Explainer: Insurance & risk transfer — what it is, why it matters, and how to evaluate options

In 2024, North American insured losses from natural catastrophes exceeded $95 billion—representing more than 60% of global insured losses and marking the fourth consecutive year where climate-related claims surpassed the $80 billion threshold. As climate volatility intensifies, the mechanisms by which organizations transfer, price, and manage physical climate risk have become foundational to both corporate resilience and the broader sustainability transition. This explainer unpacks the core economics of climate insurance, examines modern underwriting approaches including parametric triggers, and provides a decision framework for evaluating risk transfer options in an era of escalating uncertainty.

Why It Matters

The insurance sector sits at the nexus of climate adaptation and economic stability. Without functional risk transfer mechanisms, capital cannot flow efficiently toward climate-exposed assets, infrastructure projects stall, and communities face existential vulnerability to extreme weather events. The stakes are particularly acute in North America, where the concentration of high-value assets in hurricane, wildfire, and flood zones creates systemic exposure that traditional insurance models struggle to price accurately.

Recent data underscores the urgency. According to Swiss Re's 2025 sigma report, the protection gap—the difference between total economic losses and insured losses—reached $180 billion globally in 2024, with North America accounting for approximately $45 billion of that uninsured exposure. The U.S. Federal Emergency Management Agency (FEMA) estimates that 90% of natural disasters in the United States now involve flooding, yet only 4% of homeowners outside designated high-risk zones carry flood insurance. Meanwhile, California's FAIR Plan, the insurer of last resort for wildfire-exposed properties, saw its policies in force grow 260% between 2018 and 2024, reaching over 400,000 households.

For sustainability leaders, the implications are threefold. First, insurance availability and affordability directly influence the bankability of renewable energy projects, green infrastructure investments, and climate adaptation measures. Second, the retreat of private insurers from high-risk regions creates stranded asset risks and accelerates climate gentrification. Third, the evolution of underwriting models—particularly the integration of forward-looking climate scenarios—is reshaping how physical risk is disclosed, priced, and managed across supply chains.

The 2024-2025 period has witnessed accelerating innovation in response to these pressures. Parametric insurance products, which trigger payouts based on predefined physical thresholds rather than assessed damages, grew 25% year-over-year to reach $15 billion in global premium volume. Catastrophe bonds issuance hit a record $16.4 billion in 2024, with investors attracted by yields exceeding 10% and zero correlation to traditional financial markets. These developments signal a fundamental restructuring of how climate risk is transferred, priced, and capitalized.

Key Concepts

Understanding climate insurance requires fluency in several interconnected concepts that span finance, risk management, and climate science.

Insurance in the climate context refers to contractual agreements whereby an insurer assumes specified climate-related risks in exchange for premium payments. Unlike traditional property insurance, climate-focused products increasingly incorporate forward-looking risk assessments based on Representative Concentration Pathway (RCP) scenarios and Shared Socioeconomic Pathways (SSPs). The shift from historical loss experience to probabilistic climate modeling represents a paradigm change in actuarial practice.

Risk Transfer encompasses the broader ecosystem of mechanisms—including insurance, reinsurance, catastrophe bonds, and derivatives—through which entities shift financial exposure to third parties. Effective risk transfer requires accurate pricing, sufficient capital to absorb tail risks, and alignment between the transferred risk and the hedging instrument. The concept is central to both corporate treasury management and public sector resilience planning.

OPEX (Operating Expenditure) in the insurance context refers to ongoing premium payments and risk management costs that organizations incur annually. Unlike capital investments, OPEX provides continuous protection but requires sustained budget allocation. For many organizations, climate insurance premiums now represent 15-30% of total property insurance costs, up from less than 5% a decade ago.

Unit Economics describes the cost-benefit calculation at the individual policy or asset level. In climate insurance, favorable unit economics require that premium costs plus deductibles remain substantially below expected loss values, while also accounting for operational continuity benefits that prevent cascading business interruptions. Parametric products often improve unit economics by eliminating adjustment delays and reducing administrative overhead.

