Climate risk transmission across banks and insurers: Opportunities for risk mitigation and improved resilience
Banks and insurers finance and protect many of the same homes, businesses and infrastructure, leaving them exposed to the same climate shocks. Yet they often assess these risks using different information, assumptions and time horizons.
Insurers can reprice or withdraw coverage annually, while bank loans may run for decades and assume that insurance will remain available. When insurance coverage becomes unaffordable or disappears, the risk does not. It can shift onto banks, borrowers and public budgets, contributing to falling asset values, credit losses and reduced investment in resilience.
This report from Environmental Defense Fund, developed in partnership with D.A. Carlin & Company, examines how climate risk moves between banks and insurers, what this means for institutional, financial-system and societal resilience; and how closer collaboration between the two sectors could strengthen risk management, reduce underlying risks and unlock investment in adaptation.
Key insights
- Supervisory frameworks for climate risk have advanced since 2020, though progress has been uneven across geographies, and implementation of climate risk into market practices has been slower. Day-to-day credit and underwriting practices still lag, while supervision remains largely separated along sectoral lines.
- The transmission of insurance stress into credit risk is already visible in recent data, but credit decisions continue to rely on assumptions about insurance availability made at loan origination that are inconsistently updated afterwards.
- Banks and insurers have complementary capabilities. Insurers hold detailed hazard and loss information, while banks have the long-term relationships and financing capacity needed to support adaptation. But better information alone is not enough: more accurate risk assessment can accelerate market withdrawal unless accompanied by investment in risk reduction and consideration of who bears residual losses.
- The most meaningful improvements depend on joint action. Common definitions of resilience, targeted asset-level data and damage functions, routine verification of insurance coverage, and methods for capital rules to recognize resilient assets cannot be developed by individual institutions alone.
A practical agenda for action
| Target audience | Priority recommendations |
|---|---|
| Banks and insurers together | Align approaches to assessing shared risks; develop focused mechanisms for exchanging material risk information; and consider jointly offered products that reward measurable adaptation and resilience. |
| Banks | Keep insurance and underlying asset-risk information current over the life of a loan; test credit exposures against changes in insurance availability and cost; and define actions to be taken when insurability or climate risks become material. |
| Insurers | Extend analysis to second-order effects, concentrations and correlations; assess the scale of underwriting that could be affected under different scenarios; and use product design and underwriting to strengthen incentives for resilience. |
| Policymakers and regulators | Assess banks and insurers as an interconnected system; extend scenario analysis to second-order effects and potential contagion; ensure regulatory frameworks appropriately recognize resilience; anticipate the consequences of market withdrawal; and strengthen public investment and incentives for adaptation. |
The objective is not to sustain lending or insurance everywhere at any cost. It is to build a shared understanding of risk that supports better decisions about adaptation, financing and the allocation of residual losses.
By improving how banks and insurers identify and manage their shared exposures, the financial system can move beyond transferring climate risk between balance sheets and play a more effective role in reducing it, with the resilience of people and the real economy at its centre.