Justin Davies – senior vice president, head of commercial insurance & distribution, UK, Xceedance examines the challenges for the climate and catastrophe risk.

Insurance markets worldwide are experiencing weather patterns that no longer align with historical norms, and insurers are now questioning whether the past can still serve as a reliable guide.

As catastrophes grow more unpredictable, the industry is rethinking how it measures exposure, designs products and prepares to meet likely future regulatory requirements. The challenge is not only technical. It affects strategy, capital and the long-term resilience of insurance portfolios.

Why yesterday’s models can’t predict tomorrow

Traditionally, insurers have relied on consistent historical data to quantify climate risk. Today, much of that record reflects a climate system that has already changed – and continues to do so at an alarming rate. Flood patterns stretch across new regions. Heat events appear with greater frequency. Secondary perils rise in severity. These developments weaken the value of long-term data and are forcing the industry to explore new ways of understanding exposure.

Carriers are experimenting with updated modelling approaches that combine scientific projections, near-term observational trends, and scenario analysis. This helps to:

• Identify where existing assumptions may no longer hold
• Conduct scenario testing on how a shift in temperature or rainfall affects portfolio losses
• Validate whether pricing logic is still valid and appropriate
• Understand which regions may need revised appetites and/or additional reinsurance

This transition is not straightforward, but it will help to reduce the dependence on backwards-looking datasets that may no longer match emerging risk patterns.

Parametric and resilience-based products are gaining ground

This uncertainty is increasing interest in solutions that offer clearer triggers and faster payouts. Parametric products are becoming more visible in markets with frequent weather events and wide protection gaps. Their value comes from simple, measurable triggers that support quick recovery, removing uncertainty in claims settlement and reducing disputes during severe climate events.

Resilience-focused products are rising as well. These encourage or require policyholders to adopt stronger protections, such as flood barriers, elevated structures, or fire-resistant materials – measures that insurers increasingly mandate or incentivise through premium discounts and grants in high-risk zones.

While adoption varies, the movement is steady, and both product categories are expected to expand as climate patterns continue to shift.

Regulation: Climate Disclosure moves into the spotlight
It’s broadly expected that over the next couple of years, climate-risk disclosure will flip from a “nice-to-have” into a mandatory expectation in many major markets. Regulators appear to be aligning around three key themes:

Transparent Climate Exposure Reporting
Insurers must provide clearer visibility into physical, transition, and liability risks. This includes detailed disclosures of how climate factors influence underwriting, reserving, reinsurance, and investment decisions.
Integration of Climate Scenarios into Capital Models
Regulators are increasingly expecting scenario-driven evidence (not just narrative statements) to be embedded into solvency assessments, Own Risk and Solvency Assessments (ORSAs) and long-term capital planning.
Governance and Board-Level Accountability
Boards will be required to demonstrate oversight of climate risk frameworks, ensuring climate considerations shape strategy, not just compliance documents.

This regulatory shift is informed and reinforced by global accounting standards. The International Sustainability Standards Board (ISSB) has introduced IFRS S1 and S2 as the baseline for climate-related disclosures, building on the TCFD framework. These standards are designed to help organisations disclose their climate-related risks and opportunities. They aim to establish a consistent global approach to sustainability reporting, requiring insurers to demonstrate how climate risks impact their strategy and financial position, and to utilise scenario analysis and clear metrics to demonstrate resilience.

It appears that the regulatory message will be: “if climate risks materially affect your balance sheet, you will be expected to integrate them formally into how you price, reserve and allocate capital”.

Underwriting and capital decisions moving toward climate integration

The shift in climate patterns is changing how underwriting teams think about risk selection. Underwriters need a clearer understanding of how climate variables influence the frequency and severity of losses, as well as increased transparency around model limitations and emerging uncertainty.

Reserving teams are adjusting as well. They are testing portfolios under climate-stressed scenarios and assessing how exposures are likely to behave over the long-term. This matters because solvency frameworks traditionally rely on one-year perspectives, which may not capture climate-related risks that unfold slowly but with significant impact.

Reinsurance programmes are evolving too. Carriers are reassessing retentions, layer structures, and aggregate covers as volatility grows. The goal is to maintain stability even as the climate system becomes harder to predict.

Climate integration is moving from optional to expected

Investors, regulators, and boards are pressing for transparent, consistent climate integration. The industry is shifting from experimenting with climate datasets to embedding them into everyday decision-making. This includes modelling, pricing, capital planning, and product design.

Insurers that adapt early will strengthen their portfolios and improve their ability to manage volatility. Those that delay risk higher losses, weaker models, and tougher regulatory scrutiny. The industry is not being asked to predict every climate outcome, but it is being asked to prepare for a future that could behave very differently from the past.