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 to stress test insurance systems and parameterize it for tropical cyclone wind and flood risk in Florida’s residential insurance market. The mean residual financing requirement rises disproportionately with economic losses, from 4.9% of mean losses for seasons between the 10- and 25-year loss thresholds to 18.4% for seasons above the 100-year threshold. The probability that this financing need exceeds 1% of Florida's gross domestic product is 3.4% under present-day conditions and rises to 8.7% by mid-century under Shared Socioeconomic Pathway 2-4.5 (SSP2-4.5). Residual deficits from private insurer insolvencies make up the largest share of the requirement, followed by Citizens, Florida's residual insurer, and the National Flood Insurance Program. We also assess stylized changes in market structure, insurance coverage, and physical losses. With the insurance market held fixed, returning mean financing needs to their present-day level requires roughly halving economic losses relative to unmitigated mid-century conditions. Together, these analyses provide a unified quantitative framework for assessing how climate change, insurance coverage, market structure, and physical damage reduction shape financing needs and systemic risk.