In recent years, the frequency and severity of natural catastrophes have increased significantly, suggesting the need to revisit traditional insurability criteria to determine whether they remain applicable in an era of intensifying climate risks. This commentary revisits these traditional criteria, outlines current stressors, and proposes innovative approaches to address the many challenges posed by evolving climatic risks. Even when losses are "covered," real-world rebuilding often reveals gaps, delays, and disputes that challenge the concept of insurability. Indeed, this issue is among the most significant perceived threats to individuals, businesses, and governmental entities, and we need to initiate a dialogue with all stakeholders to develop sustainable solutions for the future. Insurability is not just an actuarial question, but also a practical, postdisaster claims and funding question.
Traditional Insurable Risk Characteristics
For many years, until my involvement with the Waldo Canyon Fire recovery in 2012, insurable risk criteria made common sense to me while practicing in the first 40 years of my insurance career. Even then, these characteristics remained viable until the scale of the Western states' wildfires began to create availability and affordability challenges. Since that time, other natural catastrophes have exhibited similar volatility in severity, including hurricanes, tornadoes, hail, extreme wind events, and winter weather, all of which have had insurance market consequences. These changes caused me to reexamine my early training and education on what constituted an insurable risk. Before considering how natural catastrophes impact them, let's travel down memory lane to recall what we considered attributes of insurable risk more than 50 years ago.
Depending on the author or instructors, experts offered the following elements that made risks insurable.
Many dispersed homogeneous exposure units must exist with credible loss data to better predict the future loss costs based upon this historical data. The law of large numbers helps make future losses more predictable: the greater the number of aggregated homogeneous exposure units and loss data, the greater the confidence in predicting future loss costs and in properly pricing the policy.
The insured perils should be random and unpredictable to individual policyholders. This emphasizes the importance of accidental losses.
Losses must be measurable and definite to facilitate claim settlements. Typically, this requires tangible losses, such as direct property damage, and some indirect losses (e.g., additional living expenses, but not intangible losses, such as loss of value).
Using the above elements, insurers need to calculate affordable premiums for policyholders to incentivize them to transfer the risk, so there is a large pool of premiums to pay the random losses. While affordability is somewhat subjective, it is becoming a key factor in explaining the higher premiums in catastrophe-prone states.
Expected losses should not jeopardize an insurer's financial solvency.
An insurable risk must be clearly defined in the policy document, and underwriting guidelines must be developed that minimize adverse selection.
These criteria worked reasonably well in the twentieth century, but the twenty-first-century catastrophes are increasingly straining each of them. Except for floods and earthquakes, most insurers were less concerned about underwriting natural catastrophes in the twentieth century, as such events were infrequent and did not cause severe damage to large areas in a single incident. These practices likely resulted from the following.
The availability of reinsurance to handle these occasional severe loss events.
The ability to form certain residual market approaches to handle hurricane risk near the Atlantic and Gulf Coasts.
These catastrophes were local and regional, and it was possible to offset severe losses in less loss-prone states.
Perhaps Hurricane Andrew, the first Category 5 hurricane to strike a populated area in the US, was an early omen that the traditional approach to addressing natural catastrophe risk was about to change. It was not only about dollar amounts but also about reinsurance stress. The times were "a-changin'" as we transitioned from thinking about catastrophes in million-dollar increments to billion-dollar increments.
Current Natural Catastrophe Insurable Risk Challenges
The overarching difficulty is understanding natural processes over which we have limited, if any, control and predicting when and where such events will occur. From a risk management perspective, the best outcomes are achieved by mitigating the potential damage from these storms rather than eliminating them. A major challenge in beginning to address these natural catastrophes is convincing the American public that this is a real exposure with significant financial and human consequences. This task is even more difficult when a large disaster has occurred. As the first quarter of the twenty-first century has now closed, the world is confronted by a new reality: Extreme weather events are real and continue to grow ever larger.
Climate risk is a real cost driver for the insurance industry. If a picture is worth a thousand words, the following graph shows a clear upward trend in both frequency and aggregate cost for disasters for the past 45 years.
United States Billion-Dollar Disaster Events 1980–2024 (CPI-Adjusted)
This graph illustrates the number of billion-dollar catastrophes from 1980 to 2024 across multiple peril types. It does not show the progression of catastrophes by state; however, as extreme weather continues to set new records for destructiveness, this trend will likely continue and spread to states that have not yet experienced it. The chart also shows the increasing costs borne by the insurance mechanism, necessitating continuous rate increases to maintain solvency. In addition to insurance costs, there are considerable costs borne by both state and federal governments, and often by individuals and businesses that face either underinsurance or insurance gaps.
