Insuring Against Extreme Heat Navigating Risks in a Warming World 2025

–Clear and effective measures (where available) to reduce risk in the context of rising insurance losses –Affordability and attainability for homeowners or communities –Advancing measures that align with the established business models, financial interests of insurance companies and consumer concerns67 This new direction and outlook for the insurance industry strengthens its relationship with customers by providing peace of mind, risk awareness, loss mitigation and community resilience. By embracing innovative solutions, building new partnerships and taking a more active role in resilience-building, the insurance industry can mitigate the growing risks of extreme heat. In doing so, it can transform itself into a proactive force that enhances societal preparedness, safeguards communities and strengthens long-term economic stability in the face of climate change. Policy-makers Record-breaking temperatures are pushing policy- makers to engage with regulators and insurers to address the impacts of extreme heat. While insurance is vital in managing risk and responding to losses, extreme heat will require a uniquely collaborative approach to address its far-reaching impacts. Policy- makers and government officials will play an essential role in creating targeted policies to address extreme heat and ensuring that insurance remains affordable and attainable in risk-prone communities. Officially recognizing and addressing extreme heat is a key first step to an effective policy measure. In the US, for example, the Federal Emergency Management Agency (FEMA) does not classify extreme heat as a natural disaster and, therefore, cannot mobilize much-needed capital to vulnerable communities and economies.68 In 2022, when California requested federal help with heat-induced wildfires, their requests were denied. This is largely due to the Stratford Act, a 1965 piece of US legislation designating 16 disasters in FEMA’s jurisdiction. Codifying extreme heat alongside other traditional “peak perils” such as hurricanes or tornadoes would unlock vital federal funding to build community resilience and fund long-term adaptation strategies such as urban planning initiatives to increase green spaces and improve building insulation. From a policy standpoint, defining what constitutes an extreme heat disaster is not straightforward, and the thresholds for a heatwave to be classified as a named disaster could be very high. These thresholds would likely be based on a combination of factors beyond high temperatures, including humidity, geography and the number of vulnerable residents. Another key factor is a community’s level of acclimatization to high temperatures – a stretch of 35°C days may not be considered a heat disaster in India, but that same heat could be disastrous in London, where people and infrastructure are not adapted to high temperatures. Data collection on heat impacts is also a roadblock for creating heat resilience policies, making typical insurance principles of assessing losses and providing payouts less easily applied.69 For example, heat- related deaths are often underestimated; the true costs of the disaster are more long-tail in nature and often not fully understood until months later.70 Furthermore, policy-makers should prioritize extreme heat in local, regional and national adaptation planning. This includes crowding in private investment in key adaptation investments – currently, only 2% of adaptation financing comes from the private sector.71 Private investment in adaptation, in partnership with governments, the International Monetary Fund (IMF), the World Bank and other key multilateral actors, will be critical to bridging the adaptation funding gap. There are also more bespoke policies that could manifest as PPPs to help communities, including communications interventions, air conditioner loans before an expected heatwave, funding for cooling centres, subsidized access to privately owned cool spaces such as libraries or cinemas, and additional staff at public hospitals during a heatwave. Governments can further incentivize heat action plans by pairing these goods and services with a codified heat plan. Additionally, policy-makers can and should play a key role in innovative financial mechanisms to address extreme heat. Many effective disaster risk reduction and risk transfer frameworks are built on multistakeholder partnerships to allow for philanthropic support and/or low-risk loans. This is exemplified by the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which provides disaster risk financing products and services and supports multiple countries which ensures maximum risk pooling.72 Finally, policy-makers and regulators can collaborate more closely with the insurance industry to create a regulatory and policy environment that ensures insurance remains both affordable and accessible in climate-risk-prone communities. In December 2024, California’s Insurance Commissioner passed landmark regulations aimed at stabilizing the state’s troubled home insurance market. This framework allows insurers to use a broad range of meteorological, geographic and other data to set rates, reducing reliance on historical loss data and allowing companies to apply their scientific models directly to the market. In return, major insurance companies are required to maintain a stronger presence in wildfire-risk-prone areas. The regulation also introduces greater transparency in catastrophe risk modelling, including creating a first-of-its-kind public wildfire catastrophe model, while preserving proprietary elements of the models that underpin insurers’ underwriting practices. Finally, the regulation allows insurance companies to account for reinsurance coats in rate-making for wildfire distressed regions of the state. Heat-related deaths are often underestimated; the true costs of the disaster are more long- tail in nature and often not fully understood until months later. Insuring Against Extreme Heat: Navigating Risks in a Warming World 22