The insurance catastrophe

Whole regions of the world are now uninsurable, bringing radical uncertainty to the economy. How do we fix the problem?

A temporary address sign in front of a home destroyed by Hurricane Michael in Mexico Beach, Florida, US, 18 October 2018. Photo by Scott Olson/Getty Images

is a writer whose work has been published in The Guardian, Die Zeit and The Conversation, among others. His most recent books include Skin Deep: Journeys in the Divisive Science of Race (2019), White Supremacy: From Eugenics to Great Replacement (2024), Son of a Preacher Man (2025) and Bible Stories: Fact, Fiction and Fantasy in Scripture (2025). He lives in London, UK.

Edited byMarina Benjamin

The Florida peninsula looks like a sore thumb. It juts into the Gulf of Mexico and the Atlantic, where the water is getting warmer year on year, prompting fiercer hurricanes that can blow down houses like collapsing decks of cards. Climate scientists are convinced all hell will break loose sooner or later when a monster-sized, property-destroying storm makes a direct hit on Miami or Tampa-St Petersburg. Given three near-misses in the recent past, the experts view such a calamity as inevitable. It’s a huge risk for anyone living there – they stand to lose everything – but also for those bearing the financial side of this risk, the insurance companies. Some in the industry are seeing this as a portent for their future – an impending existential threat with profound implications for the economic system.

There are no easy solutions for people still paying off mortgages and those who want to buy property along the Florida coast, because the potential payout on the back of a mammoth storm is so high that the reinsurers (who insure the insurers against catastrophe) are refusing to underwrite their clients and, with no reinsurance, there’s no insurance; and with no insurance, no mortgages; and with no mortgages, no property market. Insurance protects investments against loss and is therefore a pillar of the economic system. If it goes, economies are destabilised.

Many panicked homeowners have rushed to make their houses less risky for insurance companies by reinforcing their roofs with hurricane clips, installing impact-resistant windows, doors and shutters, and strengthening their foundations. But it’s not just storms and higher, warmer seas that concern insurers. Rising temperatures mean that the frequency, range and ferocity of wildfires are also on the rise.

So far this year, 3,374 wildfires have burned an area of Florida totalling 231,172 acres (at the time of writing), and it is even worse in California where 7,855 blazes have killed at least 31 people, destroyed more than 17,000 houses and devoured 525,208 acres of land, at an estimated cost of more than $250 billion. Here, too, homeowners rushed to make their properties more palatable to cold-footed insurers – clearing their surroundings of anything flammable, covering yards with gravel, sheathing houses with fire-resistant stucco, and replacing wooden roofs with steel.

But, even for the most diligent, insurance companies have turned tail, dumping existing clients and abandoning fire-prone and storm-prone areas altogether. On the Californian fire front, 2024 was a turning point as several insurers ceased issuing new policies because of fire-associated risks, including the United States’ biggest property insurer, State Farm, which cancelled policies in parts of Los Angeles. It is all too easy to view this cynically, but it’s happening because property insurers have been reporting year-on-year losses from climate change-related payouts.

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Insurance companies survive by making more money from covering risk than they lose from these risks, which is why they prefer clients less likely to claim (insofar as they can predict the risk involved) and require them to pay substantial excess to discourage claims. When payouts rise above the premium intake, insurance companies either hike up these premiums or withdraw. But when that risk is considered catastrophic, potentially affecting many thousands of clients, as with Floridian storms and Californian fires, it is the reinsurers who are the first to retreat because they will ultimately bear most of the cost.

Reinsurers aggregate payout patterns to establish the likelihood of having to make huge payouts from future natural catastrophes. They do this by gathering exposure data from existing insurers in a geographical area, and by examining catastrophe models (computer simulations that estimate potential losses from natural perils). When they put all this together with detailed analysis of conditions within the area, they come up with a figure for their total potential loss if a catastrophic event strikes.

This is why reinsurers focus so intensely on climate change. Take a glance at the websites of big ones like Swiss Re and Munich Re and you get a sense of how central this is to their calculations – a concern that has spread to property insurers who are starting to hire climate consultants. Even more than market volatility, climate is their biggest headache. ‘You won’t meet a single insurance or reinsurance CEO who doesn’t believe in climate change,’ the insurance investor and former Lombard Insurance CEO James Orford told me. ‘They see it in the numbers – a combination of more extreme, less predictable events, combined with big losses of sums insured. All the modelling suggests these are uninsurable risks.’

Property values plummet in areas where insurers refuse to operate

If we look at the history of insurance, we can see how the idea of paying to protect investments emerged, although the early insurers did not have a concept of ‘uninsurable risk’. The first hint (relating to a shipping agreement) comes from ancient Babylon, but insurance contracts really start in Genoa in the mid-14th century – again relating to the precariousness of shipping. Investors financed expeditions in the hope that they would bring back profitable spoils, but they often lost ships, and therefore their investments, to storms, pirates, rocky coasts and freak waves, which is why they needed someone to cover these potential losses for a fee.

A London coffee house, c1690-1700. Courtesy the British Museum

One of the first insurance companies in the world grew out of Edward Lloyd’s coffee house in Tower Street, London, which was a hub of shipping information. It began in the 1680s with shipowners, merchants and captains taking bets on which ships would make it back to port. Lloyd began renting out ‘boxes’ (tables) where entrepreneurs sold insurance to shipowners who knew their ships might not return, transferring the risk from the shipowners to themselves. It became possible for these shipowners to take a gamble on a precarious voyage with some degree of impunity because the risk was diffused in a way that is analogous to modern-day spread betting.

Incidentally, what became Lloyd’s of London relied heavily on the slave trade, with policies that covered both the ship and the enslaved people – a money-making line that thrived for 118 years until the abolition of the slave trade in the British Empire in 1807. There was at least one case (the Zong massacre of 1781) of owners........

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