The path forward for insurers is daunting, given these increasing loss exposures. How might the traditional insurable risk elements discussed earlier in this commentary factor into their decisions on the path forward? Let's look at some of the consequences that insurers face as they navigate through this new risk environment.
Dispersion
Historically, catastrophic events were much less frequent and did not regularly occur in urban and suburban areas with high property values. The new reality is significantly concentrated catastrophe exposure in certain disasters, which creates higher claim costs. A few examples follow.
Hurricane Katrina impacted New Orleans.
The Los Angeles Fires burned a large area in Los Angeles City and County.
The Joplin and St. Louis tornadoes caused considerable damage to their cities.
Large hailstorms hit major urban areas like Dallas, Denver, Kansas City, and St. Louis.
This level of spatial concentration undermines the classic diversification principle of insurance. Risk concentration also increases loss costs by creating excessive demand for goods and services following a disaster. Similarly, the limited supply of alternative housing increases the cost of temporary housing for disaster-displaced individuals.
Predictability of Natural Disasters
It remains uncharted territory on how to predict the intensity of the catastrophic perils, when and where they will occur, and how the extent of losses will affect the cost of these claims. Climate risk science remains in its infancy, and it is very difficult to model such events. The new reality is like predicting the weather every day with the variety of models used by weather forecasters. While helpful, these models are not exact.
As with the weather, other variables often contribute to potential loss, including wind speed, drought conditions, moisture levels, and building codes. It is becoming common that rapidly intensifying storms do not fit either historical or risk models. The net result is that pricing catastrophe risk with confidence has become significantly harder.
Climate change is also altering storm patterns, rendering existing risk maps either obsolete or incomplete. Because insurers rely heavily on historical loss data, their exposure analysis or risk mapping is often far behind these changes. Three examples help to exemplify this trend.
The 2013 Northern Colorado and the 2024 North Carolina floods caused damage to many residential structures that were outside the expected flood zones.
Tornadic activity seems to be moving eastward from the traditional tornado alley in Kansas and Oklahoma.
Convective storms are now the second-largest catastrophic exposures faced by the US after flooding.
The inability to achieve greater precision in modeling these new risk patterns contributes to poor pricing for exposed properties or creates a false sense of underwriting security until a large loss occurs. While many technological tools are employed to address this shortcoming, they all depend on the ability to understand the many climate change events occurring at an ever-increasing rate.
Severity, Frequency, and Capacity
As the frequency and severity of natural disasters increase, insurers are faced with consequential market decisions: (1) They can withdraw from unprofitable states or zip codes, (2) they can increase their rates, which creates regulatory and consumer resistance, or (3) they can continue to write business at prices below their potential loss exposure and face insolvency. In catastrophe-prone states, insurers are already confronting these difficult decisions (i.e., California, Colorado, Florida, and Louisiana), largely due to the frequency or severity of one or more large storms in a short period of time.
An even larger group of states is under less pressure and continues to use traditional methods to maintain a viable marketplace. These states are expected to experience increasing exposure to new extreme weather perils. As these present and future realities accelerate, insurers will need to either raise prices more or further restrict capacity in the admitted insurance marketplace. When that occurs, society will need to rely on higher-priced coverage through the excess and surplus channel and other residual markets, such as Fair Access to Insurance Requirements plans or the National Flood Insurance Plan, or find another mechanism to protect property for American consumers. Each of these options suggests that catastrophe risk is becoming less compatible with traditional insurance markets.
Capital Expansion and Reinsurance
Historically, insurers relied on profits to increase their capacity over time. If the new normal makes long-term profits more difficult, then continual pressure is created to find alternative sources of capital or to further restrict writing and renewing business. Where will they get additional capital when their profits cannot support making dividend payments? Alternatively, they may rely on the reinsurance mechanism to provide the excess capital needed to hedge their own loss potential. This practice is not a panacea, as reinsurance prices rise with demand, both domestically and internationally, due to heightened climatic risk. If reinsurance becomes structurally more expensive or scarce, primary insurers' ability to offer broad catastrophe coverage will be fundamentally diminished.
New Catastrophic Risk Management Realities
If traditional insurability criteria are under strain, what does that mean for how we manage catastrophe risk today? Daily, the industry and general press bombard the public with stories about the lack of affordable insurance premiums and coverage availability, especially in the current targeted high-risk states, and with attempts to make insurance affordable and available again in state legislatures. There are increasingly alarming reports that insurance premiums are rising faster than underlying inflation, prompting consumers to either discontinue their insurance or reduce coverage.
