Climate change risks may be building faster than governments, financial institutions, and insurance markets are prepared for, according to a new analysis from the Institute and Faculty of Actuaries (IFoA) and the University of Exeter, raising concerns about the resilience of insurance capacity and the stability of the wider financial system.
A contrast between models and the current climate
The report, The Parasol Lost, argues that current climate and economic models understate both the pace of global warming and its knock-on financial effects. Central to the findings is the loss of aerosol cooling, a “hidden sunshade” created by air pollution that has offset around 0.5°C of warming. As pollution is reduced, particularly through tighter shipping regulations, this cooling effect is diminishing, accelerating temperature increases.
The analysis also points to growing evidence that the Earth’s sensitivity to greenhouse gases may be higher than previously assumed. Together, these factors suggest global temperatures are now likely to reach 2°C before 2050, bringing forward the timeline for severe physical risks that drive insured losses, strain reinsurance capacity, and challenge existing catastrophe modelling assumptions, the analysis shows.
The report also warns that faster warming increases the likelihood of more frequent and severe extreme weather events, placing upward pressure on claims costs and premiums. It also raises the prospect of insurance becoming unavailable or unaffordable in high-risk regions sooner than expected, with implications for property markets, infrastructure investment and access to finance.
'Planetary insolvency'
The report described a scenario of “planetary insolvency”, in which the degradation of natural systems undermines economic activity and the financial mechanisms, including insurance, that support it.
A key concern raised is the continued reliance on economic models that exclude many of the most material climate risks, such as tipping points, sea-level rise, ecosystem degradation, human health impacts, and climate-related conflict and migration.
Earlier estimates suggested global GDP losses of just over 2% at 3°C of warming, while more recent analysis referenced by the report indicates that a combined climate and nature shock could plausibly lead to a 15% to 20% contraction in global GDP over a five-year period.
To mitigate this issue, the report calls for a "planetary solvency" recovery plan, urging governments and financial institutions to embed climate and nature risks more fully into policy and financial decision-making. Proposed measures include rapid methane reduction, halting deforestation, accelerating the energy transition, restoring natural carbon sinks, and researching emergency interventions to limit warming.
For insurance markets, the findings underscore the need to reassess assumptions around risk horizons, loss severity, and capital adequacy, as climate impacts threaten to emerge faster and with greater intensity than many existing plans anticipate.
