Natural hazards and insurance

One of the most unexpected things that developed in the course of my research on environmental change and cities was that I started analyzing how insurance facilitates adaptation – or fails to do so. Together with my research partners, I published my results based on various case studies. State institutions or private market corporations can provide insurance against natural hazards, they can offer incentives for adaptation (cf. through the NFIP provided by FEMA in the USA), and they sometimes demand that their insurance holders rebuild the status quo ante (cf. Ahrtal, Germany). The latter neither reduces risk nor vulnerability, both key tenets of the Sendai Framework. Now, a Member of the Board of Management of German insurance company Allianz SE posted a startling article at Linkedin on the possible impact of climate change not only on insurance companies, but the entire global economic system. In the article, the alternative to reducing or avoiding climate impacts, i.e. "business as ususal", means nothing less than the end of natural hazard insurance as we know it, and with it, any incentive for adaptation to risk in the built environment. I'm quoting the entire text further below, because it is worth reading.

My two cents, which I commented publicly:
It's not helpful to set adaptation in apostrophes as if it were some outlandish concept. There is a range of options for reducing risk and vulnerability spanning adaptation and transformation that insurance institutions and companies can and should adopt in relation to the region under consideration. Demanding that insurance holders rebuild homes destroyed by disaster according to the status quo ante is extremely ill-advised as it neither reduces risk nor vulnerability. State institutions and corporations should work together with civil society to develop sustainable solutions – and this can't happen with authoritarian governments that certain corporations seem to prefer over democratic ones.

Climate, Risk, Insurance: The Future of Capitalism, Günther Thallinger, Allianz SE, March 25, 2025 Link: https://www.linkedin.com/pulse/climate-risk-insurance-future-capitalism-g%C3%BCnther-thallinger-smw5f/
"CO₂ emissions directly increase the amount of energy trapped in the Earth’s atmosphere. This is not a vague or future issue—it is physical reality. The more emissions, the more energy retained. The more energy, the more extremely the atmosphere behaves. Storms intensify. Heatwaves last longer. Rain falls harder. Droughts cut deeper. This is the first principle.
These extreme weather phenomena drive direct physical risks to all categories of human-owned assets—land, houses, roads, power lines, railways, ports, and factories. Heat and water destroy capital. Flooded homes lose value. Overheated cities become uninhabitable. Entire asset classes are degrading in real time, which translates to loss of value, business interruption, and market devaluation on a systemic level.
The insurance industry has historically managed these risks. But we are fast approaching temperature levels—1.5°C, 2°C, 3°C—where insurers will no longer be able to offer coverage for many of these risks. The math breaks down: the premiums required exceed what people or companies can pay. This is already happening. Entire regions are becoming uninsurable. (See: State Farm and Allstate exiting California’s home insurance market due to wildfire risk, 2023).
This is not a one-off market adjustment. This is a systemic risk that threatens the very foundation of the financial sector. If insurance is no longer available, other financial services become unavailable too. A house that cannot be insured cannot be mortgaged. No bank will issue loans for uninsurable property. Credit markets freeze. This is a climate-induced credit crunch.
This applies not only to housing, but to infrastructure, transportation, agriculture, and industry. The economic value of entire regions—coastal, arid, wildfire-prone—will begin to vanish from financial ledgers. Markets will reprice, rapidly and brutally. This is what a climate-driven market failure looks like.
Some argue that the state will step in where insurers withdraw. But this assumes the state—i.e., the taxpayer—can afford to do so. That assumption is already breaking. Covering the cost of three or four major wildfires or floods in a single year strains public budgets to the limit. If multiple high-cost events happen within short time spans—as climate projections expect—then no government can realistically cover the damages without either austerity or collapse. (See: Germany’s €30B flood relief in 2021; Australia’s rising disaster relief costs 2020–2023).
There is also the false comfort of “adaptation,” as many risks do not lend themselves to meaningful adaptation. There is no way to “adapt” to temperatures beyond human tolerance. There is limited adaptation to megafires, other than not building near forests. Whole cities built on flood plains cannot simply pick up and move uphill. And as temperatures continue to rise, adaptation itself becomes economically unviable.
Once we reach 3°C of warming, the situation locks in. Atmospheric energy at this level will persist for 100+ years due to carbon cycle inertia and the absence of scalable industrial carbon removal technologies. There is no known pathway to return to pre-2°C conditions. (See: IPCC AR6, 2023; NASA Earth Observatory: “The Long-Term Warming Commitment”)
At that point, risk cannot be transferred (no insurance), risk cannot be absorbed (no public capacity), and risk cannot be adapted to (physical limits exceeded). That means no more mortgages, no new real estate development, no long-term investment, no financial stability. The financial sector as we know it ceases to function. And with it, capitalism as we know it ceases to be viable.
Capitalism must now solve this existential threat. The idea that market economies can continue to function without insurance, finance, and asset protection is a fantasy. There is no capitalism without functioning financial services. And there are no financial services without the ability to price and manage climate risk.
There is only one path forward: prevent any further increase in atmospheric energy levels. That means keeping emissions out of the atmosphere. That means burning less carbon or capturing it at the point of combustion. These are the only two levers. Everything else is delay or distraction.
The good news: we already have the technologies to switch from fossil combustion to zero-emission energy. Solar, wind, battery storage, green hydrogen, electrification, grid modernization, demand-side efficiency—these are mature and scalable solutions. (See: IRENA Global Renewables Outlook 2023; McKinsey: “Net-Zero Transition” 2022; UN: “Raising Ambition on Renewable Energy”).
The only thing missing is speed and scale. And the understanding that this is not about saving the planet. This is about saving the conditions under which markets, finance, and civilization itself can continue to operate.
I’d be interested to hear your perspectives on improving speed and scale for the green energy transition, please share your thoughts in the comments."