A new report titled “Insurance and reinsurance under climate stress: managing systemic risk in global supply chains,” prepared by the Stockholm Environment Institute (SEI), has examined the growing pressure on the existing insurance system and the need for it to be integrated into the realities of climate change.
According to the report, rising climate risks strain the capacity of insurance and reinsurance systems.
While insurance plays a critical role in managing climate shocks, successive and interconnected disasters are prolonging the impacts of losses. This not only undermines economic stability but also renders traditional insurance models increasingly inadequate in the new risk environment.
Extreme weather events are estimated to cost the European Union (EU) approximately €28 billion per year. A significant proportion of these losses are not covered by insurance.
Floods that struck Germany and Belgium in 2021 disrupted logistics and industrial activity across Europe, while droughts affecting Southern Europe in 2022 reduced agricultural output and strained water resources.
Southern Europe faces growing risks due to heat and drought that are undermining crop yields. Europe’s dependence on imports of soy, palm oil and other agricultural products makes food security dependent on climate conditions in Brazil, Argentina and Southeast Asia.
Fertilizer inputs stand out as another factor that significantly increases the risk. The EU imports approximately 30 percent of its phosphate and 85 percent of its potash, primarily from Morocco, Russia, Belarus and Canada. Climate-related disruptions in these regions have the potential to rapidly propagate throughout global food markets, resulting in increased costs and constrained supply.
Record-low water levels in the Panama Canal in 2023 caused major delays in intercontinental shipments of food, energy and industrial goods.
In 2021, extreme winter storms in the United States led to widespread power outages in Texas, halting semiconductor production and exacerbating the global chip shortage.
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Insured disaster losses are increasing in real terms by approximately 5 to 7 percent annually. Rising asset values, expanding construction in high-risk areas, and the growing frequency and severity of floods, wildfires and intense storms are among the main factors behind this trend.
As climate disasters occur more often and simultaneously affect multiple sectors, losses are becoming larger and more complex than insurers can cover. In such cases, insurance can turn into an additional source of economic pressure, as premiums jump, certain risks are excluded from coverage, or investors withdraw from the market. Especially in high-risk areas, individuals and businesses may find insurance either unavailable or unaffordable.
The report evaluates that the pressure climate risks on the insurance system is not a problem that insurers can solve alone. Instead, it calls for a coordinated transformation involving policymakers, regulators, the financial system and the real sector.
Story was adapted from greenline.
