Insurers’ climate repricing calls for new methods to close Asia’s protection gap

Despite the protection gap closing slightly in some parts of the world, Asia’s emerging markets remain among the least insured against extreme weather risks.

Last year, only 12.3% of the region’s $73bn in total losses from natural disasters were insured, according to German insurance company Munich Re’s annual report. In many of Asia’s lower-income countries, like Myanmar, Laos, Cambodia and the Philippines, insurance coverage can be lower than 5%.

In late 2025, three cyclones that swept across South and Southeast Asia in quick succession unleashed floods that led to 1,300 fatalities and at least US$20bn in losses.

While unusually warm ocean temperatures from climate change exacerbated the intensity of these cyclones, scientists and analysts say that shortcomings in flood defences and funding for disaster resilience also heightened damages.

“We saw from last year that these events are getting harder to model and price,” said Christopher Au, head of APAC Climate Risk Centre at insurance broker Willis Towers Watson (WTW). “Climate change is reshaping storms, but exposure growth, urbanisation and infrastructure vulnerability are just as important”.

“Rapid urban expansion, increasing asset values and more interconnected systems mean that losses now propagate in more complex ways than our historical data or models were designed for,” Au told Green Central Banking.

The Natural Catastrophe Review 2026 published by WTW found that losses tied to floods in Southeast Asia may grow as much as tenfold in the coming years.

“Overall, the underlying risk is becoming harder to quantify, more clustered, and more urban, while insurance products and models lag behind that reality,” said Au.

Fiscal drag and higher cost of capital

In the short term, Asia’s low insurance penetration increases the risk of fiscal drag when disaster hits, due to longer recovery times and illiquidity in the real economy, in addition to an over-reliance on government support, he cautioned.

In the long term, increasing exposure to floods, storms, sea-level rise and heat stress could further raise the cost of capital for firms across Southeast Asia, which already pay a “climate risk premium” on debt, said Karol Kempa, researcher and director at the Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance at the Frankfurt School of Finance & Management.

In a recent paper, Kempa found that companies from countries with “higher climate vulnerability” face higher borrowing costs, based on a global dataset of around 86,000 syndicated bank loans issued across 77 countries.

“Importantly, the implications extend beyond the region itself,” he said, noting that firms headquartered elsewhere but with operations in Southeast Asia could also face higher borrowing costs, with international supply chains adding another risk transmission channel which could affect firms globally.

But Kempa argues that rising borrowing costs might, to some extent, be a positive sign.

“They indicate that financial markets… are recognising and responding to climate-related risks. Of course, there remains a concern that these risks may still be underpriced, especially in regions where climate exposure is growing rapidly”.

Central banks in the region have increasingly urged banks to stress test their exposure to high physical climate risk sectors and geographies. But some experts say Asia’s financial institutions are not yet stress testing at the right levels.

In 2023, China Water Risk (CWR) and the Asia Investor Group on Climate Change released an open letter urging the region’s banks to overhaul their climate stress tests for escalating coastal threats. CWR estimated that nearly two-thirds of loan books from 17 Asian banks are at risk from rising seas.

“Our recommendation to stress test for multi-metre sea level rise in this letter still stands,” said Debra Tan, director and head of CWR. “The rate of rising seas has doubled in the past three decades and continued rapid ice sheet losses in Greenland and Antarctica now signals higher and sooner sea level rise – one metre by 2070 and two-to-three metres by 2100.”

“Stress testing to the right levels that account for rapid ice melt and rising seas will help insurers and banks understand the risks and adjust premiums or loan portfolios better. This is especially important in Asia where one metre of sea level rise will put 200 million people at risk,” said Tan.

Adapting to keep insurance affordable

In the meantime, insurers that have not withdrawn from high-risk areas in the region have started hiking premiums, raising concerns about insurance affordability.

“We don’t see insurers withdrawing entirely, but we do see a change to the insurance pricing and terms of contracts,” said WTW’s Au. “There is a repricing of risk and increased attention to catastrophe models and their accuracy in stating present day impacts. We also see terms changing, with higher deductibles and excesses required to increase the risk sharing between policyholder and insurer”.

Au said insurers are increasingly demanding more site-specific risk reduction. He cited the wildfire resilience insurance that WTW launched last year for a private homeowner association in California on the condition that the community engages in regular clearance of flammable vegetation.

As extreme weather and chronic climate risks cause more locations to become uninsurable, Tan said that insurers should work proactively with asset owners to incentivise adaptation financing through premium cuts, instead of pulling back.

For instance, Hong Kong-based real estate investor Link Asset Management worked with global insurance players AXA and Marsh to create Asia’s first sustainability-linked insurance last year, which cut its premium by 11.7%, with a further 7.5% reduction from reducing its loss ratio through flood resilience measures.

“Ultimately, driving adequate adaptation can help reduce risks and ensure the continuance of the industry,” said Tan.

Need for public intervention

Beyond a shift to proactive pre-event loss mitigation, Shaun Wang, professor of finance, Southern University of Science and Technology, told Green Central Banking that “public intervention is key.”

“Governments should act as risk anchors, using regulatory mandates and public-private partnerships to subsidise premiums and incentivise insurers’ transformation,” said Wang, who co-authored a paper proposing a new climate de-risk product to close Asia’s protection gap in 2023.

The Southeast Asia Disaster Risk Insurance Facility (Seadrif), a risk-pooling platform formed by Asean nations, Japan and the World Bank in 2019 to offer disaster cover to member states, has since made progress on this front, said Wang.

However, Wang said that Seadrif still seems to be struggling in comparison to other international risk-sharing facilities, like the Caribbean Catastrophe Risk Insurance Facility, due to the lower perceived urgency on the part of the governments.

“In Southeast Asia, large countries – like Indonesia or Vietnam – often feel they can ‘self-insure’ via their larger treasuries, unlike tiny Caribbean islands,” said Wang. Seadrif also lacks operational efficiency and economies of scale due to its low private sector engagement, he added.

In 2021, Laos became the first country to buy insurance from Seadrif. To date, it has received US$6.5mn in quick payouts, which – instead of relying on hazard data or modelled losses, as conventional insurance models do – are triggered by government data on the number of people affected by disaster events. The Philippines, which ranked the most disaster-prone country last year, is currently working with Seadrif on its public asset insurance initiative.

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