that private insurers once accepted.

For UK businesses, the implications extend beyond property insurance. Supply chain disruptions, rising premiums, and investor scrutiny all stem from this systemic failure. Moreover, companies with US operations or suppliers face direct exposure to these market exits.

Financial ties between insurers and fossil fuel companies

US insurance companies held $536 billion in fossil fuel assets in 2019. This figure comes from research by Ceres and ERM. Two companies alone account for nearly half this total. Berkshire Hathaway and State Farm own 44% of the sector’s fossil fuel holdings.

The investment side tells only part of the story. In 2023, major US insurers earned $5.2 billion from underwriting fossil fuel projects. This revenue comes from providing coverage to oil, gas and coal operations. Therefore, insurers profit twice: once from investing in fossil fuels, again from insuring them.

Between 2002 and 2022, climate-related events caused $600 billion in insured weather losses. These figures represent actual claims paid by the industry. Furthermore, climate-attributed losses are growing at 6.5% annually. General weather-related losses grow at just 4.9% per year. The gap widens each year.

Climate damage now costs approximately $16 million per hour globally. The Senate Budget Committee warned that extreme weather will become more frequent and violent. As a result, insurance will grow scarcer and premiums will continue rising. US homeowners already experienced this shift. Premiums increased by more than 30% between 2020 and 2023.

Rainforest Action Network identified specific companies fueling this crisis. Chubb, Liberty Mutual and AIG continue underwriting fossil fuel expansion. At the same time, they withdraw coverage from vulnerable communities. This approach prompted criticism from environmental groups and policymakers.

European markets face similar challenges. Only 25% of economic losses from extreme weather are insured across Europe. This protection gap leaves governments and individuals bearing most climate costs. As physical risks intensify, this gap will likely widen further.

Market exits and the emergence of insurance deserts

State Farm stopped offering new homeowner policies in California in 2023. Berkshire Hathaway carved out fire coverage from existing policies. These decisions followed years of profitable operations in these markets. Both companies cited rising wildfire risks as justification.

The withdrawals forced thousands of homeowners onto California’s FAIR Plan. This state-backed scheme serves as the insurer of last resort. However, FAIR Plan coverage typically costs more and provides less protection than private policies. Consequently, homeowners pay higher premiums for inferior cover.

Florida experienced similar market disruption. Multiple insurers reduced their exposure or exited entirely. The state’s Citizens Property Insurance Corporation now covers over one million policies. This state-run entity was designed as a temporary safety net. Instead, it has become a primary insurer for many residents.

These market exits create a dangerous precedent. Private companies collected premiums for decades when risks seemed manageable. Now, as those risks materialize, they transfer exposure to public entities. Taxpayers ultimately bear the cost of climate-related claims.

PwC analysis warned of expanding insurance deserts. These areas lack affordable risk protection. When insurance becomes unavailable, property values decline. Economic activity slows. Investment withdraws. The effects ripple through local economies.

For businesses, this trend poses several challenges. Property insurance costs rise sharply in affected areas. Some locations become effectively uninsurable through conventional markets. Companies must then choose between self-insuring, relocating, or accepting higher costs. Each option carries significant financial implications.

UK companies with US operations face direct exposure. Supply chains that run through high-risk US regions become more vulnerable. Additionally, companies serving US markets may find their customers struggling with insurance costs. These pressures eventually affect profitability and operational planning.

Essential facts about insurance industry climate exposure

• The insurance sector has recognized physical climate risks for at least fifty years, yet failed to adapt risk models accordingly.
• US insurers held $536 billion in fossil fuel assets in 2019, with Berkshire Hathaway and State Farm controlling 44% of this total.
• Top US insurance companies earned $5.2 billion from underwriting fossil fuel projects in 2023 alone.
• Climate-attributed insurance losses grew at 6.5% annually over the past decade, exceeding the 4.9% growth rate of general weather losses.
• Between 2002 and 2022, insurers paid $600 billion in climate-related weather losses, with the share rising from 31% to 38% of total weather claims.
• US homeowners insurance premiums increased by more than 30% between 2020 and 2023, with 13% representing real growth after inflation.
• Only 25% of European economic losses from extreme weather events are currently insured, creating a substantial protection gap.
• Climate-related damage costs approximately $16 million per hour globally, creating mounting pressure on insurance reserves and pricing models.

Commercial consequences for UK businesses and supply chains

Rising insurance costs affect business viability directly. Companies in vulnerable sectors face premium increases that erode margins. Manufacturing facilities, warehouses and retail locations all require property insurance. When premiums double or triple, operational budgets come under severe pressure.

