Article

Climate risk and insurability: Protecting financial stability

In much of the financial system, insurance has long been treated as a given. Mortgages depend on homes being insurable, loans are priced on the assumption that assets will remain viable, and investment decisions assume that risk can be managed within established market structures. Effectively, insurance serves as a buffer against losses that could affect debt servicing.

Climate change is now one of several factors at play, challenging many of those expectations. At the center of this shift are questions around insurability — the ability to insure an asset — which is emerging as a key channel through which climate risk can spread across the wider economy.

How climate risk shows up in insurance pricing

Physical climate risks are already increasing insurance costs through asset damage, business interruption, supply chain disruption, and pressure on public finances. Property insurance pricing is especially sensitive to climate risk.

However, these signals are often muted by broader market cycles. Even when premiums are not increasing sharply, the underlying risk remains. This is shaped by structural factors such as the growing concentration of assets in exposed locations and supply chain pressures that reflect the broader risk environment. As a result, there is concern about long-term insurability, especially for significant property exposures.

That said, many financial institutions and investors are still at an early stage in how they assess and respond to climate risk, including when it comes to their real estate and infrastructure portfolios.

Why insurability is a capital markets issue

This has implications for the wider economy. Climate change is no longer just an environmental concern or a physical threat to assets and infrastructure. It is increasingly reshaping how capital is priced, allocated, and protected.

As the Bank of England recently warned in a climate-related financial disclosure: “In a severe but plausible scenario, if investors were to rapidly reprice financial assets, including government debt, corporate bonds and equities, to reflect climate risks, the resulting move in asset prices could be comparable to the moves seen in recent market stress episodes.”

As insurance becomes more expensive, more limited, or unavailable altogether, the conditions that support lending and investment are undermined. Rising premiums, higher deductibles, and narrower coverage can increase operating costs and reduce the attractiveness of certain assets.

The effects then flow through to lending, investment, and public finances. This weakens bankability and investability across the economy, as discussed further in Marsh’s recent report: Mind the protection gap: The Risk to Capital Markets and the Resilience Financing Imperative.

The protection gap is therefore a challenge to capital creation and long-term growth.

Closing protection gaps to safeguard financial stability

However, there is a real opportunity to address the risks to the economy and capital markets posed by protection gaps. Doing so will require coordinated action across the public and private sectors. Key actions for lenders, asset owners, asset managers, governments, and corporates include:

1. Make greater use of forward-looking physical climate risk data and act when thresholds are breached

The health of the property insurance market — including affordability, availability, and trends in exclusions and deductibles — often serves as an early warning indicator of rising physical climate risk and deteriorating bankability or investability. Tools such as Marsh’s Insurance Enabler Framework can help financial institutions and other organizations understand the structural and cyclical forces behind insurance pricing. This comprehensive overview, in turn, helps identify where resilience measures can improve risk outcomes and where pricing pressure may point to deeper vulnerabilities.

Forward-looking physical climate risk data sources can be used to identify material exposures, assess resilience over relevant time horizons, and inform decisions on portfolio management, insurance, and capital allocation. Organizations need to act when these indicators are breached by adjusting risk appetite, tightening terms, and redirecting capital toward resilience.

2. Reward active risk reduction, not just risk transfer

Risk reduction, not just risk transfer, needs greater recognition. Where resilience measures are independently verified, they should be reflected in pricing and financing terms, for example, through more flexible lending terms. The Marsh Carlyle insurance-centric Investing in Resilience Framework is designed to help translate documented resilience investments into insurer-recognized risk reduction and potential insurance benefits.

3. Embed resilience into routine capital investment

Resilience should be embedded in capital investment decisions rather than treated as a standalone project. This will enable more effective recognition of enterprise-level return on investment through enhanced business continuity, asset protection, and long-term value preservation.

4. Use of ART solutions and blended capital

The capital markets are also part of the solution. Alternative risk transfer (ART) solutions are innovative mechanisms that go beyond traditional (re)insurance to enable more flexible and capital-efficient risk transfer. They can diversify capital sources, stabilize insurance costs in volatile markets, and expand capacity for hard-to-place risks. For example, insurance-linked securities (ILS) convert insurance risk — such as peak natural catastrophe exposures — into tradable securities like catastrophe bonds, which can then be transferred to capital markets investors in exchange for yield. ART solutions could also help narrow growing protection gaps in many countries worldwide and reduce the risk of stranded assets.

Meanwhile, governments have a critical role to play — including by supporting pooled solutions, driving wider adoption of prevention standards, and investing in risk reduction measures.

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Murray River floods a road surrounded by trees

Article

Climate risk and insurability: Protecting financial stability

How climate risk shows up in insurance pricing

Why insurability is a capital markets issue

Closing protection gaps to safeguard financial stability

1. Make greater use of forward-looking physical climate risk data and act when thresholds are breached

2. Reward active risk reduction, not just risk transfer

3. Embed resilience into routine capital investment

4. Use of ART solutions and blended capital

Fill out the form to speak with a Marsh representative

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Amy Barnes

Alexander Ackermann

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