The concept of insurance began thousands of years ago in ancient societies as a way to share and manage risk. It evolved from informal, community-based practices into the complex global industry we know today.
According to Allied Market research, the global insurance market size was valued at $9.0 trillion in 2023, and is projected to reach $28.5 trillion by 2032, growing at a CAGR of 13.5% from 2024 to 2032.
However, environmental challenges are posing a great risk to global economies, capital markets and insurance industry if fundamental challenges are not addressed. Climate change is said to slash worldwide income by 19% in the next 25 years. In 2024, 320 billion US dollars loss was estimated due to the wrath of climatic disasters. These figures are neither optimistic nor indicative of a promising future.
In the time of climate uncertainty and unpredictability, insurance for climatic disaster or climate insurance gained prominence. Climate insurance is considered as a tool to protect assets from various risks arising from climate change risk. An amount invested in climate insurance was considered to catalyze crisis response, relief, enable positive humanitarian impacts, and even alleviate economic losses.
Insurance companies are offering a suite of financial risk transfer instruments that help any individual or business to dampen and protect its assets from various risks and uncertainty.
In 2024, the insurers covered about $151 billion of that total estimated economic cost of $402 billion due to weather and climate events.
However, the cost of climatic disasters are exacerbating in never imagined ways. In the year 2024, the global insured losses (the financial losses incurred by the insurance companies due to natural disasters and other catastrophic events) was at a staggering US$140 billion.
Insurance basically functions on this principle: pool premiums from its large policyholders, and use these funds to pay back the claims for those who experience losses. Whether health, life or even climate insurance, this is how they function.
As the insurance settlements increase, the insurance companies increase the premium amounts. Or, in some cases, insurers even exit from high-risk markets due to the exceeding cost of underwriting. Insurers are not just a risk bearer: their role in the economy is huge. Any volatility in the foundations of insurance will create a ripple effect in the economy.
Whenever the premium amount hikes, to adjust financial burden, either the customer cancels the policy or in worse case, let-off some of his financial assets to compensate for the premium in the United States. It is reported that between 2020 and 2023, the average homeowners insurance premiums have increased by more than 30%. The brunt of this escalation will impact the policyholders.
The effect of this happens in two ways: first, insurance companies witness a significant drop in their customer base, which reduces their revenue. Second, the customer will be financially and economically vulnerable to any other disasters. Nevertheless, these incidents will eventually culminate into various other types of crises.
For instance, increased homeowner premiums will hit the property market. The number of interested buyers may come down drastically. This takes a toll on the taxes for governments and other different livelihood options of people.
Here is another example: insurance is a key factor that helped for mortgages, business loans and infrastructure financing. Raising insurance premiums or uninsurable factors make these financial products difficult to access for some people.
Eventually, this will ruin the financial markets, severely impacting the economy. In short, the aftermath of climate change is making some risks uninsurable. In India, things are not that different. On one side, the country is most susceptible to climate change. On the other, insurance penetration in India is just about 1%. This makes both the population and the country at risk.
Year after year, the climatic disasters are costing the Indian economy, businesses, and individuals dearly. Traditionally, in India these costs are cushioned through the government and private aid. However, often these assistance are stuck in red-tapeism, ill and slow government machinery.
Therefore, climate insurance is like a lucrative option for the public. Initiatives like Pradhan Mantri Fasal Bima Yojana (PMSBY) – a sub-segment of climate-insurance and recently introduced SEWA’s parametric insurance, etc are helpful.
However, India’s diverse geographical and climatic zones are encouraging to innovate insurance schemes that are imperative to hedge climate risks. The possibility of lowering tax rates for insurance is a first step towards rebuilding everything. Next, reducing the complexities and regulatory roadblocks will catalyze India’s insurance ecosystem.
Climate insurance is not the ultimatum for climate mitigation. We need to pioneer more financial tools and solutions against the escalating cost of insurance. Above all, it is time to rethink from a reactive recovery approach to proactive prevention against climate change.
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Sources
- https://www.alliedmarketresearch.com/insurance-market-A17037
- https://www.nature.com/articles/s41586-024-07219-0
- https://www.insuresilience.org/wp-content/uploads/2022/10/factsheet_understanding-climate-risk-1-1.pdf
- https://www.ilo.org/resource/climate-change-and-insurance#:~:text=It%20protects%20against%20the%20livelihood%20loss%20and,unpredictable%20risks%20that%20cannot%20be%20managed%20otherwise.
- https://earth.org/financial-storm-how-escalating-climate-events-are-reshaping-the-insurance-market/
- https://ieefa.org/resources/confronting-climate-change-rising-insurance-costs-can-curb-economic-growth#:~:text=Globally%2C%20insured%20losses%20in%202024,due%20to%20extreme%20weather%20events.
- https://www.actuary.org/content/risk-pooling-how-health-insurance-individual-market-works-0#:~:text=What%20is%20risk%20pooling?,higher%2Dthan%2Daverage%20premiums.
- https://earth.org/nobodys-insurance-rates-are-safe-from-climate-change/
- https://www.nber.org/papers/w32579
- https://sustainabilitymag.com/articles/allianz-how-climate-change-is-unravelling-insurance-markets
- https://www.orfonline.org/expert-speak/india-needs-a-climate-insurance-market
- https://www.weforum.org/stories/2025/03/the-heatwave-that-sparked-a-new-era-for-women-workers-in-india/
- https://www.personalfn.com/dwl/Insurance/gst-on-insurance-premiums-may-reduce-from-fy26
- https://www.business-standard.com/finance/insurance/irdai-proposes-changes-in-listing-requirements-of-insurance-companies-124020201707_1.html
- https://www.cgap.org/blog/protection-to-resilience-rethinking-insurance-for-all
- https://www.rcc.city/impact-rethinking-insurance
