Climate Risk, Insurance, And Your Wallet

Climate change often feels distant—something discussed in headlines, not felt in daily life. Even phrases like “one-in-100-year flood” sound like a once-in-a-lifetime fluke, something most people will never experience. In reality, it means there is a one percent chance of that level of flooding in any given year. Those odds don’t reset with time, and they actually add up. Over the 30 years of a typical mortgage, even in a stable climate, the chance of experiencing at least one such flood is about 25 percent. That’s not a remote possibility. It’s a real, cumulative risk.

Scientists have spent decades translating climate change into charts and forecasts, yet its effects still feel remote to many people. That’s because climate change unfolds over long time horizons, years and decades rather than days or months. Actuaries are one of the few professions trained to think through these longer timelines. Their job is to turn uncertain future hazards into present-day numbers, which include insurance premiums, capital reserves, and risk pools. In doing so, an actuary assigns dollar values to events that might happen once in a decade or once in a century. They treat the improbable as financially real, a skill that is crucial in building a more sustainable future.

Seen through an actuarial lens, climate change is not an environmental ideology. It’s a risk management challenge already reshaping insurance markets, mortgage lending, municipal bond ratings, and reinsurance markets. Rising premiums in Florida and California, for example, are balance-sheet responses to changing hazards. Climate risk is no longer theoretical. It’s actively being priced into financial products that are a part of our daily lives.

Houses In Geneva on Mullet Lake Park Road, are inundated by floodwaters from the St. Johns River after historic levels of rainfall from Hurricane Ian in 2022. (Joe Burbank/Orlando Sentinel/Tribune News Service via Getty Images)

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What Risk Really Means

In technical fields, “risk” has a precise definition. The Intergovernmental Panel on Climate Change (IPCC), the United Nations body for assessing climate science, defines risk as the likelihood of harmful outcomes under a given scenario such as the probability of a major hurricane or wildfire in a specific year. These risks can be estimated.

Uncertainty, by contrast, refers to what cannot be fully known: incomplete data, complex systems, and unpredictable human behavior. Climate change sits between these two categories. While rising temperatures and sea levels are measurable, the climate system is deeply interconnected and impacted by changes in human behavior, and small changes can trigger large effects.

Actuaries price insurance by looking at a variety of factors, including historical losses, year-to-year variability, and the probability of extreme events. Rare disasters are the hardest to model because they happen infrequently but can be the most financially consequential. Today, these disasters increasingly arrive as compound events. They unfold as interconnected systems of risk, with physical damage escalating into supply chain disruptions, business interruption, ecosystem loss, and humanitarian emergencies. A hurricane during a heat wave that knocks out a power grid is not three separate events. It is one correlated risk cluster. These cascading risks are exactly what climate change accelerates and what actuaries and insurers are struggling to price.

Economists look at the same problem from another angle, focusing on how markets and consumers respond, using tools like discount rates, tradeoffs, and cost-benefit horizons. As climate risks compound and accelerate, the future weighs more heavily on the impact of present-day decisions, reshaping incentives, investment decisions, public policy, and household finances.

How Actuaries Model a Warmer World

Natural disasters don’t behave like every day random events. Most years are uneventful. But when something bad happens, a single event can wipe out years of premiums. To manage this, insurers rely on catastrophe models that simulate thousands of hypothetical disasters using historical weather data, climate projections, and economic exposure.

Unlike car accidents, climate disasters affect many policyholders simultaneously, violating the independent-risk assumption that stabilizes insurance markets. That’s why insurers must hold more capital and why reinsurance matters.

Reinsurers – insurers who provide insurance to other insurers – sit at the top of this system. Operating globally, they often detect climate trends first. When reinsurers raise rates, higher premiums ripple quickly through the system, impacting millions of households.

One climate indicator already exerting a strong influence on insurers and reinsurers is ocean conditions, particularly sea surface temperatures. Warmer waters fuel stronger storms and alter atmospheric behavior, materially changing near-term risk. In discussing actuarial modeling with a colleague whose firm specializes in catastrophic reinsurance and risk management, he shared how they closely model ocean data early in the year to position portfolios. This trend is significant enough to influence pricing, capital allocation, and investor confidence.