Transition Finance refers to capital deployed to facilitate the shift from high-carbon to low-carbon economic activities. Insurance plays a critical enabling role by making transition investments bankable—renewable energy projects, for instance, typically require comprehensive coverage packages including construction all-risk, business interruption, and increasingly, revenue protection linked to weather variability.

CAPEX (Capital Expenditure) represents upfront investments in physical assets or infrastructure. Climate risk considerations are increasingly integrated into CAPEX decisions through requirements for insurance availability assessments, forward-looking risk disclosures, and total cost of ownership calculations that incorporate escalating insurance costs over asset lifetimes.

Green Bonds are fixed-income instruments specifically earmarked for climate and environmental projects. The intersection with insurance occurs in credit enhancement structures, where insurance guarantees improve bond ratings and reduce borrowing costs for resilience projects. The global green bond market exceeded $600 billion in issuance in 2024, with insurance-wrapped structures growing as a percentage of total volume.

What's Working and What Isn't

What's Working

Parametric Insurance Adoption in Agriculture and Municipal Finance

Parametric products have achieved significant traction where traditional indemnity insurance proves too slow, expensive, or operationally complex. In the agricultural sector, index-based products tied to rainfall, temperature, or soil moisture indices now cover over 50 million hectares globally, with North American adoption accelerating through USDA-subsidized programs. Municipal governments have embraced parametric structures for budget stabilization—Miami-Dade County's $50 million parametric hurricane facility, placed in 2024, provides liquidity within 30 days of a qualifying storm event, compared to 12-18 months for traditional claims processes.

Catastrophe Bond Market Maturation

The cat bond market has evolved from a niche alternative risk transfer mechanism to a mainstream component of institutional portfolios. Record issuance in 2024 reflected strong investor appetite, with spreads compressing to historic lows despite elevated natural catastrophe activity. For sponsors, cat bonds provide multi-year coverage with no counterparty credit risk, as collateral is held in trust. The California Earthquake Authority's ongoing cat bond program demonstrates how public entities can access capital markets for tail risk protection, diversifying beyond traditional reinsurance relationships.

Integration of Climate Analytics into Underwriting

Leading insurers have operationalized climate science integration, moving beyond static flood zone maps to dynamic, forward-looking risk assessments. Companies like Jupiter Intelligence and One Concern provide granular, property-level risk scores that incorporate climate projections under multiple warming scenarios. This analytical capability enables more precise pricing, supports risk-based mitigation incentives, and provides transparency for investors conducting climate due diligence on real estate and infrastructure portfolios.

What Isn't Working

Basis Risk in Parametric Structures

Basis risk—the mismatch between parametric trigger conditions and actual losses experienced—remains the Achilles heel of index-based products. A drought index that fails to capture localized rainfall variability, or a wind speed threshold measured at a distant airport rather than the insured location, can result in scenarios where policyholders suffer significant losses without triggering payouts (negative basis risk) or receive payouts despite minimal damage (positive basis risk). Studies indicate that basis risk can exceed 30% of total coverage value in poorly designed programs, undermining trust and adoption.

Affordability Crisis in High-Risk Regions

Insurance market dynamics are creating affordability crises in precisely the regions most exposed to climate hazards. In Florida, average homeowner premiums exceeded $6,000 in 2024—more than triple the national average—while Louisiana and California face similar pressures. Insurer withdrawals, including State Farm's exit from California new business and several carriers' departures from Florida entirely, concentrate risk in residual markets ill-equipped to handle catastrophic loss scenarios. The resulting coverage gaps disproportionately affect lower-income communities, exacerbating climate justice concerns.

Disclosure Fragmentation and Greenwashing Concerns

Despite progress on climate risk disclosure through frameworks like the Task Force on Climate-related Financial Disclosures (TCFD) and nascent SEC regulations, the insurance sector faces persistent challenges in standardization. Underwriting methodologies remain proprietary, making it difficult for policyholders to compare products or validate pricing assumptions. Concerns about "climate washing"—products marketed as climate-resilient without substantive analytical backing—have prompted regulatory scrutiny and calls for certification standards.

