Insurers have been told they need to strategically realign their approach to climate risk.

The call came from HDI as the company’s Natural Hazards and GIS/Data analyst said there is now a need for long term partnerships to create the ecosystem to drive business resilience.

HDI added climate change transforms the global risk landscape.  Extreme weather events and natural catastrophes (Nat Cat) have become one of the most significant economic risks worldwide.

“Losses are increasing continuously, while insurance penetration remains limited in many vulnerable regions,” the company said. “To address these risks effectively and remain a reliable partner in transformation, insurers must be proactive and strategically realign their approach.”

Dr Melanie Fischer said while the challenges are significant insurers can enhance the resilience of their partners against climate change.

“Socio-economic processes are the primary driver behind the increase in insured Nat Cat losses,” she explained. “Population growth, rising prosperity, and rapid urbanisation are causing valuable assets to be concentrated in high-risk areas, thereby amplifying exposure to natural hazards. Additionally, construction costs, labour shortages and supply chain disruptions are pushing up rebuilding costs following natural disasters.

“The consequences extend far beyond individual businesses or households. Natural catastrophes can significantly impede the economic development of entire regions, threaten jobs and weaken local infrastructure in the long term. In countries with low insurance penetration, such events further exacerbate social disparities.”

Fischer continued: “Historically, the largest Nat Cat losses have been caused by tropical cyclones and earthquakes, such as Hurricane Katrina (2005) and the Tohoku Earthquake in Japan (2011). These ‘primary perils’ are infrequent but result in severe damage with profound humanitarian and societal consequences. In contrast, ‘secondary perils’ like floods, wildfires, and severe convective storms occur more frequently and typically result in smaller individual claims.

“However, their cumulative impact is substantial. In 2024, secondary perils accounted for more than half of all insured Nat Cat losses worldwide, underscoring their growing relevance in the global risk landscape.”

She explained weather-related hazards are influenced by complex climate systems and are subject to natural variability, such as the El Niño-Southern Oscillation.

“These natural climatic patterns influence the frequency and intensity of natural catastrophes, thereby shaping global loss trends,” Fischer continued. “Accurately attributing individual extreme events to specific climate patterns, as well as quantifying the influence of climate change, remains challenging.

“Nevertheless, rising global temperatures are increasing the risk and magnitude of natural hazards, resulting in greater loss potential. Although climate change related losses are still modest, some studies project that by the middle of this century, they could account for a double-digit percentage of the global GDP.”

Despite rising losses, insurance penetration remains low in many regions. In 2024, losses from natural catastrophes exceeded $300 billion, of which only 40% were insured.

HDI said on a positive note, the proportion of insured Nat Cat losses is gradually increasing, and the protection gap – the difference between total economic losses and insured losses – is narrowing.

“However, there are significant regional disparities: the largest coverage gaps and financial risks are found in countries of the Global South,” Fischer added. “It is imperative to close global protection gaps and strengthen financial resilience in vulnerable regions.”

She concluded: “The location and construction of valuable assets are critical determinants of loss potential, especially as the likelihood of natural catastrophes increases. Adaptation through stricter building codes or smart urban planning is crucial. Insurers can strengthen their clients’ resilience through long-term investments and tailored solutions, such as captives and ESG liability products.

“Highly specialised Nat Cat assessment tools and bespoke climate risk consulting enable comprehensive risk evaluation and enhance clients’ resilience to future challenges. Long-term partnerships are key to achieving this.”