Likewise, there are ongoing reports of failures by the insurance mechanism to indemnify survivors in many ongoing disaster recoveries. Some of these stories stem from inadequate claim services, but many stem from the significant frictional forces that claimants and survivors face in rebuilding after wildfires or other total-dwelling-loss events.
As a seasoned insurance professional and three-time participant in wildfire recovery teams, I find these stories suggest that solutions to our many issues surrounding climate risk lie within our existing tools and traditional approaches (i.e., raising rates, restricting underwriting, and increasing efficiency in delivering on our insurance promises). Certainly, these adjustments and improvements should be a continuous effort for any business. However, there also needs to be occasional reality checks on whether these changes have a chance of success, especially in a rapidly changing extreme-weather environment. Final solutions will not be easy nor inexpensive, but the industry needs to do a much better job of communicating to its customers and other stakeholders the significant stress that these climate risks are placing on the long-term viability of the property and casualty insurance industry and its ability to provide affordable protection for these risks.
Consistent with my prior article on risk scoring, "Risk Scoring and Mapping Are Reshaping Property Insurance," a good starting point is to educate policyholders on their unique risks and methods to prevent or minimize their exposure to these risks. This process has its own challenges from several perspectives.
From a communication perspective, many people do not think climate risk is a real issue, so it will take focused communications to share with customers how we look at the issue and how it impacts our ability to deliver affordable protection.
From a risk management perspective, the many mitigation practices to reduce these exposures are not often easy nor inexpensive, so a good case needs to be made about the importance of this technique to control their risks. It is also not enough for one person to mitigate, but whole neighborhoods and towns need to practice community mitigation as well.
From a claims perspective, the industry needs to better manage and communicate the many recovery challenges it faces to adjust claims in the postdisaster setting. Negative coverage in the general press and on social media often focuses on disputes over scope, delays, or underinsurance following major wildfires or hurricanes. There is a pressing need to humanize this topic and recognize that disaster survivors may require specialized communication to better understand and navigate the postdisaster claims process.
From a technological perspective, the industry needs to continuously share with its employees and customers the new and changing insights that artificial intelligence and other tools are making in better measuring this risk.
From a consumerist perspective, there needs to be much more emphasis on the importance of making sure that policyholders are paying more attention to the levels of coverage and not just to the price. If consumers systematically underinsure, then catastrophe risk is only partially transferred, undermining the very concept of insurability and making their recovery even more problematic.
Recognizing change is difficult for everyone, and for a traditional industry like insurance, it is time to begin an aggressive dialogue within our industry and with its many stakeholders to identify practical, affordable solutions to address the many dimensions of climate risk. The following ideas are not fully developed solutions but rather starting points for industry discussion.
Structural reform. Separate catastrophe protection from traditional indemnity policies, and adopt more focused managed benefits programs.
Savings-based tools. Catastrophe protection accounts that are tax-deductible serve two purposes: risk mitigation and/or payments of large deductibles following a covered event. In addition, they might facilitate consideration for public grants in the event of an unexpected disaster.
Hybrid models. HMO-like or no-fault catastrophe coverage.
Parametric approaches. Single-limit or trigger-based policies, like life insurance or a parametric policy.
Package. Several tools listed above combined for an affordable product.
Each of these approaches recognizes that traditional insurance alone may no longer be sufficient to fully insure against catastrophes.
Conclusion
The bottom line is that we need to collectively find new best practices to tackle these new claim realities. This problem persists under our current approach to handling catastrophic risk within the traditional definition of insurable risk. I remain confident that our industry is resilient enough to implement changes within our organizations and among other stakeholders that better serve our customers and benefit society. It is time for us to find new creative solutions for these evolving climate risk exposures. As with any problem-solving, there will likely be bumps in the road to reaching the final solution, but that should not deter us from committing to change. Whether catastrophes remain insurable will depend as much on how we collectively handle claims and address funding gaps as on how risks are priced and insured.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
In recent years, the frequency and severity of natural catastrophes have increased significantly, suggesting the need to revisit traditional insurability criteria to determine whether they remain applicable in an era of intensifying climate risks. This commentary revisits these traditional criteria, outlines current stressors, and proposes innovative approaches to address the many challenges posed by evolving climatic risks. Even when losses are "covered," real-world rebuilding often reveals gaps, delays, and disputes that challenge the concept of insurability. Indeed, this issue is among the most significant perceived threats to individuals, businesses, and governmental entities, and we need to initiate a dialogue with all stakeholders to develop sustainable solutions for the future. Insurability is not just an actuarial question, but also a practical, postdisaster claims and funding question.