Key Players

Established Leaders

Swiss Re operates as the world's largest reinsurer with deep expertise in climate risk modeling. Their nat cat R&D team produces influential research on loss trends and climate attribution, while their parametric and index-linked solutions unit has pioneered innovative structures across agriculture, energy, and public sector applications.

Munich Re combines one of the industry's largest historical loss databases with forward-looking climate scenario analysis. Their Climate Solutions unit provides specialized capacity for renewable energy, grid infrastructure, and adaptation projects, while their Location Risk Intelligence platform delivers granular exposure analytics.

Aon functions as the leading insurance and reinsurance broker with extensive climate risk advisory capabilities. Their Impact Forecasting team produces catastrophe models used industry-wide, and their Climate Risk Analytics practice supports clients in quantifying physical risk exposure across global portfolios.

FM Global specializes in commercial and industrial property insurance with an engineering-led approach to risk mitigation. Their proprietary risk assessment methodology and emphasis on loss prevention investments position them as a preferred carrier for manufacturing and logistics operations seeking to demonstrate resilience.

Zurich Insurance Group has integrated climate considerations across underwriting, with particular strength in serving multinational corporations navigating complex global exposures. Their partnership with the Z Zurich Foundation on climate resilience initiatives demonstrates commitment beyond commercial operations.

Emerging Startups

Descartes Underwriting leverages satellite imagery and machine learning to design and price parametric products for complex, historically uninsurable risks. Their focus on wildfire, drought, and flood exposures has attracted significant venture backing and partnerships with major reinsurers.

Kettle applies deep learning to California wildfire risk, enabling more precise pricing and broader availability in markets abandoned by traditional carriers. Their approach combines high-resolution fuel moisture data, weather forecasting, and historical burn pattern analysis.

Arbol operates a blockchain-based platform for parametric weather derivatives and insurance, targeting agricultural and energy sector clients. Their programmable contract architecture enables rapid product customization and transparent trigger verification.

FloodFlash offers parametric flood coverage using connected water depth sensors that trigger payouts when predetermined levels are reached. Their approach eliminates the need for adjusters while providing same-week liquidity for business interruption mitigation.

Sensible Weather provides microweather risk coverage for outdoor events and activities, demonstrating parametric principles in consumer applications. Their platform illustrates how index-based structures can enable previously uninsurable personal lines products.

Key Investors & Funders

Nephila Capital stands as the largest dedicated insurance-linked securities manager, deploying over $12 billion in catastrophe bonds, collateralized reinsurance, and weather derivatives. Their analytical capabilities and market presence influence pricing and product development across the ILS sector.

Fermat Capital Management manages $10 billion in insurance-linked investments with a focus on cat bonds and industry loss warranties. Their participation provides critical capacity for cedants seeking alternative risk transfer solutions.

FEMA's Building Resilient Infrastructure and Communities (BRIC) program allocated $1 billion annually for pre-disaster mitigation funding, often working in conjunction with insurance structures to improve project economics and demonstrate return on investment for adaptation measures.

The Rockefeller Foundation supports climate insurance innovation through its Resilience Dividend initiative, funding pilot programs for parametric products serving vulnerable communities and smallholder agricultural operations.

Munich Re Ventures provides growth-stage capital to insurtech companies developing climate risk analytics, distribution platforms, and novel product structures. Their strategic investments signal validation within the incumbent industry ecosystem.

Examples

1. IBHS Fortified Home Program (United States): The Insurance Institute for Business & Home Safety developed the FORTIFIED construction standard, which specifies building techniques that reduce damage from hurricanes, hail, and severe thunderstorms. Insurers including USAA and Alabama's state-backed insurer offer premium discounts of 15-45% for FORTIFIED-certified homes. As of 2024, over 45,000 homes across the Gulf Coast and Southeast have achieved certification. A 2023 study found that FORTIFIED homes experienced 60% lower losses than conventional construction in Hurricane Ian, demonstrating how mitigation standards can align insurer and policyholder incentives while reducing aggregate market losses.

