Economic Consequences of Natural Disasters

You may not believe in climate change (despite scientific consensus), but your insurance provider sure does. Günther Thallinger of Allianz puts it plainly: if global temperatures rise by 3°C (which is where we’re currently headed) the insurance industry will collapse. “The financial sector as we know it ceases to function. And with it, capitalism as we know it ceases to be viable.” Extreme heat and climate-driven disasters have killed and displaced millions across the globe. This isn’t normal. These events are becoming more unpredictable, more intense and more deadly. Climate change and the destruction of nature are combining to create the perfect storm, fuelling disasters while stripping away our capacity to endure them. Right now, in fact, you are likely reading about a fresh disaster that is ‘unprecedented’. And the financial fallout is mounting. Global insured losses from natural (climate) disasters have averaged about US$100 billion over the past five years (Moody's). And insurance providers are hiking up premiums or, as was the case in California, refusing to issue new home insurance policies due to climate disaster (see State Farm and Allstate). As Günther says, "Heat and water destroy capital. Flooded homes lose value. Overheated cities become uninhabitable. Entire asset classes are degrading in real time." The risk of climate change, he says, has historically been managed by the insurance industry. But we are fast approaching temperature levels "where insurers will no longer be able to offer coverage for many of these risks." Insurers don’t deal in opinion, they deal in data. And the data is clear: climate change and nature decline aren’t up for debate; they’re a reality that you are witnessing. Whether or not you buy the science, the financial consequences are impossible to ignore. Your premiums have already noticed. Thankfully, we already have many of the tools and solutions to address climate change and the destruction of nature. What we don't have? Consistent political will. For Australians wanting to make a difference ahead of the election, Biodiversity Council has created a simple tool to help you contact your local political candidates and call for stronger environmental action: https://lnkd.in/ghAxEv2y They have also identified the key actions we need the next government to take to safeguard and restore the environment: https://lnkd.in/g62uCTfd See Günther Thallinger's post: https://lnkd.in/gahhv6MK See the report by Moody's: https://lnkd.in/ggE_2VCa See the article by The Guardian: https://lnkd.in/gpGBXCRZ

🔥 Climate risks are no longer abstract—they’re disrupting businesses, communities, and economies right now. The World Economic Forum’s 2024 report, "The Cost of Inaction: A CEO Guide to Navigating Climate Risk", delivers a sobering message: ignoring climate risks isn’t just irresponsible—it’s economically devastating. 🌡️ Key insights from the report: 💥 Climate-related disasters have caused $3.6 trillion in damages since 2000, exposing critical vulnerabilities in supply chains and infrastructure. 📉 Physical risks could put 5-25% of EBITDA at risk for some sectors by 2050 under a 3°C warming trajectory. 💸 Transition risks, like carbon pricing and changing regulations, could impact 50% of EBITDA in energy-intensive industries by 2030. 🌱 Every $1 invested in climate adaptation yields $2-$19 in avoided costs, while green markets are projected to grow from $5 trillion in 2024 to $14 trillion by 2030. 💡 My reflections: 🔄 Resilience isn’t enough anymore. Too often, we focus on simply "weathering the storm" of climate risk. But true leadership is about rebuilding something better—rethinking markets, redesigning business models, and creating solutions that lead entire industries forward. 🌍 Supply chain fragility is the Achilles’ heel of the global economy. A single extreme weather event can cascade across operations, grinding everything to a halt. Climate-resilient supply chains can’t just be about survival—they must be radically adaptive, decentralized, and built to thrive under disruption. 📊 Climate risk is fundamentally redefining the concept of value. Businesses stuck chasing quarterly earnings are missing the bigger picture. In a world of rising costs and irreversible climate impacts, long-term value will belong to those who embed sustainability, resilience, and equity into their strategies. The time for cautious, incremental steps has passed. How are we using this moment to transform the way we work, innovate, and lead? #ClimateAction #Sustainability #Resilience #Leadership #Innovation

Back in my finance days, a graph heading north was usually a cause for celebration. But now, in the chocolate world, it's a whole different story! 📈🍫 Observing the cocoa commodity price recently, it's striking to see how the cost has doubled over the last 12 months and is at an all-time high. So whats causing it? This surge in cocoa prices is largely attributed to adverse weather conditions associated with the El Niño phenomenon, which has severely impacted cocoa yields, especially in West Africa. The region, and particularly the Ivory Coast – the world’s leading cocoa producer – is under considerable strain. In a recent development, Ivory Coast had to suspend next-season sales of cocoa due to a bean shortage of about 150,000 tons. This shortage, coupled with escalating freight costs in the Red Sea, has brought the nation to the brink of defaulting on several export contracts. The repercussions of this situation are global. Ivory Coast, along with Ghana, accounts for approximately two-thirds of the world's cocoa production. A significant portion of their beans are exported to Europe for chocolate processing. As a result, the disruption in West African cocoa supply is causing ripples through confectionery rates worldwide to places like Colombia and Peru, where we source cocoa. As such, I'd expect that bigger brands are either going to reduce the amount of cocoa used in their products or hike up prices over the next 6 months. These are the kinds of challenges that push us to innovate and adapt. I'm keen to understand how others have adapted to these challenges?

