The hidden cost of climate risk

For much of the sustainability conversation so far, climate risk has predominantly been considered in terms of the long-term impact climate change poses on an asset, company, portfolio or financial system. Now, as the physical effects of a changing climate become increasingly visible, another question is beginning to emerge for investors – whether that risk can continue to be insured at an economically viable cost?

Insurance has always played an important role in allowing economies to absorb uncertainty, transferring risks that would otherwise sit directly on corporate, household or investor balance sheets. As climate impacts increase in frequency, severity and financial impact, the assumptions underpinning that protection are beginning to change. Over the past year alone, extreme weather events resulted in approximately US$320 billion in economic losses, of which only around US$140 billion were insured.

When physical risk becomes financial risk

One of the challenges surrounding physical climate risk is that its effect on investment portfolios is not always immediately visible. An infrastructure asset may continue operating, a property may retain its valuation, and a listed company may continue reporting strong earnings, even as the underlying exposure to flooding or extreme heat increases.

As climate-related perils become more severe and difficult to predict, insurers can respond through higher premiums, more restrictive terms or, in some higher-risk markets, the withdrawal of coverage altogether. Insurance pricing, in this sense, can act as a market signal for climate risk, potentially revealing a shift in the economics surrounding an asset before that change becomes fully visible elsewhere.

For investors, the implications can extend considerably further than the premium itself. Where adequate insurance becomes more expensive or difficult to obtain, asset owners and operators may retain more risk on their own balance sheets, while potentially facing additional expenditure on resilience, changing financing conditions and, ultimately, pressure on valuations.

The protection gap

Perhaps what makes this particularly significant is the amount of climate-related loss that already sits outside insurance. The difference between total economic losses and those covered by insurance represents a protection gap which can leave households, businesses and even governments absorbing the remaining financial impact.

As we move through the Atlantic hurricane season, this question feels particularly timely. Although the 2026 season is currently expected to be below normal, the peak months historically fall between August and October, providing a reminder that the number of storms in any one year tells us relatively little about where the financial impact may ultimately fall. A single hurricane reaching a densely populated area with high concentrations of property and infrastructure can still result in significant losses.

Perhaps the more interesting question for investors, however, is what happens when that storm arrives – how many of the properties and businesses in its path have adequate insurance, and how many have been built to withstand the physical impact itself? Being exposed to climate risk, being insured against that risk and being sufficiently resilient to withstand it are not necessarily the same thing. As repeated events alter the underlying economics of insurance, the question may increasingly become not only whether coverage exists today, but whether it will remain available and affordable tomorrow.

A risk beyond real assets

While this relationship is perhaps easiest to see in property and infrastructure, physical climate exposure can be considerably less visible across public market portfolios, where a company’s risk may extend through its facilities, suppliers, transport networks and access to water and energy. An individual facility may be well protected, for example, while the roads, electricity grid or suppliers surrounding it remain exposed to the same physical hazard.

Questions around the adequacy and changing cost of property and business interruption insurance may therefore provide investors with another indication of operational resilience. I’ve also observed an interesting mismatch in time horizons, with investors potentially holding assets for decades while insurance can be repriced annually, meaning changes in coverage or cost may provide an earlier signal that the long-term economics surrounding an asset are changing.

From insurance cost to resilience investment

Deteriorating insurability is not necessarily inevitable. If insurance can signal where physical risks are becoming financially material, investment in adaptation may help to change that risk profile.

Measures ranging from flood protection and cooling systems to drought-resistant infrastructure, wildfire management and more resilient supply chains can potentially reduce these expected losses. Increasingly granular catastrophe modelling is also beginning to capture asset-level characteristics such as flood protection standards and vegetation management, creating greater potential to distinguish between an asset’s exposure to a hazard and its vulnerability when that hazard occurs.

As the value of adaptation is often measured through avoided disruption rather than direct returns, greater resilience may become easier to value where it helps maintain access to insurance and financing, extend an asset’s useful life and protect its long-term value.

Even as climate arguably receives less consistent attention across parts of the market, physical risks continue to evolve, making insurability an increasingly useful signal of how exposure is changing within investment portfolios. While insurance cannot provide a complete measure of climate risk, changes in its cost and availability can help reveal where underlying risks are becoming more financially material.

As investors consider which assets and businesses are positioned to remain resilient over the long term, the question may therefore extend beyond what an asset is worth today, to how effectively it can continue to be protected, financed, and insured tomorrow.

This article is also published on LinkedIn. illuminem Voices is a democratic space presenting the opinions of leading Sustainability Thought Leaders , their views do not necessarily represent those of illuminem.

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