2. Caribbean Catastrophe Risk Insurance Facility (CCRIF): While headquartered in the Caribbean, CCRIF's parametric model has influenced North American municipal and agricultural applications. The facility provides participating governments with rapid liquidity following hurricanes, earthquakes, and excess rainfall events. Since 2007, CCRIF has made 63 payouts totaling $265 million, with most disbursements occurring within 14 days of triggering events. The World Bank-supported structure demonstrates how risk pooling across multiple jurisdictions can improve pricing efficiency and ensure capital availability for post-disaster response. U.S. states including Florida and Louisiana have explored similar regional pooling arrangements to address capacity constraints.

3. PG&E Utility Wildfire Liability Coverage (California): Following the 2019 bankruptcy driven by wildfire liability claims exceeding $30 billion, Pacific Gas & Electric restructured its risk transfer arrangements with support from the California Wildfire Fund. The $21 billion fund provides a liquidity backstop for participating utilities, funded through a combination of utility contributions, ratepayer charges, and state appropriations. The hybrid structure—combining self-insurance retention, traditional coverage, and government participation—illustrates how catastrophic risk exposure that exceeds private market capacity requires public-private partnership approaches. By 2025, the fund had dispersed $2.5 billion in claims while maintaining sufficient reserves for future events.

Action Checklist

• Conduct a comprehensive physical climate risk assessment across all owned and leased facilities, using forward-looking scenarios aligned with 1.5°C and 2°C warming pathways
• Map current insurance coverage against identified exposures, documenting gaps in limits, exclusions, or geographic restrictions that create uninsured residual risk
• Evaluate parametric alternatives for exposures where traditional indemnity coverage is unavailable, unaffordable, or operationally inadequate due to adjustment delays
• Quantify basis risk for any parametric products under consideration by back-testing trigger structures against historical loss events and modeled scenarios
• Engage with brokers who maintain specialized climate and sustainability practices, as generic placement teams may lack access to innovative capacity or product structures
• Integrate insurance cost projections into long-term financial planning, modeling premium escalation scenarios under various climate pathways for CAPEX decision-making
• Explore risk mitigation investments that qualify for premium credits or improved terms, calculating payback periods that incorporate both reduced premiums and avoided deductible expenses
• Review supply chain exposures for concentration risk in climate-vulnerable regions, considering contingent business interruption coverage or supplier resilience requirements
• Establish protocols for rapid claims notification and documentation, including pre-positioned adjusters and digitized asset registers that accelerate indemnification
• Monitor regulatory developments in climate risk disclosure that may require enhanced insurance-related reporting, including SEC climate rules and state-level requirements

FAQ

Q: How do parametric triggers differ from traditional insurance indemnification, and when should organizations consider them? A: Traditional indemnity insurance requires assessment of actual damages before claims are paid, involving adjusters, documentation, and often protracted negotiation. Parametric products instead pay predetermined amounts when objective, measurable triggers are reached—such as wind speed exceeding 120 mph within 50 miles of a specified location, or rainfall <70% of historical average over a growing season. Organizations should consider parametric structures when: (1) rapid liquidity is essential for operational continuity; (2) traditional coverage is unavailable or prohibitively expensive; (3) exposures are highly correlated with measurable indices; or (4) claims administration costs consume excessive value. However, parametric products transfer the risk of mismatch between index and actual loss (basis risk) to the policyholder, requiring careful analysis of trigger design and historical correlation.

Q: What is basis risk, and how can organizations minimize it when purchasing parametric coverage? A: Basis risk represents the potential divergence between parametric trigger payouts and actual incurred losses. Negative basis risk occurs when losses exceed payout amounts or when losses occur without triggering conditions being met; positive basis risk occurs when payouts exceed actual losses. Minimization strategies include: selecting indices with high historical correlation to specific loss drivers; using multi-index triggers that require convergence of multiple conditions; specifying measurement points as close as possible to insured locations; layering parametric coverage atop traditional indemnity for large losses; and retaining actuarial analysis of trigger performance under stress scenarios. Some products now incorporate hybrid structures that blend parametric and indemnity features, paying immediately upon trigger while reserving adjustment capacity for losses exceeding index-indicated levels.

Q: How are climate projections incorporated into insurance pricing, and what should buyers understand about model uncertainty? A: Modern catastrophe models integrate climate science through adjustments to hazard frequency and severity distributions. Short-term models (<5 years) typically apply trend factors to historical data, while longer-horizon assessments employ General Circulation Model outputs under various emissions scenarios. Buyers should understand that significant uncertainty exists in both climate projections (particularly for regional precipitation and storm intensity) and loss amplification factors (how physical hazards translate to insured damages). Different vendors may produce materially different risk estimates for identical exposures. Organizations should request transparency regarding model versions, climate scenarios applied, and sensitivity analyses. Prudent practice involves comparison across multiple model providers and stress-testing of coverage adequacy under pessimistic assumptions.

Q: What role do green bonds and transition finance play in climate insurance markets? A: Green bonds and climate insurance intersect in multiple dimensions. First, insurance availability is often a prerequisite for bond issuance—offshore wind projects, for example, require comprehensive coverage packages before lenders will commit. Second, insurance guarantees can provide credit enhancement that improves bond ratings and reduces borrowing costs. Third, the proceeds of green bonds often fund resilience measures that subsequently reduce insurance costs. The emerging market for "sustainability-linked insurance" connects premium pricing to verified progress on emissions reduction or adaptation metrics, creating additional incentives for bondholders and project sponsors to deliver on sustainability commitments.

Q: How should organizations evaluate insurance carrier financial strength in an era of escalating natural catastrophe losses? A: Carrier solvency concerns have intensified as climate losses strain industry reserves. Organizations should prioritize carriers with: (1) A.M. Best ratings of A or higher, with stable or positive outlooks; (2) diversified geographic exposure that prevents concentration in any single peril region; (3) robust reinsurance programs that transfer tail risk to highly-rated counterparties; (4) adequate capitalization relative to probable maximum loss scenarios; and (5) transparent risk management disclosures. For critical exposures, consider splitting coverage across multiple carriers to avoid single-point-of-failure risk. Include contract provisions addressing carrier insolvency scenarios, and monitor quarterly financial reports for signs of reserve strengthening or adverse loss development that may indicate emerging distress.

Sources

• Swiss Re Institute. "Natural catastrophes in 2024: Record insured losses amid growing protection gaps." Sigma No. 1/2025. Zurich: Swiss Re, 2025.

• Insurance Information Institute. "Facts + Statistics: U.S. catastrophe losses." Updated January 2025. https://www.iii.org/fact-statistic/facts-statistics-us-catastrophe-losses

• Artemis. "Catastrophe bond & ILS market statistics." Q4 2024 Report. https://www.artemis.bm/statistics/

• National Flood Insurance Program. "The Watermark: Fiscal Year 2024 Financial Report." Washington, DC: Federal Emergency Management Agency, 2024.

• California Department of Insurance. "FAIR Plan Statistics and Market Trends." Annual Data Release, December 2024.

• Aon. "Weather, Climate and Catastrophe Insight: 2025 Annual Report." Chicago: Aon plc, 2025.

• Kousky, Carolyn, and Howard Kunreuther. "Improving Flood Insurance and Flood Risk Management: Insights from St. Louis, Missouri." Risk Management and Decision Processes Center Working Paper, The Wharton School, University of Pennsylvania, 2024.

• Munich Re. "Climate Change and Natural Catastrophes: Updating Loss Projections for a Warming World." NatCatSERVICE Analysis, 2024.