Floods, droughts, and wildfires driven by climate change could spark panic across financial markets, the Financial Times reported last week, citing a report (pdf) from The Financial Stability Board. The report highlighted risks of a broad pullback in lending and a downturn in investor confidence as financial institutions reassess climate-related risks. “Banks could reduce lending, including for recovery, to already vulnerable households and corporates,” the FSB said, cautioning that a sharp repricing of climate risks could ripple across sectors and regions not directly affected by disasters.

Ins. under pressure: The Swiss-based watchdog also flagged growing challenges in the ins. sector, noting rising premiums in high-risk areas and ins. firms withdrawing from vulnerable markets. The FSB also pointed to data showing that 62% of global losses from natural disasters in 2023 were uninsured, warning that poorly managed risks could create “correlated shocks” throughout the financial system. Unchecked climate risks can also be linked to higher government borrowing costs and cross-border economic spillovers.

REMEMBER- Ins. for risk management isn’t the silver bullet it’s made out to be for developing nations. African countries — which contribute the least to global climate change but lose a staggering 15% of GDP per capita to climate shocks each year — are leaning on parametric ins. to offset financial risks from climate disasters. However, the benefits often fall short of expectations.

Tags: