How to avert the looming crisis of uninsurable infrastructure

Consider power plants, transport networks and other critical infrastructure that underpin economies and societies. What happens to vulnerable communities and states overall if these assets cannot be built because they cannot be insured?

Much of the discussion around climate and insurance has focused on the effects on the residential market. Far less attention has been paid to the insurability of ​infrastructure.

In our recent report, in partnership with the MSCI Institute, we spoke with over 50 insurers from around the world about physical risk and the ‌future of insurance. Nearly all respondents (96%) expressed high concern about the long-term insurability of infrastructure in climate-vulnerable regions.

This matters because insurance underpins virtually every financial transaction. Without insurance, financing dries up. Without functioning infrastructure, basic services and economic activity erode.

This growing challenge is the result of three self-reinforcing dynamics.

First, the climate risks are increasing. Insured losses from natural catastrophes exceeded $100 billion for the sixth straight year. As extreme weather events become ​more frequent and severe, insurers face growing volatility in claims and increasing losses. In some high-risk markets, this is already leading to reduced capacity or withdrawal.

Second, risks are ​becoming more concentrated. As insurers exit or reduce exposure, fewer firms are left to absorb losses and the highest risk exposures. This raises ⁠the cost of coverage and, in some cases, limits its availability altogether. This creates a feedback loop of increased risks both for the insurers and those covered.

Third, public policy is ​increasingly uncertain. In many markets, such as Florida and California, insurance markets already rely on government support, whether through state-backed insurance, reinsurance schemes or disaster-relief mechanisms. Yet the long-term viability of ​these backstops is increasingly in question. Fiscal pressures are rising and political willingness to absorb growing climate-related losses cannot be assumed.

Taken together, these dynamics have pushed insurance for infrastructure to the edge and the implications will extend far beyond the insurance sector if infrastructure in vulnerable regions becomes uninsurable.

Investment will dry up without insurance. Asset values will crater as services fail. Economic activity will grind to a halt. Budget-strapped governments may need to ​absorb losses directly, placing additional strain on public finances.

In our report, we saw leading insurers developing a variety of different approaches to navigate away from the insurability cliff.

The first of ​these approaches involves updating risk assessment and management. This means moving beyond traditional catastrophe models toward more granular, forward-looking approaches that combine geospatial data, climate science and local hazard information.

Firms such as AXA are ‌already applying ⁠high-resolution flood and climate modelling at the asset level to better understand exposure and inform underwriting decisions. These new models allow insurers to refine pricing, adjust coverage terms and potentially identify where mounting risks demand new approaches.

One new approach is being seen within insurance product design. Parametric insurance, which pays out based on predefined triggers such as wind speed or rainfall, is expanding into areas where traditional insurance coverage would struggle to operate.

Off the coast of Belize, Willis Towers Watson set up the Mesoamerican Reef insurance programme, to protect this critical natural and economic ​asset. The programme offered parametric insurance that ​triggered a pay-out after Hurricane Lisa occurred ⁠in 2022. This funded rapid reef repair, helping protect the coastal infrastructure and tourism economy that depend on it. These products provide faster pay-outs and greater customisation, particularly for infrastructure and large-scale assets exposed to increasingly volatile risks.

In addition to risk management and parametric insurance, we ​found insurers increasingly offering advisory and data services to help their clients reduce risk exposure and maintain insurability. This reflects a broader ​shift in the role of ⁠insurers to becoming partners in the active management of client risks.

These developments are positive, but they are not sufficient. Governments and regulators need to play a role in ensuring that markets remain functional, particularly in places where risks are systemic and concentrated.

This includes strengthening public-private partnerships, providing targeted backstops for essential assets, and investing in resilience measures that reduce underlying risk.

The leading practices we identified ⁠around risk ​management, parametric insurance, and data advisory need to be more widely adopted by the insurance industry. Firms need to ​increase investments in forward-looking analytics, developing new forms of coverage and embedding climate risk into underwriting, pricing, and capital-allocation decisions.

The insurability of infrastructure is becoming a defining issue in climate-vulnerable regions around the world. If addressed proactively, climate-ready ​infrastructure can sit at the heart of a more resilient future.

Insurance has long been the financial sector’s early warning system on climate risks. Now the alarm has been raised for infrastructure.

This article first appeared in Reuters.