Insuring against extreme heat: navigating risks in a warming world

In 2024, the planet reached a critical milestone: each of the last 10 years has been the hottest on record. For the first time, the global average temperature over a 12-month period rose 1.5°C above pre-industrial levels, currently at 1.62°C and exceeding the Paris Climate Accord’s target. UN Secretary-General António Guterres starkly described this as the “era of global boiling”, underscoring the urgency of addressing the intensifying and devastating impacts of extreme heat.

Among the many climate risks reshaping the world, extreme heat may pose the most profound threat to human health, infrastructure, and economic stability. It is a uniquely pervasive hazard that affects worker productivity, educational outcomes, mental health, utility systems, transportation networks, migration and political stability.

The insurance industry will play a critical role in managing this escalating risk landscape. Insurers, operating across life, health, property and agriculture, are directly exposed to extreme heat’s ripple effects – ranging from infrastructure damage and crop failure to rising mortality and morbidity.

As some of the largest asset owners globally, insurers also face significant investment risks tied to extreme heat. By 2035, extreme heat is projected to cause $2.4 trillion in annual productivity losses and $448 billion in annual fixed-asset losses for publicly listed companies. Despite a proven return on investment – where every dollar spent on risk reduction yields $13 in long-term benefits – 88% of disaster funding remains allocated to post-event response.

This fast-evolving threat demands transformative action from the insurance industry, including:

Between May 2023 and May 2024, 6.3 billion people – four-fifths of the global population – experienced at least one month of abnormally high temperatures. Workers in India, Spain and the US, along with over 1,000 worshippers during the Hajj pilgrimage, succumbed to extreme heat.

Currently, an estimated 489,000 people die annually from extreme heat, making it the deadliest climate risk – causing more fatalities than floods, hurricanes and earthquakes combined. By 2050, nearly half of the global population will face dangerous heat for at least one month per year.

The economic consequences are equally staggering. By 2050, climate risks could shrink the global economy by $23 trillion, with disproportionate losses in the Global South, where resources for adaptation are limited. In the US alone by 2050, heat-fuelled labour productivity loss is projected to reduce total economic output in construction by 3.5% ($119 billion per year), manufacturing by 1.7% ($90 billion per year) and agriculture by 3.8% ($13.07 billion per year).

The following five objectives provide a roadmap for addressing the impacts and root causes of extreme heat:

1. Building a common language on extreme heat. The challenge must be quantified and communicated effectively. This includes mapping the exposure of societies and economies to extreme heat, raising awareness of its far-reaching impacts and supporting public initiatives like the US EPA’s “Let’s Talk About Heat” campaign. Policy measures like naming and ranking heatwaves and appointing Chief Heat Officers have proven effective in enhancing preparedness and protecting vulnerable individuals and communities.

2. Transforming the insurance industry’s role. Insurers must go beyond paying claims to proactively support risk prevention. Leveraging AI and technologies like Google’s NeuralGCM can enhance climate prediction and innovative underwriting approaches. Turning away from these risks as “uninsurable” is not an effective long-term solution amid an increasingly volatile climate risk landscape.

3. Accelerating adaptation and resilience. By deploying their expertise and capital, insurers can drive investments in high-impact solutions such as reflective paving, cooling systems and energy-efficient buildings. The focus should shift from reactive measures to preventative initiatives with measurable outcomes.

4. Supporting policy and regulation. Insurers should advocate for stronger building codes, urban planning policies and other measures that reduce exposure to extreme heat. Regulatory alignment is crucial to maintaining an accessible and affordable insurance landscape in climate-risk-prone communities.

5. Strengthening public-private partnerships. Addressing extreme heat requires the involvement of a wide range of stakeholders (including utility providers, scientists, public health officials, infrastructure planners, media, mayors and local government, and leaders from highly-exposed sectors like real estate, agriculture, construction and manufacturing) to develop community-based and sector-specific heat resilience strategies.

With less than 60% of global weather-related losses insured, the economic burden of extreme heat is unsustainable for governments and communities. By broadening their scope and focusing on proactive adaptation, insurers can expand their societal value. This includes promoting behavioural change, incentivizing risk reduction and driving innovations such as vertical urban farming and AI-enabled parametric coverage.

The growing challenge of extreme heat coordinated proactive action. The cost of inaction – measured in human lives, economic losses and societal disruption – is simply too high. Decisions made today will shape how well the world endures and adapts to a fast-warming world in the future. With decisive action, the insurance industry can lead the charge toward a more resilient and sustainable future.