Insurance, Reinsurance and Financial Sectors’ Perspectives on Quantifying Climate Change-related Harms

This paper explores the complexities of modeling, valuing, and quantifying climate change-related harms from the perspectives of the insurance, reinsurance, and financial sectors. For the purposes of legal reparation, the adverse impacts of climate change are conceptualized as an increased risk of future damage, or a "risk difference," which necessitates accurate monetary evaluation.Because historical data is increasingly unreliable due to shifting weather patterns, the paper highlights the industry's shift toward forward-looking, probabilistic catastrophe risk models. These frameworks combine hazard, exposure, and vulnerability assessments to translate potential physical damage into monetary values. A critical metric identified for this process is the Average Annual Loss (AAL), which represents the expected loss per year and serves as a powerful tool for pricing and managing physical climate risks.Additionally, the paper examines the broader economic costs of climate change—spanning mitigation, adaptation, and residual loss and damage (both economic and non-economic). In light of the Loss and Damage Fund operationalized at the COP28 summit to assist vulnerable developing nations, the author emphasizes the critical need for ex ante disaster risk financing over purely ex post emergency responses.The study concludes that innovative risk transfer mechanisms, such as parametric insurance and catastrophe bonds, are essential for providing timely financial relief. Ultimately, the insurance and financial sectors must move beyond merely transferring risk and instead actively link their financial tools with concrete risk reduction strategies to build long-term global resilience.