Insurance markets pushed to the brink as catastrophe costs soar

Escalating catastrophe losses driven by climate exposure, development patterns and inflation are testing the limits of insurance markets and raising questions about long-term affordability, an Aon risk expert told state regulators last week.

Liz Henderson, who leads the global climate risk practice at Aon, said insurers have paid more than $2.5 trillion in natural catastrophe losses since 2000 and face increasing pressure to adapt. That's equivelant to the GDP of Italy and Brazil, Henderson noted.

“The reality is that our losses are increasing,” she said during a presentation to the Natural Catastrophe Risk and Resilience Task Force. “We need more forward-thinking ways that we can build resilience into our communities and into our built environment.”

The task force is a newly restructured body of the National Association of Insurance Commissioners, which held its spring meeting last week in San Diego.

The task force is charged with coordinating discussions among state insurance regulators, industry stakeholders and the public to enhance market resilience. Its primary goals include: implementing strategy, risk assessment and closing protection gaps.

Losses rising beyond climate factors

While climate change is a growing concern, Henderson said other factors -- including population growth in high-risk areas, rising construction costs and insufficient mitigation -- are major drivers of losses.

A study of severe storms in the United States found that about 80% of increased losses were tied to building density, inflation and structural vulnerability rather than climate change alone, she explained.

At the same time, insurers are adjusting their models.

"We found in a survey that 68% of insurers are now using improved methods to integrate climate change impacts on their view of risk, whether that's for portfolio risk management, to better understand risk selection, to respond to regulatory requirements, or even to have an improved view of their pricing," Henderson said. "The industry is trying to respond."

Secondary perils reshaping market

So-called “secondary perils,” such as severe convective storms, are increasingly driving losses, Henderson said.

In 2025, cumulative losses from severe storms surpassed hurricane losses for the first time, reflecting the frequency of smaller but widespread events.

“While any individual event may not reach the same level as the extremities of hurricanes, on a cumulative basis, it is just an earnings erosion for the insurance industry,” she said.

Reinsurers have responded by reducing coverage for lower layers of risk, leaving primary insurers to retain more exposure — a shift that can ultimately affect consumer premiums.

As losses rise, insurers have limited tools to respond, Henderson said. Those include increasing rates, tightening underwriting or declining to renew policies.

A third strategy gaining traction is investment in mitigation and resilience, such as stronger building standards and home-hardening programs that reduce damage from disasters.

Several states, mainly in the South, offer direct grants, typically up to $10,000, to help homeowners cover the cost of retrofitting their roofs to meet fortified standards. California now mandates insurance discounts for residents who perform wildfire mitigation, such as creating defensible space or installing fire-resistant windows.

“What we're starting to see now is a need to really scale those types of programs and also think outside of that insurance premium mitigation discount approach," Henderson said. "There are other ways to think about how do we finance and how do we address resilience in order to maintain long-term affordability."

Still, Henderson acknowledged concerns about whether some properties could become uninsurable. Insurance costs continue to rise in storm-risk areas.

“We don’t know exactly where the tipping point is,” she said, but warned that affordability pressures will continue without broader action.

'We need better understanding'

Henderson urged regulators, insurers, infrastructure planners and lenders to work together to scale resilience efforts and better integrate risk data into decision-making.

She said insurance should be viewed as a “risk price signal” that reflects underlying exposure, while affordability challenges may require separate solutions.

"We need investment in infrastructure. We need building codes to be improved," Henderson said. "We need better understanding and a shared responsibility between regulators, insurers, emergency management, departments and other stakeholders, infrastructure investors and other lenders to come together and really understand what are the practical steps that we need to do."

California Insurance Commissioner Ricardo Lara, chair of the task force, asked how to encourage insurers and modelers to recognize mitigation efforts, such as fortified homes or infrastructure upgrades.

Better communication and data sharing are key, Henderson said.

“They don’t know you’re doing it,” she said of insurers and mitigation investments. “That investment doesn’t show up in their models.”

Protection gaps persist

Despite rising risks, gaps in insurance coverage remain widespread, particularly for perils such as flooding and earthquakes.

Globally, the “protection gap,” the share of losses not covered by insurance, has remained between roughly 55% and 65% over the past decade, Henderson said.

As insurers adjust deductibles and coverage terms, regulators also raised concerns about whether higher out-of-pocket costs could leave homeowners more exposed. Changes such as percentage-based deductibles and limits on roof coverage are already reshaping policies, particularly in storm-prone areas, Henderson said.

Henderson said the insurance industry remains committed to paying claims and supporting recovery but emphasized that long-term sustainability will depend on reducing risk before disasters strike.

“Our industry has our skin in the game and a vested interest in making sure we can continue to pay out those claims and support communities to make targeted investments in reducing those losses," Henderson said.

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.