Climate-induced events such as floods, cyclones, landslides and heatwaves can threaten a country’s financial stability, a fact acknowledged by regulators.

Non-insurance can make it difficult to repair or replace infrastructure that has been damaged as a result of weather-related disasters. Globally, insured losses in 2024 amounted to$140 billion, considerably higher than the ten-year average insured losses close to $94 billion, thanks to increased insurance payout due to extreme weather events.

Smaller property and casualty insurers, such as Go Insurance Company, 1st Auto & Casualty, and Cameron Mutual Insurance Company, have gone bankrupt in the recent past as a result of such events. These events have prompted insurers to reevaluate risk, resulting in increased premiums and withdrawal of insurance from highly vulnerable markets. The recent wildfire in Los Angeles, which is being attributed by experts to climate change, comes against the backdrop of California’s top insurer cancelling hundreds of policies due to rising wildfire risk.

India, which is also vulnerable to climate change, is facing the brunt of dynamic insurance pricing. Between 2019 and 2023, the Centre for Research on the Epidemiology of Disasters reported that climate disasters caused damage worth approximately $56 billion. Anecdotal evidence suggests that specific sectors such as hydropower in India are experiencing substantial hikes in insurance premiums due to climate-related risks. The lack of insurance coverage can discourage banks from providing credit to corporates. In addition, the lack of insurance poses a risk to borrowers if they do not renew their insurance amidst rising premiums. Conversely, to retain business, some insurers may choose not to increase premiums significantly, but instead, reduce coverage limits or shorten coverage periods. Such measures can have an adverse effect on loan recovery and deteriorate the credit profile of borrowers.

As these costs rise, businesses may need to redirect resources from growth initiatives to cover escalating insurance expenses, potentially stifling economic development. The escalating cost of insurance is not just a financial burden, but a warning for businesses and economies. To mitigate these risks, corporations and policymakers must adopt a proactive approach to climate risk management.

Steps to be taken

First, businesses should prioritise investments in extreme weather event resilient infrastructure and focus on integrating climate-resilient practices in their value chain.

Second, large businesses can work closely with insurers to develop customised coverage plans for themselves, and their suppliers and customers. This collaboration can lead to innovative products that better meet the needs of both parties and build a more resilient business ecosystem.

For instance, Mahindra Finance and Magma HDI General Insurance Company have partnered to deliver customised solutions for motor and non-motor customers.

Third, the government can consider providing subsidies or incentives for resilience-building initiatives to alleviate the burden on businesses, particularly micro, small, and medium enterprises, nearly 85 per cent of which are uninsured. In the medium term, governments should consider expanding parametric insurance as an adaptive measure for easing the blow after a climate disaster.

Unlike traditional insurance, parametric insurance utilises predetermined metrics, such as rainfall levels or wind speeds, to trigger payouts. State governments (like Nagaland), cooperatives (like KCMMF) and informal worker organisations (like SEWA) are already experimenting with this model. Lessons learnt can help in developing weather-resilient insurance products.

Finally, in the long term, the government should incentivise the building of a climate-resilient infrastructure ecosystem through instruments like Climate Insurance-linked Resilient Infrastructure Financing. This instrument motivates subnational governments to invest in resilient infrastructure as the cost of insurance can be reduced. Pilots of this approach are being run in Durban, South Africa, and Makati, the Philippines. India should study and customise the instrument for pilot runs. As insurance premiums increase, businesses and governments must take proactive steps.

Jena is a Sustainable Finance Specialist at Institute for Energy Economics and Financial Analysis (IEEFA); Anand is an executive working with BSNL. Views are personal