Stress testing insurance market stability under climate risk

Simona Meiler, Steven I Jackson, Kerry Emanuel, Noah S Diffenbaugh, Jack W. Baker

Climate change, urban development, and evolving insurance markets threaten the stability of disaster-risk financing. Homeowners insurance is embedded in a layered network of reinsurers, capital markets, and public backstops that can be overwhelmed by extreme events. We develop a probabilistic risk propagation model linking tropical cyclone wind and flood losses to Florida’s residential insurance market, backstops, and regulatory thresholds. Between 10- and 100-year tropical cyclone seasons, total losses increase ninefold while public burden increases more than fortyfold as institutional thresholds and capital constraints bind. We estimate a 3.7% annual probability that hurricane-related public burden exceeds 1% of Florida’s GDP, a fiscal scale comparable to public costs of systemic banking crises. By evaluating climate change, market dynamics, and adaptation within the same quantitative framework, we provide a transferable template for stress-testing insurance systems and identifying whether policy and market changes reduce losses or shift burdens across households, insurers, and public institutions.