Supply chain risks intensify as insurers withdraw from key regions. A UK manufacturer sourcing components from California faces new uncertainties. If their supplier loses insurance cover, contractual relationships become unstable. Business continuity plans must account for these disruptions.

Tender requirements increasingly include climate risk assessments. Public sector contracts now often require evidence of climate resilience. PPN 06/21 specifically addresses carbon reduction commitments. However, broader procurement criteria increasingly consider physical climate risks. Companies without adequate insurance may struggle to meet these requirements.

Financial institutions scrutinize climate exposure more closely. Lenders consider insurance availability when assessing loan applications. Properties in high-risk areas may face higher interest rates or reduced loan-to-value ratios. This affects both property purchases and refinancing arrangements.

The affordable housing crisis worsens in affected areas. Residents unable to secure insurance cannot obtain mortgages. Property values decline as buyers withdraw. Communities that depended on stable housing markets face economic contraction. UK companies with US operations must consider these factors when planning investments.

Self-insurance becomes more common but requires substantial capital reserves. Companies must set aside funds to cover potential losses. This ties up working capital that could otherwise support growth. Additionally, self-insurance exposes businesses to concentration risk. A single severe event could exhaust reserves.

Relocation costs present another consideration. Moving operations from high-risk to lower-risk areas requires significant investment. Facilities must be rebuilt. Supply chains must be reconfigured. Workforce disruption affects productivity. These costs often exceed insurance premium increases in the short term.

The Senate Budget Committee highlighted the connection between energy transition and insurance availability. Without rapid movement to clean energy, extreme weather will intensify. Insurance will become scarcer and more expensive. Businesses must factor this trajectory into strategic planning.

Actions businesses should consider in response

Review your current insurance arrangements thoroughly. Check whether your policies exclude climate-related events. Understand what coverage you actually have, not what you assume. Many standard policies now contain new exclusions. Read the fine print carefully.

Assess your supply chain exposure to insurance market exits. Identify suppliers in high-risk regions. Request evidence of their insurance status. Consider alternative suppliers in lower-risk locations. Diversification reduces concentration risk.

Evaluate your property portfolio for climate vulnerability. Flood risk, wildfire exposure and storm damage potential all affect insurability. Properties in vulnerable locations may require additional risk mitigation. Physical improvements can sometimes reduce premiums or maintain coverage.

Engage with ESG compliance and carbon reporting services to understand regulatory expectations. Climate risk disclosure requirements continue expanding. Businesses must demonstrate how they identify and manage physical risks. Documentation becomes increasingly important for lenders and investors.

Consider whether your business model depends on climate-stable conditions. Seasonal businesses, agricultural suppliers and outdoor activity providers face particular exposure. Planning should account for increased weather volatility. Revenue models may need adjustment.

Examine your contractual relationships for insurance requirements. Many commercial contracts specify minimum insurance levels. If you cannot obtain required cover, you may breach contract terms. Renegotiation may become necessary.

Explore whether industry-specific schemes or mutual insurance arrangements offer alternatives. Some sectors have developed collective approaches to challenging risks. These arrangements may provide cover when conventional insurers withdraw.

Build climate resilience into capital investment decisions. New facilities should incorporate climate adaptation measures from the design stage. Retrofit existing properties where economically justified. Investment in resilience often costs less than repeated damage repair.

Maintain detailed records of your carbon reduction efforts. Insurers increasingly consider environmental performance when pricing risk. Companies with strong carbon reporting and reduction programs may access better terms. This connection between emissions and insurance costs will strengthen.

Stay informed about regulatory developments in your operating regions. Insurance regulation varies significantly by jurisdiction. Changes in state-backed schemes or mandatory cover requirements affect planning. Early awareness allows better preparation.

Where to find authoritative guidance and data

The Department for Energy Security and Net Zero provides UK policy guidance on climate resilience and risk management. Their publications address both mitigation and adaptation strategies. Businesses should monitor their updates on climate-related regulations.

For insurance market data and analysis, the Bank of England Prudential Regulation Authority publishes research on climate risks to the financial sector. Their work examines how climate change affects insurance availability and pricing. This analysis helps businesses understand market dynamics.

The UK legislation website maintains current versions of all relevant statutes and regulations. Climate-related disclosure requirements and insurance regulations appear here. Checking primary sources ensures accuracy when assessing compliance obligations.

International climate finance data comes from the Financial Stability Board and their Task Force on Climate-related Financial Disclosures. These resources help businesses understand global trends affecting insurance markets. The recommendations provide frameworks for risk assessment.

Sector-specific guidance often comes from professional bodies and trade associations. The Institute of Environmental Management and Assessment offers resources on environmental risk management. Their publications help businesses develop appropriate response strategies. Training through professional development programs builds internal capability to manage these evolving challenges.