It ’ s a well-established fact that weather patterns are changing . More than ever , people are being caught off-guard by severe events at a magnitude not previously experienced . So , how does the insurance industry , whose entire model runs on detecting and reducing risk , manage the burden of climate instability ? What problems do insurers face , what are they doing , and what more needs to be done ?

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While physical risk poses the most direct threat to insurers , transitional risk is the most tricky , as it has the greatest potential to destabilise investments that affect the insurer ' s portfolio : just the announcement of an energy price cap in the UK caused the value of sterling to fall against the euro .

There is an outcry for financial institutions to take an active stance on climate change ; it ’ s no longer something that the insurance sector can ignore .

How is climate change affecting insurance ? In recent years , cyclones have left thousands of Africans displaced . Rising temperatures have caused some of Australia ’ s worst-ever bushfires , destroying millions of hectares of natural habitats and homes . Droughts and floods have affected areas that were woefully underprepared . These are all events that require quick payouts from the insurance sector – and this is just the tip of the iceberg .

Under old insurance models , the impact of these sudden and catastrophic incidents would eventually render some areas uninsurable , increasing animosity between consumers and insurers while heavily impacting the economy , leaving devastated businesses unable to recover .

Insurers are not only affected by the physical risk ( weather effects ), they are also dealing with transitional risks ( policy enacted by governments to combat these risks ). insurtechdigital . com 73