Climate risks increasingly pose threat to insurance markets, broader financial system: MSCI Institute

[SINGAPORE] Climate-driven physical risks are no longer just an underwriting issue, but could also pose a systemic financial risk with implications for infrastructure finance and real asset markets, a report by MSCI Institute found.

Losses from extreme weather events are rising across geographies, according to the report, which surveyed 50 of the world’s largest insurers and reinsurers – with 24 per cent from the Asia-Pacific region – on the growing impact of extreme weather and physical hazards. 

“(Over) the past few years, insured losses from natural catastrophes have exceeded US$100 billion, underscoring the growing financial materiality of physical hazards for the insurance industry.”

MSCI estimates indicate that losses from physical hazards could rise to US$4.6 billion by 2050 – nearly four times the 2024 figure of US$1.2 billion.

As severe floods, wildfires and storms drive “substantial losses”, MSCI pointed out that shifting hazard patterns and continued exposure growth are increasing uncertainty to underwriting, pricing and capital planning. 

It further noted that a large share of total economic losses remains uninsured, which creates “persistent protection gaps”. 

These add greater strain on households, businesses and public institutions, particularly in vulnerable regions exposed to repeated climate shocks, such as coastal zones, flood-prone areas, and heat-exposed urban centres.

Impact on insurance industry 

As hazards intensify and exposures concentrate, the implications of physical risks can extend beyond individual insurance portfolios, potentially affecting insurance markets, MSCI said. 

Notably, larger tail events and the clustering of secondary perils can lower predictability, it added. This, in turn, places pressure on risk selection, pricing adequacy and exposure management. 

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“These pressures can be compounded by developments in reinsurance markets, where higher attachment points, rising prices and more restrictive terms require primary carriers to retain a greater share of losses,” pointed out MSCI.

It noted that these trends, should they persist, may influence long-term insurability in certain geographies or lines of business. “The combination of rising hazard activity and exposure growth can make it more difficult to maintain pricing stability and coverage availability, particularly in areas where the gap between economic and insured losses is widening.”

MSCI noted that the insurability of infrastructure assets is particularly sensitive to escalating physical risks, as these assets are long-lived, capital-intensive and geographically fixed. 

Spillover on financial system, public funds 

Beyond insurance markets, the effects of physical risks can spill over to the broader financial system by altering how risk is priced, financed and borne, MSCI found. 

“As exposure to climate hazards increases in certain regions, insurance can become less available, increasing uncertainty around the protection of underlying assets”, it said. This can weigh on property values and collateral quality, with knock-on effects for mortgage markets, banks’ balance sheets and how investors allocate capital. 

MSCI noted that these dynamics may spill over into public finances, as a decline in insurance coverage may require governments to absorb a greater share of losses or finance recovery and adaptation through public balance sheets. 

“Recurrent climate-related shocks can therefore increase fiscal strain, raise contingent liabilities and affect long-term public investment,” added MSCI. “As a result, assessing physical risks is increasingly relevant not only for insurers, but also for other market participants, central banks and financial regulators concerned with system-wide resilience.”   

Universal concern, uneven risk-management maturity     

MSCI found a “near-unanimous” concern among insurers about the physical risks undermining the long-term insurability of infrastructure projects in vulnerable regions exposed to physical climate threats. 

Globally, 96 per cent of insurers surveyed reported a high level of concern about physical risks impacting the insurability of infrastructure in vulnerable regions. For Asia-Pacific, this was 100 per cent. 

Similarly, while 88 per cent of respondents globally reported moderate-to-very high levels of concern about physical risk creating systemic financial risk, the figure was 100 per cent for Asia-Pacific insurers.

MSCI said that despite this universal consensus – with insurers across the board reporting high levels of concern – climate-related systemic risk-management maturity levels are uneven across different insurers.

It noted “significant variation” in how insurers are operationalising physical risk considerations, with most insurers in North America and Asia-Pacific in the early stages of incorporating systemic risks into their management frameworks. 

Globally, 84 per cent of insurers had established climate-related metrics to monitor risk exposure and performance. 

European insurers showed the most advanced adoption, with 54 per cent at the most mature stage of developing and monitoring such metrics, above the global average of 39 per cent.

Meanwhile, 31 per cent of North American insurers were at the most mature stage of developing and monitoring climate-related metrics to monitor risk exposure and performance. Just 17 per cent of Asia-Pacific insurers were at this stage.