Climate Change Exposes Vulnerabilities in Global Supply Chain Insurance and Reinsurance

Escalating climate hazards are fundamentally altering the landscape of risk management in international trade networks. Extreme weather events now trigger widespread interruptions that extend far beyond local impacts, challenging the core mechanisms designed to absorb financial losses.

Annual insured losses from catastrophes have risen steadily by 5–7% in real terms over recent years, prompting insurers and reinsurers to limit exposure in vulnerable areas and industries. This withdrawal transfers more financial responsibility to governments, companies, and individuals, potentially straining public finances and economic stability.

For Europe and other regions, interruptions in cross-border logistics represent a critical systemic threat—compounded by threats to food availability, energy reliability, and broader financial pressures. Notable examples include the 2021 devastating floods across Germany and Belgium, which halted manufacturing and transport networks continent-wide, and the 2022 severe droughts in southern Europe that reduced agricultural output and intensified water shortages.

“Extreme weather is no longer confined to isolated incidents; it propagates through tightly linked global systems, converting regional events into worldwide shortages, production halts, and economic vulnerabilities,” explains Dr. Mikael Allan Mikaelsson, Policy Fellow at the Stockholm Environment Institute (SEI).

Traditional insurance and reinsurance frameworks—built to spread and mitigate shocks—are under severe strain from more frequent, intense, and interconnected climate threats. SEI’s new working paper, Insurance and reinsurance under climate stress: managing systemic risk in global supply chains, analyzes insights from senior experts at leading European (re)insurers. It assesses industry responses to evolving hazards and identifies growing constraints in conventional risk-transfer approaches.

Without transformative shifts in operations, regulatory frameworks, and collaborative public-private efforts, the sector risks exacerbating instability rather than alleviating it, the analysis warns.

“Systemic climate exposure is outpacing the adaptability of insurance mechanisms. Once diversification fails due to widespread correlated damages, the system can no longer function as intended,” adds Dr. Mikaelsson.

Core Insights from the Report

• Erosion of insurability fundamentals: Rising hazard frequency and severity, combined with asset clustering in high-risk zones, erode diversification principles essential to (re)insurance viability. This drives market exits and expands uninsured exposure gaps.
• Emerging innovations show promise but face constraints: Tools like parametric triggers, contingent business interruption policies, and resilience-focused evaluations provide partial solutions, yet their coverage and dependability remain restricted.
• Narrow focus of current coverage: Policies predominantly address physical assets and immediate losses, overlooking gradual-onset effects, secondary impacts, and societal consequences. Risks to workforce health, productivity, and well-being in supply chains—especially in agriculture, construction, and transport—are largely unaddressed.
• Modeling and data shortcomings: Dependence on past patterns, inadequate integration of future climate projections, and inconsistent metrics hinder accurate forecasting of interconnected exposures. Harmonized, forward-looking probabilistic approaches are urgently required.
• Mismatch in time horizons: Annual underwriting and pricing cycles prioritize short-term financial health over sustained resilience investments, clashing with the long-term trajectory of climate threats.
• Overlooked labor vulnerabilities: Workers in climate-exposed sectors often lack adequate life, health, or disability protection. Formal coverage gaps persist, and even insured individuals rarely receive recognition or compensation for heat-related illnesses, reduced output, or psychological strain tied to environmental extremes.

Insurance cannot single-handedly address these cascading systemic challenges. Enhanced adaptation measures, improved data infrastructure, and aligned governance between public authorities and private entities are essential to bolster resilience where risk transfer increasingly falls short, the report emphasizes.

Report Background

This SEI working paper draws from an extensive literature review and in-depth discussions with top climate risk professionals in Europe’s (re)insurance community. It offers targeted recommendations for policymakers, regulators, insurers/reinsurers, and companies reliant on stable, insurable supply networks.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.