Because it’s a long weekend, I’m sharing a bonus second long read! Here, the brilliant Pilita Clark joins the dots between climate risk, insurance, property markets and what could easily be a future financial crisis: “There is no single scenario for exactly how property insurance costs might lead to climate-fuelled financial upheaval. But here is one that has emerged from discussions I’ve had this year with more than 20 investors, financial analysts, regulatory experts, insurance executives, scientists and researchers. It begins with the number of insurers pulling back from US states swelling from a stream to a flood, and not just in disaster-prone states such as California. Across the country, homeowners face soaring premiums or an inability to renew their cover as insurers confront a remorseless spate of wildfires, storms and hurricanes. Cash-strapped governments try to plug the gaps with more last-resort insurance schemes. But these plans typically cost more and cover less, raising a chilling new reality for thousands of homeowners. The value of their family home, which had risen year after comforting year, instead begins to sink. The contagion spreads because you need insurance to get a mortgage, so as property coverage fades, so does the presence of banks. In state after state, it becomes impossible to find a bank branch. Some lenders quit the mortgage business completely. A few begin reporting big losses. And the US is not alone. Climate-driven upheaval intensifies abroad, rattling insurers, banks and property markets from southern Australia to northern Italy. In city after city, people find themselves living in homes worth less than what they had paid for them. Each monthly mortgage payment feels like throwing good money after bad.” Detailed, appropriately skeptical, and wonderfully written. Enjoy! https://lnkd.in/dZ_qvp4U

🏠🌪 As climate disasters intensify, the hidden fault lines in our financial system are starting to crack—especially in the mortgage and insurance sectors. For decades, mortgage lenders have relied on homeowners insurance as a shield against loan losses. But today, that shield is weakening. Skyrocketing premiums, insurer withdrawals, and flood insurance gaps are leaving millions of households—and their mortgages—vulnerable. 📉 A new national analysis from First Street shows that #climaterisk has become the 6th “C” of credit, joining character, capacity, capital, collateral, and conditions. Why? Because physical climate risk is now driving mortgage defaults—especially from floods—and conventional credit models are failing to capture these losses. 💰 In fact, climate-driven credit losses could cost U.S. banks: $1.2 billion by 2025, and $5.4 billion by 2035, even without accounting for indirect economic shocks like housing downturns. 🌊 Floods are the leading peril, particularly damaging in areas outside FEMA flood zones, where insurance isn’t mandatory. Following disasters like Hurricane Sandy, banks faced tens of millions in hidden losses—unforeseen and unmodeled. 📉 Rising insurance premiums are also forcing borrowers to absorb more risk. For every 1% increase in insurance costs, the foreclosure rate ticks up by over 1%. At the same time, household savings have shrunk to just 4.6% of disposable income. 👉 The message is clear: climate risk is credit risk. If lenders don’t integrate high-resolution climate data into their risk models, they risk being blindsided by the next disaster—not just physically, but financially. Read the report here 👇 https://lnkd.in/edmCrQY8

