Uninsurable homes, coming to a city near you

Insurance companies are in the business of managing risk. But can they handle the biggest risk of them all – the climate crisis?

As weather-related disasters, like floods and droughts, grow increasingly frequent and severe, many insurers are responding by raising insurance premiums to levels that owners can no longer afford – or refusing to insure some properties at all.

Are we reaching an uninsurable future? The answer will have enormous implications for investments, businesses and anyone purchasing a home. While some argue that we could soon reach this point, others say there are still ways to keep the industry resilient.

Rising risks, rising losses

Reinsurers – the insurers of insurance companies – have sounded the alarm about growing climate risks.

According to Munich Re, the world’s largest reinsurer, the world saw USD 320 billion in total losses from natural disasters in 2024, of which USD 140 billion were insured.

The vast majority of this damage – 93 percent of overall losses, and 97 percent of insured losses – was attributed to weather catastrophes.

The cost of these disasters has been mounting for decades, even accounting for inflation. Last year’s losses were substantially higher than the average over the last 10 years – USD 236 billion in today’s dollars.

The most expensive disasters of 2024 were Hurricanes Helene and Milton, which struck the southern U.S., Mexico and the Caribbean, causing USD 56 billion and 38 billion in losses respectively.

As Thomas Blunck, a member of the board of management at Munich Re, put it: “At its core, insurance puts a price tag on the risks, which further encourages prevention.”

Swiss Re, another of the world’s largest reinsurers, estimated 2024’s global losses at USD 328 billion, of which USD 146 billion were insured.

Both reinsurers, in their reports, cited the climate crisis as contributors to this rise.

In the Global North, it’s rare for individuals to purchase a home without insurance, as an unexpected disaster – for instance, a hurricane, flood or fire – could wipe out their most valuable asset. In fact, homeowners are often required to have insurance to be approved for a mortgage in the first place.

Businesses are similarly dependent on insurance. Without it, industrial assets, agricultural operations and infrastructure projects could become far riskier investments, especially as they are often fixed in place and cannot be easily moved.

Insurance companies are factoring in these growing risks – and charging for them accordingly.

In the U.S., they have raised premiums and pulled out of areas that were once considered safe from the climate crisis.

For example, in California, a state that has been widely affected by wildfires, regulations make it difficult for insurers to raise premiums. Some insurers are instead canceling or refusing to renew policies, causing more than 100,000 homeowners to lose coverage in the last five years.

Similarly, up to one in ten homes in Canada could already be uninsurable due to flood risks, and a similar percentage of Australian homes could face the same scenario by 2035.

Can insurers afford the climate crisis?

Reinsurers typically have models that allow them to predict losses for each year, which are generally rising. Some years, however, are particularly devastating and are known as ‘peak loss’ years.

When these peak loss years strike and insurance companies struggle to meet their payouts, reinsurers play a critical role in helping them absorb these losses.

According to Swiss Re, the last peak loss year was 2017, when Hurricanes Harvey, Irma and Maria struck North America and the Caribbean and drove up global insurance losses.

While the years since have been quieter, the underlying loss projections have continued to grow at its normal pace of 5 to 7 percent each year.

Swiss Re’s projections estimate that this year’s insured losses will amount to USD 145 billion, which is similar to last year. Even the devastating wildfires in California in January, which caused USD 40 billion in damage, might not make 2025 particularly expensive on a global scale.

The reinsurer see a one-in-10 chance that 2025 will be a peak loss year with damages above USD 300 billion, but it believes global primary insurers and reinsurers have enough capital to absorb this cost.

It stresses, however, that primary insurers and reinsurers need to build enough capital to cover rising future losses.

Another driver of rising costs is urbanization, as densely populated areas are likely to suffer greater damage when affected by a disaster. Inflation, including higher construction costs, also pushes up property values and makes rebuilding more expensive.

Swiss Re believes governments can mitigate these losses by strengthening building codes and improving flood protections, but these measures can only do so much when property values continue to rise and urbanization continues at breakneck speed.

Woes of the uninsured

Even as insured losses are on the rise, the majority of global losses from disasters are uninsured – meaning that the property owners likely had to absorb the costs themselves.

This is typically the case in the Global South, where uninsured losses further pushes the costs of the climate crisis onto those who have contributed the least to it.

Last year’s floods in southern Brazil caused USD 7 billion in damage, of which only USD 2 billion were insured. Meanwhile, the entire Asia-Pacific region and Africa lost USD 91 billion in assets – only USD 16 billion of which were insured.

And while the most expensive disasters last year tended to be in the Global North, especially in terms of insured losses, those in the Global South tended to be deadlier, according to Munich Re.

Typhoon Yagi topped the list with 851 fatalities across Southeast Asia and China, followed by landslides in Papua New Guinea and Kerala in India.

Uninsured families impacted by disasters are often forced to take short-term measures that can hurt their long-term financial health, such as pulling children out of school or taking out emergency loans.

With fewer people able to afford premiums, the insurance industry tends to be smaller than in the Global North, and governments typically have fewer resources to offset these risks.

But these protection gaps exist in rich countries, too: when Spain was hit with severe flooding last year, less than half of the total damages were insured.

And even in disasters where most losses are insured, those who lack insurance can still suffer devastating financial hits.

The future of insurance

Luckily, the insurance industry has multiple ways to mitigate climate risks. These include better risk forecasting, working with contractors that construct more resilient buildings, and allowing customers to offset insurance premiums with mitigation measures, according to the Boston Consulting Group.

Mitigation often requires homeowners to pay an upfront cost now to prepare for a future possible disaster, which they may not be inclined to do.

Insurance companies can help by sharing that initial cost with homeowners, as seen in Flood Re’s Build Back Better program in the U.K. After all, better protections save insurance companies money, too.

Allowing insurers to charge higher premiums in high-risk areas could also be a way to incentivize building in less risky places. However, that could put a financial strain on many lower-income households, who may not be able to afford to relocate elsewhere.

Another form of insurance, known as parametric insurance, caters well to smallholder farmers in less affluent countries.

Rather than filing claims after a disaster, parameters like rainfall or wind speed are proactively measured and compensated for once a threshold is met.

This can allow funds to be paid out more quickly and saves households and small businesses the costs of monitoring and verifying losses.

Countries can also band together to form sovereign risk pools, in which they pay premiums to an insurance company that is also covered by reinsurance. The pooled risk allows them to secure better terms than if they were insured individually and improves their access to international capital.

One such example is the African Risk Capacity Group. Established by the African Union to help member states respond to climate risks, it both provides insurance to governments and provides assistance for monitoring and contingency planning.

But there is a limit to how much insurance can adapt to a warming planet.

In a widely publicized LinkedIn post, Günter Thallinger, a member of the management board of Allianz, wrote that climate disasters will eventually become so expensive that it will threaten the existence of the insurance industry and the financial underpinnings of the modern world.

“That means no more mortgages, no new real estate development, no long-term investment, no financial stability,” he wrote.

“The financial sector as we know it ceases to function. And with it, capitalism as we know it ceases to be viable.”