Traditional Insurable Risk Characteristics
For many years, until my involvement with the Waldo Canyon Fire recovery in 2012, insurable risk criteria made common sense to me while practicing in the first 40 years of my insurance career. Even then, these characteristics remained viable until the scale of the Western states' wildfires began to create availability and affordability challenges. Since that time, other natural catastrophes have exhibited similar volatility in severity, including hurricanes, tornadoes, hail, extreme wind events, and winter weather, all of which have had insurance market consequences. These changes caused me to reexamine my early training and education on what constituted an insurable risk. Before considering how natural catastrophes impact them, let's travel down memory lane to recall what we considered attributes of insurable risk more than 50 years ago.
Depending on the author or instructors, experts offered the following elements that made risks insurable.
These criteria worked reasonably well in the twentieth century, but the twenty-first-century catastrophes are increasingly straining each of them. Except for floods and earthquakes, most insurers were less concerned about underwriting natural catastrophes in the twentieth century, as such events were infrequent and did not cause severe damage to large areas in a single incident. These practices likely resulted from the following.
Perhaps Hurricane Andrew, the first Category 5 hurricane to strike a populated area in the US, was an early omen that the traditional approach to addressing natural catastrophe risk was about to change. It was not only about dollar amounts but also about reinsurance stress. The times were "a-changin'" as we transitioned from thinking about catastrophes in million-dollar increments to billion-dollar increments.
Current Natural Catastrophe Insurable Risk Challenges
The overarching difficulty is understanding natural processes over which we have limited, if any, control and predicting when and where such events will occur. From a risk management perspective, the best outcomes are achieved by mitigating the potential damage from these storms rather than eliminating them. A major challenge in beginning to address these natural catastrophes is convincing the American public that this is a real exposure with significant financial and human consequences. This task is even more difficult when a large disaster has occurred. As the first quarter of the twenty-first century has now closed, the world is confronted by a new reality: Extreme weather events are real and continue to grow ever larger.
Climate risk is a real cost driver for the insurance industry. If a picture is worth a thousand words, the following graph shows a clear upward trend in both frequency and aggregate cost for disasters for the past 45 years.
United States Billion-Dollar Disaster Events 1980–2024 (CPI-Adjusted)
Source: Adam Smith, "2024: An Active Year of U.S. Billion-Dollar Weather and Climate Disasters," NOAA.
This graph illustrates the number of billion-dollar catastrophes from 1980 to 2024 across multiple peril types. It does not show the progression of catastrophes by state; however, as extreme weather continues to set new records for destructiveness, this trend will likely continue and spread to states that have not yet experienced it. The chart also shows the increasing costs borne by the insurance mechanism, necessitating continuous rate increases to maintain solvency. In addition to insurance costs, there are considerable costs borne by both state and federal governments, and often by individuals and businesses that face either underinsurance or insurance gaps.
The path forward for insurers is daunting, given these increasing loss exposures. How might the traditional insurable risk elements discussed earlier in this commentary factor into their decisions on the path forward? Let's look at some of the consequences that insurers face as they navigate through this new risk environment.
Dispersion
Historically, catastrophic events were much less frequent and did not regularly occur in urban and suburban areas with high property values. The new reality is significantly concentrated catastrophe exposure in certain disasters, which creates higher claim costs. A few examples follow.
This level of spatial concentration undermines the classic diversification principle of insurance. Risk concentration also increases loss costs by creating excessive demand for goods and services following a disaster. Similarly, the limited supply of alternative housing increases the cost of temporary housing for disaster-displaced individuals.
Predictability of Natural Disasters
It remains uncharted territory on how to predict the intensity of the catastrophic perils, when and where they will occur, and how the extent of losses will affect the cost of these claims. Climate risk science remains in its infancy, and it is very difficult to model such events. The new reality is like predicting the weather every day with the variety of models used by weather forecasters. While helpful, these models are not exact.
As with the weather, other variables often contribute to potential loss, including wind speed, drought conditions, moisture levels, and building codes. It is becoming common that rapidly intensifying storms do not fit either historical or risk models. The net result is that pricing catastrophe risk with confidence has become significantly harder.
Climate change is also altering storm patterns, rendering existing risk maps either obsolete or incomplete. Because insurers rely heavily on historical loss data, their exposure analysis or risk mapping is often far behind these changes. Three examples help to exemplify this trend.