I am happy to co-author this article with Beatrice WEDER DI MAURO, President of the CEPR - Centre for Economic Policy Research, reflecting on the urgent need to engage in collective thinking and action to adapt our response to the challenge of insurability in the face of escalating climate risks. This article, which captures key convictions from our joint workshop hosted at Collège de France by the AXA Research Fund and CEPR - Centre for Economic Policy Research, couldn't have been more timely.   Devastating floods in Valencia, the wildfires in Los Angeles, the typhoons in Mayotte and La Réunion... These recent climate catastrophes show a clear reality: climate risks are intensifying and the protection gap for local communities and economies are becoming evident. Global economic losses from extreme weather events reached $320 billion in 2024, while in Europe, only 25% of economic losses were insured - leaving individuals, businesses, and communities vulnerable.    To address this, we need to enhance risk-sharing mechanisms and promote partnerships between public institutions and private companies.   Ensuring insurance accessibility and effectiveness is crucial. This can be done through: ➡️ Hybrid models, combining market mechanisms with public-private partnerships, to help ensure broad coverage and affordability. France’s CatNat regime and Switzerland’s hybrid model offer valuable insights. These models can be adapted to regions facing extreme exposure, such as sea level risks. ➡️ Greater investment in prevention and risk-sharing mechanisms. Initiatives like local municipal risk assessments can help small municipalities assess and mitigate local climate risks. ➡️ Impact underwriting, where insurers incentivize policyholders to adopt risk-reducing measures in exchange for lower premiums. ➡️ Public education on climate risks and stronger coordination between insurers, governments, and consumers to ensure preventive measures are taken seriously.   As we move forward, it's clear that policymakers, insurers, and society must work together to strike a sustainable balance between affordability and fiscal viability. This is not just about who pays the bill. It is about how we manage risk in an increasingly uncertain climate landscape. Let's continue to foster collaboration and innovation to close the protection gap and build a resilient future. 👇 https://lnkd.in/er6BkrtZ

New research from the Cambridge Institute for Sustainability Leadership (CISL)), with risk analysis from global insurance group Howden Group Holdings, demonstrates the transformative economic efficiency of risk-sharing systems to provide vulnerable countries with financial security from climate related disasters. The smallest and most vulnerable countries risk losing over 100% of their GDP from extreme climate shocks next year, according to the findings, which underlines the scale and severity of the risks faced by the Global South. Small Island Developing States (SIDS) and other vulnerable countries bear these overwhelming threats almost alone. This can be solved. The report, which models Loss and Damage (L&D) implementation, reveals these risks are insurable and proposes a solution using the power of (re)insurance and capital markets to dramatically scale up the impact of L&D funding. The modelling shows that the intolerable financial risks faced by this group of countries could be reduced to just 10% of GDP. The research outlines an action plan for L&D implementation across 100 less developed, climate vulnerable countries. It proposes leveraging donor funding to unlock vast sums from (re)insurance and capital markets to provide guaranteed financial protection to exposed communities now, and through to at least 2050.  https://lnkd.in/e-tX4AsP

Losses Up, Premiums Up More U.S. home insurers experienced their most significant underwriting loss this century, driven by severe weather events, greater reimbursements driven by higher replacement costs, and greater property development that occurred in high-risk areas. The home insurance industry faced a staggering $15.2 billion underwriting loss in 2023, according to insurance rating agency AM Best. Last year’s loss was more than double the losses seen in the previous year as flooding became problematic, despite fewer hurricaines reaching landfall. Home insurance in flood zones is hard to obtain, making FEMA the default option for most homeowners, even though FEMA caps its payout to be much less than full replacement cost. Additionally, changes in reinsurance practices, driven by higher attachment points, meant that primary insurers bore a larger share of the losses. Primary insurers vulnerable to high risk areas such as Florida coastal homes have seen premiums soar as population migration to these regions increase, yet insurance costs soar. California fire risk creates an equally dire dynamic for homeowners. Less competition means higher insurance premiums. Home insurance premium increases nationwide rose 12.4% in 2023, much faster than CPI, rents, or home price sales. Homeownership has never been more expensive; insurance is just one of the reasons why. I expect mortgage rates to decline marginally in the coming year which implies that home ownership might be more affordable, but all lenders require homeowners to secure insurance, and home insurance will become more expensive as inlfation adjustements and weather patterns warrant. Marathon Asset Management has adjusted its financial models to reflect higher home insurance premiums which translates to greater cash flow advances when a speical servicer is advances payments in the event of foreclosure, so this dynamic has little/no impact to our evaluation results. Escrow balances, which covers taxes and insurance has soared and no surprise Florida leads the way.

