Allianz: How Climate Change is Unravelling Insurance Markets

Climate change is threatening to destabilise all sectors of the global economy, but perhaps none so much as the insurance sector.

As weather becomes more extreme, sea levels rise and temperatures soar, brokers will be faced with an intractable problem – how to insure an increasingly unpredictable world.

“This is not a vague or future issue – it is physical reality,” says Günther Thallinger, Chairman of the Sustainability Board at Allianz.

Intensifying storms, heatwaves, floods and droughts are damaging fixed assets and disrupting industrial operations with growing frequency.

Factories, transport networks and supply chains are all vulnerable to this shift, and manufacturers with global footprints are already seeing the impact on balance sheets and operational continuity.

What was once considered an externality is now material. 

“Entire asset classes are degrading in real time, which translates to loss of value, business interruption and market devaluation on a systemic level,” Günther explains.

Insurance is no longer a safety net

Traditionally, the insurance sector has been the buffer between the elements and economic loss. That buffer, however, is decaying.

More and more, insurers are pulling out of high-risk markets where the cost of underwriting exceeds what customers are willing or able to pay.

In 2023, State Farm and Allstate withdrew from California’s home insurance market due to the huge risk of wildfires.

“We are fast approaching temperature levels – 1.5°C, 2°C, 3°C – where insurers will no longer be able to offer coverage for many of these risks,” said Günther.

Uninsurable climate risks might cause a mass exodus of residents in high-risk areas, whose homes could be destroyed without any safety net to fall back on.

The impacts will be huge on the global economy too. Without insurance, credit markets start to lock up. 

Mortgages, business loans and infrastructure financing all depend on underlying assets being insurable. 

In the absence of insurance, those assets become unfinanceable, and markets seize.

This presents an urgent challenge for manufacturing sectors dependent on large-scale capital expenditure and long-term investments.

Will the state always be a backstop?

Governments, once seen as insurers of last resort, are also reaching their financial limits.

Public disaster relief efforts, such as Germany’s US$33bn flood package in 2021 or Australia’s repeated payouts for wildfires and floods, are becoming harder to sustain.

Antoine Poincaré, Head of the Climate School at AXA, pointed to the experience of the Los Angeles fire as a warning sign.

“The State decides to cap insurance prices in high risk regions, private insurers leave, everybody turns to the last resort insurer, a disaster hits and the last resort insurer cannot pay out, the state raises a tax on all private insurance companies in the region to bail them out,” he explains.

“So far it ‘holds’ because it's not so frequent, in a hotter world we don't know for how long it will.”

This sequence reveals how unsustainable risk exposure can cascade across public and private sectors, undermining financial stability.

For the manufacturing sector, this translates to rising premiums, limited access to insurance, and growing uncertainty around future project viability—especially in climate-exposed regions.

The limitations of climate adaptation

There is a growing narrative around climate adaptation, but Allianz warns this has limits.

“There is no way to ‘adapt’ to temperatures beyond human tolerance,” Günther explains.

Industrial zones in low-lying coastal areas or wildfire-prone regions cannot easily relocate or retrofit against extremes. 

For manufacturers, particularly those in energy-intensive or geographically constrained sectors, this presents difficult strategic choices.

“Once we reach 3°C of warming, the situation locks in,” says Günther. 

“There is no known pathway to return to pre-2°C conditions.”

At that point, risk cannot be transferred, absorbed or adapted to. And without that, long-term investment becomes virtually impossible.

The urgent need for decarbonisation

The way forward, according to Allianz and others, is unequivocal – reduce emissions at speed and scale.

The technologies already exist – solar, wind, battery storage, green hydrogen, grid upgrades – but deployment remains sluggish.

This is not just a moral imperative, they argue. It is a financial one.

“This is not about saving the planet,” Günther explains. 

“This is about saving the conditions under which markets, finance and civilisation itself can continue to operate.”

Manufacturers, particularly those dependent on insurance, finance and cross-border capital flows, must see decarbonisation as not just a regulatory or ethical requirement—but as a precondition for business continuity.

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