Insurance is supposed to be boring. Few people read their coverage policies, fewer still enjoy a dinner conservation about premiums. However, that boredom vanishes when the fine print determines whether a family can rebuild after a disaster or must file for bankruptcy.
The summer of 2025, unfortunately, evaporated the insurance boredom. Temperatures hit 42 degrees Celsius in Spain and, in neighboring Portugal, ravaging forest fires burned roughly 3 percent of the national territory. Similar extreme weather events plagued the United States as deadly flash floods struck Texas and over 40 states found themselves in a condition of at least moderate drought. Last year, 27 storms with incurred losses of over $1 billion hit the United States, and the total cost associated with Europe’s three deadliest events alone reached nearly $15 billion.
By nearly all metrics, the frequency and severity of storms is increasing. California Governor Gavin Newsom captured the growing unpredictability of extreme weather events back in January when he warned that “there is no fire season anymore.” His observation applies just as readily to flooding as once-rare hundred-year storms become commonplace. Amidst climate disasters, households are facing an unrelenting cycle of uncertainty, instability, and risk. Insurance companies are starting to take notice.
Although many would describe insurance as monotonous, tedious, or overly bureaucratic, one adjective is often forgotten: essential. Individuals purchase homes, build lives, and engage in innovation when stability is guaranteed. Insurance is indispensable because it provides that reassurance. However, climate change deconstructs the financial logic of insurance that is dependent on disasters remaining rare, spatially dispersed, and statistically predictable. It is this climate-induced uncertainty that now threatens this overlooked foundation of economic security.
The Status Quo System for Disaster Recovery
Financial relief in the wake of disasters comes in many shapes and sizes. Recovery is funded by a patchwork of private insurers—often providing coverage for those relatively affluent property owners who are willing and able to maintain policies—and public programs. Municipal governments bear much of the initial cost in rebuilding public infrastructure, typically supported by state or federal funding packages.
In the United States, the Federal Emergency Management Agency (FEMA) distributes recovery funding to individuals and communities, and the Department of Housing and Urban Development (HUD) provides block grants to states and municipalities in need. In the European Union, a complex web of disaster recovery and preparedness funds—from the Civil Protection Mechanism to the Solidarity Fund and regional development funds—channel relief to member states in the aftermath of severe natural disasters. In recent years, the international community has even set up global disaster relief funds as a means to account for historical responsibility for the climate crisis.
The interconnected relationships and web of dependencies between private insurers and reinsurers, public insurance programs, and government-funded disaster relief platforms complicates efforts to reform any aspect of the system. Each actor can obfuscate responsibility and stall reform, but the skyrocketing cost burdens imposed by stronger and more frequent disasters will further strain an already flawed system—increasing risk of broader systemic failure. Early indications of deterioration are already visible.
In California’s Pacific Palisades, significant spikes in insurance policy prices began before the Los Angeles wildfires claimed over 35,000 acres last January. Rates reportedly skyrocketed from $4,500 to $18,000—an unaffordable leap that forced some residents to forgo insurance. For those that opted to “go bare,” the flames devouring Sunset Boulevard brought particularly catastrophic consequences. Disparities in coverage and disaster response also reflect an increasing chasm of wealth inequality.
To compensate, some individuals turned to private fire fighters in the Palisades—a concerning sign that the effects of climate damages will be unevenly distributed and disproportionately shouldered by those unable to afford private protections. The mass exodus of coverage in fire-prone areas is expected to accelerate when the one-year moratorium on cancellations and refusal to renew expires in January 2026. While price hikes have made insurance increasingly inaccessible, major private insurers, such as State Farm and Allstate, have stopped writing new policies in high-risk states such as California and Florida altogether.
Florida’s private property insurance market was also in crisis between 2019 and 2024, when multiple private insurers pulled coverage in the most at-risk areas, while those that remained increased premiums by over 42 percent. As a result, policies with the state’s public insurer of last resort—Citizens Property Insurance Corporation—ballooned to over 1.4 million in 2023. Recognizing the immense state burden and potential for catastrophic default in the event of a major disaster, state legislators passed a suite of legislation limiting policy holders’ ability to sue insurers, which pulled several private insurers back into the market.
A More Proactive Approach
Europe has been more proactive in its response to managing the changing landscape of disaster risk management. A partnership between the European Central Bank (ECB) and the European Insurance and Occupational Pensions and Authority (EIOPA) recently proposed a mixed public-private approach to insuring disaster risk on the continent. The goal of the platform is to diversify coverage of high-risk assets by pooling private risk across Europe, while simultaneously increasing public spending on disaster management and resilient infrastructure.
As the proposal is debated, the need for adjusted insurance protocols is becoming more urgent. According to Munich Re, almost 90 percent of the natural disaster-induced losses in the first half of 2023 were not covered by insurance. The ECB estimated in the same year that one quarter of the continent’s climate-related losses were insured, with that figure dropping below 5 percent in some member states.