When Insurance Makes Climate Change Personal

People may not physically feel climate change, but they experience it in their insurance bills. As insurers update their models, premiums rise and coverage becomes harder to maintain. Nearly eight percent of U.S. homeowners now forego insurance altogether, leaving roughly $1.6 trillion in assets exposed. This pattern signals that insurance costs are exceeding what many households can reasonably pay.

When insurers raise premiums or withdraw entirely from high-risk markets, they aren’t making value judgments. They’re responding to hazards that have become too costly to underwrite. What once seemed confined to coastal states is now appearing inland as well.

Florida and California: Early Warning Systems

Florida and California offer clear examples of how climate stress appears in insurance markets before it registers in public opinion.

• Florida has always carried enormous hurricane risk. But sea-level rise, warmer waters, and rapid coastal development have changed the math. The result has been a wave of insurer withdrawals, soaring premiums, and increased reliance on Citizens Property Insurance, the state-backed insurer. Across the Sunshine State, homeowners’ insurance has surged an estimated 30% since 2021, averaging residents around $10,000 each year.
• California’s wildfire situation is similar. Longer fire seasons and expansion into fire-prone areas have made risk difficult to price under existing regulations. Millions of homes now sit at the wildland-urban interface – areas incredibly difficult to protect. Insurers argue they cannot charge rates that match the risk under current state pricing rules, and 19 providers, including major insurers such as State Farm and Allstate, have restricted coverage offerings or withdrawn completely from the market. Again, actuarial math, not ideology, drives this shift.

In both states, homeowners face a bind where mortgages require insurance, but rising premiums make homes harder to insure, rebuild, or sell, particularly after storm or wildfire damage. Climate risk is trapping value in place.

Climate as a Threat Multiplier

The U.S. Department of Defense calls our changing climate a “threat multiplier” because it worsens existing vulnerabilities – geographic, economic, social – and amplifies them.

Hotter temperatures intensify wildfires, and drought produces more fuel. Warmer oceans strengthen hurricanes, with more storms reaching Category 4 and 5 intensities, in addition to becoming more polar and pushing storms farther north into regions like Washington, DC and New York that hold far more insured value.

A warmer atmosphere holds more moisture, making extreme rainfall events more frequent. Inland flooding is now a major driver of insurance losses in landlocked states like Tennessee, Kentucky, and Missouri, which can be amplified by local land use, zoning, and development decisions.

Heat waves stress energy systems, threaten agricultural yields, reduce labor productivity, impact water supply, and increase mortality. Health insurers are already struggling to adjust to rising costs associated with extreme heat, while disease vectors like mosquitos and ticks expand into new regions.

These scenarios are increasingly embedded in insurance pricing and underwriting assumptions.

What Markets Are Telling Us

Economists see markets as information systems. Rising insurance premiums signal increasing hazards and uncertainty. In many cases, markets recognize climate risk before households do.

But climate change also exposes market failures. Carbon emissions, for instance, impose long-term costs the emitter doesn’t pay. As a result, risks are underpriced, mitigation is underfunded, and communities build in high-hazard areas because the true costs are hidden. Insurance helps correct some of this but only some. Political pressure often keeps premiums artificially low, masking hazards and leaving governments and taxpayers to absorb the shock.

Politics therefore can play a central role in how states regulate insurance prices and operate state-backed insurers. Rapidly rising premiums have meant government-backed “insurers of last resort,” intended to step in only when private insurers withdraw or are reluctant to enter the market due to potential for losses, are bearing significantly more risk. A recent report on climate risk in the U.S. insurance markets found that enrollment in these last-resort plans doubled between 2018 and 2023 in Florida, California, and Louisianna. And, in Florida, Citizens Property Insurance Corporation is now the largest homeowner insurer in the state.

The consequences extend beyond insurance: falling property values, stressed municipal finances, threatened pensions, and weakened local economies. These financial risks overlap with rising health costs from heat, pollution, and disease.

Climate change isn’t one crisis. It’s many interconnected ones.

Toward a More Honest Risk Conversation

Actuarial science strips away both panic and denial. It deals in probabilities, not beliefs, and forces clarity about tradeoffs and consequences. Through that lens, climate change becomes much clearer.

Our challenge isn’t belief. It’s management. Climate change is not just an environmental story. It’s a story about risk, probability, finance, and how we value the future. And these affect us directly and personally. If we learn to see it through the slow, steady accumulation of risk rather than a sudden shock of disaster, we might finally understand the scale of the challenge. And we might begin to come together to respond accordingly, before disaster strikes.