The inability to achieve greater precision in modeling these new risk patterns contributes to poor pricing for exposed properties or creates a false sense of underwriting security until a large loss occurs. While many technological tools are employed to address this shortcoming, they all depend on the ability to understand the many climate change events occurring at an ever-increasing rate.
Severity, Frequency, and Capacity
As the frequency and severity of natural disasters increase, insurers are faced with consequential market decisions: (1) They can withdraw from unprofitable states or zip codes, (2) they can increase their rates, which creates regulatory and consumer resistance, or (3) they can continue to write business at prices below their potential loss exposure and face insolvency. In catastrophe-prone states, insurers are already confronting these difficult decisions (i.e., California, Colorado, Florida, and Louisiana), largely due to the frequency or severity of one or more large storms in a short period of time.
An even larger group of states is under less pressure and continues to use traditional methods to maintain a viable marketplace. These states are expected to experience increasing exposure to new extreme weather perils. As these present and future realities accelerate, insurers will need to either raise prices more or further restrict capacity in the admitted insurance marketplace. When that occurs, society will need to rely on higher-priced coverage through the excess and surplus channel and other residual markets, such as Fair Access to Insurance Requirements plans or the National Flood Insurance Plan, or find another mechanism to protect property for American consumers. Each of these options suggests that catastrophe risk is becoming less compatible with traditional insurance markets.
Capital Expansion and Reinsurance
Historically, insurers relied on profits to increase their capacity over time. If the new normal makes long-term profits more difficult, then continual pressure is created to find alternative sources of capital or to further restrict writing and renewing business. Where will they get additional capital when their profits cannot support making dividend payments? Alternatively, they may rely on the reinsurance mechanism to provide the excess capital needed to hedge their own loss potential. This practice is not a panacea, as reinsurance prices rise with demand, both domestically and internationally, due to heightened climatic risk. If reinsurance becomes structurally more expensive or scarce, primary insurers' ability to offer broad catastrophe coverage will be fundamentally diminished.
New Catastrophic Risk Management Realities
If traditional insurability criteria are under strain, what does that mean for how we manage catastrophe risk today? Daily, the industry and general press bombard the public with stories about the lack of affordable insurance premiums and coverage availability, especially in the current targeted high-risk states, and with attempts to make insurance affordable and available again in state legislatures. There are increasingly alarming reports that insurance premiums are rising faster than underlying inflation, prompting consumers to either discontinue their insurance or reduce coverage.
Likewise, there are ongoing reports of failures by the insurance mechanism to indemnify survivors in many ongoing disaster recoveries. Some of these stories stem from inadequate claim services, but many stem from the significant frictional forces that claimants and survivors face in rebuilding after wildfires or other total-dwelling-loss events.
As a seasoned insurance professional and three-time participant in wildfire recovery teams, I find these stories suggest that solutions to our many issues surrounding climate risk lie within our existing tools and traditional approaches (i.e., raising rates, restricting underwriting, and increasing efficiency in delivering on our insurance promises). Certainly, these adjustments and improvements should be a continuous effort for any business. However, there also needs to be occasional reality checks on whether these changes have a chance of success, especially in a rapidly changing extreme-weather environment. Final solutions will not be easy nor inexpensive, but the industry needs to do a much better job of communicating to its customers and other stakeholders the significant stress that these climate risks are placing on the long-term viability of the property and casualty insurance industry and its ability to provide affordable protection for these risks.
Consistent with my prior article on risk scoring, "Risk Scoring and Mapping Are Reshaping Property Insurance," a good starting point is to educate policyholders on their unique risks and methods to prevent or minimize their exposure to these risks. This process has its own challenges from several perspectives.
Recognizing change is difficult for everyone, and for a traditional industry like insurance, it is time to begin an aggressive dialogue within our industry and with its many stakeholders to identify practical, affordable solutions to address the many dimensions of climate risk. The following ideas are not fully developed solutions but rather starting points for industry discussion.
Each of these approaches recognizes that traditional insurance alone may no longer be sufficient to fully insure against catastrophes.
Conclusion
The bottom line is that we need to collectively find new best practices to tackle these new claim realities. This problem persists under our current approach to handling catastrophic risk within the traditional definition of insurable risk. I remain confident that our industry is resilient enough to implement changes within our organizations and among other stakeholders that better serve our customers and benefit society. It is time for us to find new creative solutions for these evolving climate risk exposures. As with any problem-solving, there will likely be bumps in the road to reaching the final solution, but that should not deter us from committing to change. Whether catastrophes remain insurable will depend as much on how we collectively handle claims and address funding gaps as on how risks are priced and insured.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.