Brace for risk repricing as insurers face rising climate claims

Insurance, once built on the assumption that yesterday’s weather is a fair guide to tomorrow’s, is being forced to acknowledge that the past no longer reliably predicts the future. For Indian businesses, this change matters greatly.

The insurance industry is not just a financial service; it is a barometer of risk. When premiums rise or coverage shrinks, it signals where vulnerabilities are mounting. While GST relief on some policies may aid personal insurance penetration, climate stress demands attention.

Five sectors in India are the most exposed. Agriculture is the most vulnerable. Farmers endure whiplash between floods and droughts, hail storm and cyclones. According to district-level climate risk assessments, India’s flagship crop insurance scheme has struggled to keep pace with the volatility. Insurers are testing simpler designs such as parametric covers, where payouts are automatic when rainfall or temperatures breach a threshold, avoiding delays and disputes.

Urban housing and infrastructure have become increasingly fragile as construction spreads into flood-plains and low-lying zones. The World Bank has noted that heavy rainfall, waterlogging and heat stress are straining Indian cities. Insurers are responding by raising premiums in risky locations, excluding flood coverage and insisting on higher building standards.

The energy sector, including renewables, is also under pressure. Cyclones have battered wind turbines and solar farms along the coasts, while heatwaves reduce efficiency. Swiss Re Institute, an arm of the global reinsurer, has shown how so-called secondary perils like localized storms, once considered marginal, now dominate global loss portfolios, a trend relevant for India’s expanding renewable energy sector.

Ports and logistics, too, face disruptions from storm surges and flooding, forcing contracts to narrow coverage. Health and labour-intensive industries are vulnerable as heatwaves and extreme humidity threaten worker safety. Group health covers are beginning to include heat-related illnesses, while micro-insurance is being tested for outdoor workers losing income to extreme weather. This alters not just the demand for insurance, but also how insurers operate.

Traditionally, premiums were set by averaging decades of past losses. The climate crisis has broken that assumption. Insurers now weight recent extremes more heavily and use climate models to estimate how rainfall, temperature and cyclones will evolve. This shift is significantly altering products. Policies that once promised broad ‘all-risk’ coverage now list specific perils. Deductibles are getting larger, especially for floods and cyclones. Coverage is increasingly conditional: a factory with raised plinths or flood barriers will receive better terms than one without.

Reinsurers are playing a decisive role in this transformation. Global firms that backstop Indian insurers have been hit by escalating losses from European floods to American wildfires. Their response has been to tighten terms in India as well—by raising rates, lifting payout thresholds and pushing parametric products that can be settled faster. Because reinsurers operate globally, a flood in Germany or a wildfire in Canada can influence the cost of insuring a warehouse in Mumbai.

The business of insurance is essentially a balancing act. Of every ₹100 paid as a premium, about ₹25-30 goes towards expenses such as salaries and administration, industry data shows. That leaves ₹70-75 for claims. If payouts exceed this share, insurers lose money on underwriting. In India, non-life insurers often run combined ratios above 100%, which means claims and expenses exceed premiums. They routinely depend on investment income to remain viable.

Climate change, by raising both the frequency and severity of payouts, is pushing this balance to its limits. Unless insurers adapt, their solvency could come under strain, especially given the 150% solvency margin requirements imposed by the Indian regulator.

In the short term, changes will be most visible in pricing. Property premiums in coastal and flood-prone areas will climb. Deductibles will rise and exclusions will become sharper. Large projects like highways, ports or renewable plants will increasingly require climate risk cover as a condition of financing. Parametric insurance is set to expand into the coverage of infrastructure and small business.

Over the medium term, deeper structural shifts are likely. Insurance products will become modular, allowing businesses and households to choose cover against specific perils such as floods, cyclones or heatwaves. Discounts will reward climate-resilience investments, from cool roofs to improved drainage. Regulators, in turn, are expected to push insurers to disclose how they measure and manage climate risks in line with norms issued by the International Association of Insurance Supervisors.

Climate change is forcing insurers to do what they are supposed to: put a price on risk. In India, where both exposure and vulnerability are rising, prices are set to rise. The sooner companies and policymakers recognize this, the better prepared they will be for a future where protection is neither guaranteed nor cheap.

The author is an independent expert based in New Delhi, Kolkata and Odisha. Twitter: @scurve Instagram: @soumya.scurve.