Extreme weather prompts pullback from insurers The insurance industry faces rising natural catastrophe losses, widening the protection gap. Since the 1970s, extreme weather-related damage has increased sevenfold, with 2022 alone witnessing $313 billion in global economic losses.143 In 2023, only 38% of global economic losses due to natural catastrophes were insured144 and the protection gap is widening further,145 putting additional financial burden on individuals, businesses and governments.146 The strains are already showing. Leading insurers in California have restricted coverage for both residential and commercial real estate due to increased frequency and severity of wildfires, reflecting a wider trend of firms pulling back from risk-prone areas147 and a subsequent pullback of bank lending due to un-insurability. Furthermore, liability insurance is becoming increasingly unavailable for companies, especially those implicated in climate-related incidents like wildfires, exposing them to significant uninsured litigation risks, such as class actions.148 This could severely affect corporate valuations and financial stability as legal challenges from climate events continue to rise. Reinsurers face rapidly increasing exposure to severe losses due to the climate crisis. Research conducted by S&P Global indicates that reinsurers’ estimates of their exposure to natural catastrophe risk – and therefore physical climate risk - could be underestimated by 33-50%.149 The increased volatility and growing demand for reinsurance products could result in both higher risk exposure for the reinsurers and increased costs for reinsurance buyers.150 Recommendations to build industry and societal resilience in the financial services system The following recommendations give financial institutions an array of solutions where they can take the lead and respond to growing risks from climate hazards in the financial services system: Leading insurers in California have restricted coverage for both residential and commercial real estate due to increased frequency and severity of wildfires. Business on the Edge: Building Industry Resilience to Climate Hazards 43

Business on the Edge 2024