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 absorb losses and can be overwhelmed by extreme events. We develop a probabilistic risk-propagation model linking physics-based simulations of tropical cyclone wind and flood losses to residential insurance markets, backstop mechanisms, and regulatory thresholds, applied to Florida under present-day and future climate conditions. 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. Post-insolvency mechanisms, residual markets, and the National Flood Insurance Program are more sensitive to extreme events than the reinsurance layer, and this concentration intensifies under climate change. The framework provides a transferable template for stress-testing insurance systems and evaluating how climate change, market dynamics, and adaptation reshape systemic disaster risk.