Insurability Gaps, Climate Impacts, and Innovations in Commercial Insurance

In this episode, we explore the insurability gap and its impact on economic stability, focusing on climate change and insights from the AXA Future Risks Report 2024. We discuss underwriting challenges in high-risk areas, balancing insurance affordability with sustainability. Innovations like parametric insurance and data analytics are highlighted, alongside risk-based pricing and proactive insurer services. We also examine global resilience initiatives, government-backed catastrophe pools, and industry standards, concluding with the importance of prevention, mitigation, and data sharing for future readiness.

Chapters:

0:00

Introduction to the episode

0:27

The insurability gap and economic stability

1:53

Regional insurability and climate change impacts

2:26

AXA Future Risks Report 2024 and catastrophic financial impacts

3:33

Underwriting challenges and high-exposure regions

4:40

Insurance affordability vs. sustainability

5:06

Innovations in commercial insurance and risk transfer

6:01

Parametric insurance case study and data analytics advancements

6:56

Risk-based pricing and proactive insurer services

7:47

Global resilience initiatives and government-backed catastrophe pools

9:26

Industry resilience standards and Chubb’s climate initiative

10:09

The significance of prevention, mitigation, and data sharing

11:05

Conclusion and closing remarks

Key Points:

• Climate change increasingly makes certain risks uninsurable, leading to higher premiums and insurance deserts, particularly in high-exposure regions.
• Innovative solutions like parametric insurance and advanced climate modeling can help bridge the insurability gap by providing more accurate risk assessments and expedited payouts.
• Public-private partnerships and government-backed catastrophe pools are essential for maintaining affordable insurance coverage and enhancing community resilience against climate threats.

Transfer:

Welcome to Beyond Tech Frontiers, where we explore the mechanics of disruptive innovation, market trends, and the future of work, all focusing on ethical technology. I am your host, Sabine VanderLinden, and today, we're diving into a topic that's not just about numbers and policies, but about resilience and survival in the face of one of the greatest challenges of our time.

Insurance has long been a cornerstone of economic stability, helping communities recover from unforeseen losses and enabling businesses to withstand shocks. However, today, the industry finds itself at a crossroads. Climate change drives more frequent and severe natural catastrophes—from hurricanes to wildfires and floods. These once-insurable risks are becoming more challenging, or even impossible, to underwrite at an affordable price.

When the cost of coverage spikes or coverage vanishes altogether, we face an insurability gap. Regions, industries, and even entire populations can be left vulnerable. In a world where insurability is questioned, innovation is key. The insurability gap refers to the growing divide between risks covered by insurance and those not, particularly in the context of climate change.

As climate-related events become more frequent and severe, the cost of insuring these risks rises, leading to higher premiums and, in some cases, the withdrawal of coverage altogether. This results in what we call 'insurance deserts,' where affordable insurance is unavailable, leaving individuals and businesses vulnerable to catastrophic losses. The gap is particularly pronounced in regions highly susceptible to extreme weather events.

For instance, areas in Queensland, Australia, face urgent concerns regarding the insurability gap due to their high exposure to such events. This regional variation highlights the need for targeted solutions that address specific local challenges. Today, we'll explore why bridging the insurability gap matters, the challenges surrounding emerging climate risks, and how insurers, governments, and the private sector can collaborate to create more resilient, climate-ready insurance markets.

According to the AXA Future Risks Report 2024, climate change consistently ranks as the leading global concern across regions. The rising toll of hurricanes, floods, and heatwaves has increased immediate claims and threatens to destabilize the insurance ecosystem in the longer term. The interplay between climate change and other societal challenges—such as demographic shifts or shifting geopolitical tensions—adds complexity.

Between 2017 and 2023, there were 137 separate billion-dollar disasters in the United States alone, costing over one trillion dollars in damage—this increase in catastrophic events results in higher claims and financial losses for insurers. Even for global insurers used to macro-level risk modeling, the heightened intensity and unpredictability of extreme events challenge the assumptions upon which traditional underwriting is based.

Insurers have long relied on historical catastrophe data to anticipate future losses, but the ever-evolving climate signals that past trends are less reliable indicators. Wildfires, for instance, are becoming more intense and reaching zones previously considered low-risk. Similarly, the expansion of floodplains, accelerated by sea-level rise and changing rainfall patterns, brings new threats. As these physical impacts grow, entire segments of property insurance can become prohibitively expensive—if they remain available at all.

The squeeze is felt most acutely in high-exposure regions, such as coastal areas, wildfire-prone regions, and communities in floodplains. Businesses and homeowners may see their premiums spike, coverage exclusions grow, or, in worst cases, no renewal offers at all. Where options do exist, affordability becomes a barrier, leading to underinsurance—one of the root causes of the insurability gap.

