Actuarial Science series: How to insure climate extremes ?

Climate change, poverty and ageing populations can create huge risks for society and the insurance sector. In a new series we look at how research in Actuarial Science can help tackle these issues.

Natural catastrophes, particularly those exacerbated by climate change, are of increasing concern to the insurance industry with global insured losses hitting US$80 billion for the first half of 2025. This is almost double the ten-year average and marks the fifth successive year when losses exceeded $US50 billion for this period, according to the Swiss Re Institute.¹

Such losses reflect the growing financial impact of climate change, posing challenges for the insurance sector.

“The big questions are: Who should pay for such losses? Is this risk insurable? This is where the work of actuaries is crucial. Since premiums may not be sufficient to cover bad years, how much additional capital is needed to keep insurance solutions viable? Actuaries assess the likelihood and severity of such losses to address these questions,” explains Hansjörg Albrecher, Professor of Actuarial Mathematics at HEC Lausanne.

“In order to work out how much we expect claims to be, how much premiums should be charged and how much capital we need to deal with more extreme events, you need accurate modelling. This can tell us how to set up a system that remains sufficiently attractive for investors, but also pays out when disaster strikes.”

The issue with natural catastrophes, unlike many other types of insurance claims, is that huge losses occur simultaneously. Assessing such likelihoods is complicated by climate change, since the past is not a sufficient indicator of the future, as more emissions are pumped into the atmosphere leading to more extremal events, and at a larger frequency.

An interdisciplinary team of scientists, climatologists, geologists, hydrologists, mathematicians and actuaries is needed. This is where the work of the Expertise Center for Climate Extremes (ECCE) at the University of Lausanne is vital, of which Professor Albrecher is a founding member.

“In the future, we still want to be able to provide insurance coverage of climate-induced catastrophes without bankrupting insurance companies. No individual or business wants to be uninsurable. But how can we make such insurance attractive to investors?” he asks.

Through mathematical modelling, Professor Albrecher and his team have identified optimal dividend strategies for an insurer, which show that it can be beneficial for shareholders to invest in natural catastrophe insurance.² This is a promising result, at a time when reinsurers are reluctant to cover such risks.

“We’ve demonstrated that with a good understanding of event probabilities, shareholders can use this knowledge to their advantage,” he notes.

This finding holds even when climate tipping points are to be expected, moments when conditions worsen irreversibly, driving both the frequency and severity of catastrophies higher. However, premiums must be adjusted fairly once such a tipping point occurs.³

The research suggests that greater climate variability will not necessarily make catastrophe insurance unattractive for shareholders, investors, or the industry as a whole.

“Results like this indicate that insurance can remain viable. But another question arises: who should bear the cost of higher premiums as climate risks intensify? Is it acceptable for individuals alone to shoulder the burden, or should governments step in with subsidies funded through taxation? Our aim is to build transparent models that can help academics, industry and policymakers understand and calibrate climate risk, so that insurers – and society – can deal with this challenge effectively,” Professor Albrecher concludes.

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