Climate risks could cost companies $1.2 trillion annually by the 2050s 🌎 By the 2050s, annual financial losses from climate physical risks for companies in the S&P Global 1200 are projected to reach $1.2 trillion, assuming no adaptation measures. Extreme heat and water stress are expected to account for the majority of these costs, even under a scenario where global greenhouse gas emissions stabilize and decline after 2050 (SSP2-4.5). Utilities are projected to experience the highest financial burden. The average electric utility in the S&P Global 1200 is expected to face $4.6 billion annually in climate-related costs, nearly five times the average across all sectors. Water stress, essential for power generation, is projected to have a larger financial impact than extreme heat in this sector. Annual financial impacts from climate physical risks are expected to grow over time. Projected costs are estimated at $885 billion in the 2030s, $1.2 trillion in the 2050s, and $1.6 trillion in the 2090s, even with current emissions reduction pathways. These estimates focus on direct impacts to corporate assets and operations and do not include changes in demand or revenue. Despite widespread climate risk assessments in the utilities and energy sectors, financial implications remain underexamined. 94% of electric utilities analyze acute climate risks, while only 62% have identified the potential financial impacts, according to the S&P Global Corporate Sustainability Assessment. Regional differences influence risk exposure. While extreme heat and water stress are the largest global hazards, pluvial flooding poses a higher risk in South Asia and Sub-Saharan Africa, while drought is a greater concern in Latin America, the Caribbean, and the Middle East. Extreme heat is expected to impact companies across all sectors. Worsening heat conditions can reduce labor productivity, increase cooling costs, and disrupt supply chains. Water stress and drought create additional risks, particularly for industries reliant on freshwater resources. The financial impact of specific hazards is expected to increase significantly over time. Coastal flooding costs are projected to rise nearly 14x from $5 billion annually in the 2050s to $71 billion in the 2090s, driven by sea level rise and more frequent extreme weather events. Climate physical risks will continue to escalate in the absence of adaptation. Higher capital expenditures, rising operational costs, and disruptions to business continuity are projected to impose increasing financial burdens on companies in the coming decades. Source: S&P #sustainability #sustainable #business #esg #climatechange #risk

🔍 New research reveals a sharper picture of the climate–economy connection: 📉 Climate change will likely hurt economic growth more severely than we thought. 📈 Meanwhile, the economic case for investing in climate action is stronger than ever. 𝐈𝐧 𝐬𝐡𝐨𝐫𝐭: 𝐜𝐥𝐢𝐦𝐚𝐭𝐞 𝐦𝐢𝐭𝐢𝐠𝐚𝐭𝐢𝐨𝐧 𝐢𝐬𝐧’𝐭 𝐣𝐮𝐬𝐭 𝐚𝐧 𝐞𝐧𝐯𝐢𝐫𝐨𝐧𝐦𝐞𝐧𝐭𝐚𝐥 𝐢𝐦𝐩𝐞𝐫𝐚𝐭𝐢𝐯𝐞—𝐢𝐭’𝐬 𝐚 𝐬𝐦𝐚𝐫𝐭 𝐞𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐬𝐭𝐫𝐚𝐭𝐞𝐠𝐲. It delivers near-term growth while significantly reducing long-term losses. 𝐓𝐡𝐞 𝐞𝐯𝐢𝐝𝐞𝐧𝐜𝐞 Key takeaways from this paper ( 👉 https://lnkd.in/eZfKSq_x): 🟣 Most economic models assume climate change only affects a country's economy through local weather—but what if global weather disruptions matter more than we think? 🟣New research adds global weather variables to three major climate-economy models and finds: 🟣 𝐏𝐫𝐨𝐣𝐞𝐜𝐭𝐞𝐝 𝐠𝐥𝐨𝐛𝐚𝐥 𝐆𝐃𝐏 𝐥𝐨𝐬𝐬 𝐛𝐲 𝟐𝟏𝟎𝟎 𝐮𝐧𝐝𝐞𝐫 𝐡𝐢𝐠𝐡 𝐞𝐦𝐢𝐬𝐬𝐢𝐨𝐧𝐬 (𝐒𝐒𝐏𝟓-𝟖.𝟓) 𝐣𝐮𝐦𝐩𝐬 𝐟𝐫𝐨𝐦 ~𝟏𝟏% 𝐭𝐨 ~𝟒𝟎% 💥 Why? Because we're more interconnected than ever. Climate extremes in one country now: ➿ Ripple through global supply chains 🟪 Impact trade, food security, inflation, and more 📊 When these insights are plugged into the DICE 2023 integrated assessment model (see figure below 👇 ): The “optimal” level of warming for policy drops from 2.7°C ➡️ 1.7°C— aligned with the Paris Agreement, and Recommended carbon pricing and emissions cuts become far more ambitious In addition, the OECD - OCDE published a new paper ( 👉 https://lnkd.in/e6qJ6tuM) where they show that stronger climate targets (NDCs) could boost global GDP by 0.2% by 2040: ⚡ Low-carbon investments cut emissions intensity & drive productivity 💰 Policy clarity attracts investment—inaction could cost 0.75% of GDP by 2030 🌡️ Act now to avoid climate shocks: up to 13% GDP gain by 2100 if we enhance NDCs Climate action isn’t a cost—it’s a wise investment in future prosperity 🌱