Meanwhile, public authorities often struggle to strike the right balance: imposing rate caps may keep insurance superficially affordable, but it can also drive insurers away if they cannot price adequately for escalating risk. Additionally, as highlighted in Chubb’s 2024 TCFD Report, even commercial lines of insurance—like energy infrastructure coverage—face new complications.

On the one hand, the economy still depends on conventional energy sources while transitioning to low-carbon alternatives. On the other hand, extreme weather can expose assets to higher failure rates and lead to expanded liability claims, raising difficult underwriting questions. Without a robust framework for risk-based pricing, insurers either exit the market or charge substantially higher rates to cover costs.

Innovative risk transfer solutions are emerging to help bridge the gap for climate-driven exposures. Parametric insurance, for example, offers a promising tool. Unlike traditional indemnity-based products, which pay out after appraising damage, parametric solutions pay a pre-agreed amount once a defined event threshold—such as storm wind speed or earthquake magnitude—is reached.

In Ghana, a public-private partnership has developed parametric insurance products like the Excess Rainfall Cover and the Flood Footprint Product to enhance financial resilience against urban flooding. This structure can expedite payouts and provide coverage even in catastrophe-prone regions that standard underwriters may shy away from.

Similarly, new data analytics and climate-modeling technologies can give underwriters a more refined measure of local conditions, incorporating projections of sea-level rise, rainfall intensity, and wildfire behavior. Alternative Risk Transfer solutions, such as insurance-linked securities and catastrophe bonds, allow insurers to spread risk beyond the traditional reinsurance market. These solutions provide additional capacity and flexibility in managing large-scale risks.

While politically sensitive, risk-based pricing can help reestablish solvency and encourage policyholders to invest in resilience measures. Implementing forward-looking pricing strategies that account for long-term climate projections ensures premiums reflect the true risk. This approach helps insurers maintain financial stability while providing more accurate coverage.

As documented in the AXA Future Risks Report, some insurers now provide targeted services such as real-time weather warnings, guidance on structural retrofits, or supply-chain audits to help clients reduce losses before they occur. Public-private partnerships can expand coverage in high-exposure regions by sharing losses between insurers and government entities.

The Insurance Development Forum, a global public-private partnership, aims to enhance resilience to climate shocks. Similarly, the Caribbean Catastrophe Risk Insurance Facility and the African Risk Capacity help governments in their respective regions plan, prepare, and respond to extreme weather events and natural disasters.

Government-backed catastrophe pools, funded by modest levies or tax revenues, can smooth out claims spikes, sustaining coverage without making premiums unaffordable. This approach has proven effective in multiple countries, from France’s CatNat system for natural disasters to flood reinsurance programs in the United Kingdom and select United States states.

Governments can also foster more resilient infrastructure by building seawalls, restoring wetlands, strengthening power grids, and enhancing firefighting capacity. These investments reduce underlying risk, thereby lowering long-term insurance costs. Furthermore, there is a growing appetite for mandating resilience standards in industries like construction and utilities.

Such regulations unlock a dual benefit: they reduce community-wide losses and preserve the feasibility of commercial insurance. Scaling up climate-related services is not just about developing new products; it involves expanding climate-focused advisory services. Insurers like AXA and Zurich Insurance invest in risk consulting teams to help clients measure potential damages due to natural disasters and design more robust assets.

Chubb’s climate initiative combines underwriting expertise with climate engineering. Through specialized hubs, insurers share best practices for emissions reductions and operational resilience, strengthening relationships with policyholders while lowering the entire portfolio’s risk profile.

Bridging the insurability gap is vital for economies, governments, and individuals alike. Addressing climate change head-on—through public-private risk pooling, parametric coverage, more accurate modeling, and sound regulatory frameworks—offers a path to maintaining the insurance industry’s viability and the well-being of communities.

Prevention and mitigation are as crucial as post-disaster payout. Insurers, governments, businesses, and civil society can preserve a functioning insurance market ready to withstand intensifying climate threats. In an era where risks seem to multiply and intensify, transparency, innovation, and collaboration are indispensable.

Only by aligning incentives—strengthening resilience and sharing data—can all stakeholders ensure that coverage remains available, accessible, and capable of safeguarding society’s most vulnerable property owners and businesses. The insurability gap is not unbridgeable, but it demands sustained effort, forward-thinking leadership, and a collective commitment to making insurance a cornerstone of climate adaptation.

Thank you for joining me today on Beyond Tech Frontiers. I hope this episode has shed some light on the complexities and opportunities within the insurance industry as it confronts climate risk. Join us next time as we continue to explore the frontiers of innovation and technology. Until then, stay resilient and keep pushing the boundaries.