Higher premiums and private insurers’ withdrawals from disaster-prone areas are normal market functions, which reflect for greater risk from stronger disasters, but once insurers vacate markets, governments are often left to fill the gap through subsidized public insurance, such as Florida’s Citizens and California’s FAIR, or ad-hoc disaster disbursements, like those by FEMA, HUD, or the Solidarity Fund. The two compensatory government policy options—subsidized public insurance and ad-hoc bailouts—introduce undesirable externalities. Both result in the creeping socialization of climate risk, where public treasuries absorb the burden insurance agencies are unwilling to bear.
Disasters Meet Debt
The increased frequency and intensity of disaster events paired with a greater public burden for relief and recovery introduces a disaster-fueled debt problem. At the individual level, households unable to afford increasing insurance premiums or relocate to low-risk areas can be left with nothing. The reconstruction costs can be debilitating and create significant demand for public interventions.
Furthermore, uncertainty also renders immobile assets, such as housing, increasingly unattractive, eroding property values which in turn decrease municipal revenues. In this sense, municipal governments in high-risk areas will bear greater disaster-related expenditures while generating less revenue from property taxes. Eroding municipal revenue stocks from both ends would increase local governments’ dependence on supplementary funding from state and federal levels.
The abdication of coverage by private firms in the US is made all the more concerning by US President Donald Trump’s promise in June to start “phasing out” funding from FEMA post-hurricane season, which would defer recovery burdens to state governments. Dissolving FEMA would limit the options afforded to disaster survivors and reduce available tools to recover post-catastrophe. This would prove catastrophic, as research from the Carnegie Endowment’s Disaster Dollar Database shows, undermining the financial position of state and local governments alike.
Nationally, governments are often forced to step in and stabilize households through debt-financed spending. This is particularly troubling in the post-pandemic era of inflated debt-to-GDP ratios which, in many high-income industrialized democracies, have reached peaks not observed since World War II. While concerning, truly existential debt burdens are often concentrated in countries least responsible for emissions, yet most vulnerable to climate damages.
This is felt acutely in small island developing states that have been forced to take on significant post-climate catastrophe debt, such as Tonga—40 percent of contracted debt between 2008-2023 is attributable to disaster recovery efforts—or Antigua and Barbuda where three successive hurricanes in 2017 brought damages of $136 million (9.3 percent of GDP). Sovereign debt is designed to fund development infrastructure projects and address severe, albeit rare public emergencies. However, the never-ending cycle of climate catastrophes leaves little room for proactive adaptation interventions or long-term investment in development programs that could break cyclical entrapment in foreign debt.
Europe’s Not Immune
While in far less debt distress, fire-prone eurozone economies are not immune to significant climate damages. Bloomberg estimated that wildfires cost Europe €4.1 billion in 2024 with significant strain on Greece, Italy, Portugal, and Spain—four countries above the average eurozone debt-to-GDP ratio. In Portugal alone, the expected annual economic loss induced by wildfires is €60-140 million. Pricing the economic costs of climate change is challenging, but experts agree it will be expensive. A report by the Institute and Faculty of Actuariesestimated that there could be losses of up to 50 percent of global GDP between 2070-2090 attributable to climate shocks and the World Economic Forum projected the costs of climate damages to be between $1.7 trillion and $3.1 trillion per year by 2050.
What’s worse, increasing disaster risk will also result in higher costs of issuing new debt. At the municipal level, greater exposure to physical climate risks could contribute to a decline in credit ratings, limiting access to the municipal bond market, a critical source of funding for public infrastructure projects. Lack of capital for new infrastructure would diminish municipal government’s ability to fund resilience projects, creating a reinforcing feedback loop. Increasing severity and frequency of natural disasters may also affect national debt instruments, with early research indicating a negatively effect on short- to medium-term sovereign bond issuances.
Heightened Insecurity
Yes, insurance and relief funding are monotonous, tedious, and overly bureaucratic, but they are also the unassuming infrastructure of economic security. As wildfires and flooding erode ecosystems, so too do they erode the fiscal foundation of financial markets. Private insurance companies now pricing in climate disaster risk are passing unaffordable premiums to customers, many of whom are then forced to “go bare” or turn to government-backed programs, or the firms flee vulnerable markets altogether. The exodus leaves everyone—municipal governments, national governments, those with immobile assets, low-income individuals unable to afford private coverage—increasingly unable to plan for the long term.
This domestic uncertainty must also be situated in the context of remarkable geopolitical insecurity. Set against the backdrop of Trump’s tariff chaos—a 15 percent tariff ceiling on most of the EU’s goods imported into the US and, more recently, calls for the EU to impose 100-percent tariffs on China and India—and serious global debt distress, a quaking insurance market does little to increase consumer confidence. The compounding trade-induced volatility and climate-induced unpredictability has produced serious systemic vulnerabilities that will undoubtedly become more challenging to address.
Economic insecurity is an increasing function of uncertainty—and climate change embodies the most extreme uncertainty of all. Unless addressed with foresight and collective resolve, this uncertainty could calcify into crisis, leaving households, markets, and governments alike unable to plan beyond the next disaster.
Emily Hardy co-writes IPQ’s CARBON CRITICAL column and is an environmental, social, and governance consultant at Aqua Blue Investments.
Dan Helmeci co-writes IPQ’s CARBON CRITICAL column and is a master’s student at Columbia University.
