What are insurance deserts and what are their implications for business and people?

It’s possible that January’s deadly wildfires that ripped through swathes of Los Angeles, devastating miles of Sunset Boulevard, the upscale Palisades and the likes of Malibu and Pasadena, will give rise to a new type of desert, and not one characterized by sand and arid winds.

An insurance desert is a region where insurers either heavily reduce or stop offering coverage. Typically, these are areas that are deemed high risk, with this risk often tied to the increased frequency of climate-related extreme weather.

These developments reflect the transformation under way in the insurance industry, which has found itself facing mounting losses from these events. As the risks from climate change intensify, it is forecast that insurance premiums for this type of protection will rise by 50% by 2030, while in other cases, premiums have already been withdrawn.

Speakers at the World Economic Forum's Annual Meeting 2025 were conflicted over the use of the term. For Jeffrey C. Hines, Chairman and Co-CEO of Hines, it was a “bit of a strong term,” and he felt that ultimately the insurance market would adjust and customers would adapt to this, while for Katherine Brennan, Senior Vice-President and General Counsel at Marsh McLennan, the problem wasn’t one of insurance, but of risk.

The weather patterns that have historically informed risk models are becoming increasingly unreliable. This results in uncertainty about pricing. Over successive years, the insurance industry has faced a $100 billion underwriting loss. This is unsustainable and the typical response has been to reduce coverage in exposed markets. At the same time, premiums have increased, which in turn, deters some individuals from taking out coverage. Not only does this leave them exposed, but it reduces the number of people paying premiums, driving prices still higher.

To put this into context, in California, the cost of the state’s 2017-2018 fire season totalled the equivalent of 20 years’ worth of insurance industry profits. Of the 12 largest homeowner insurance providers which account for 85% of the market, seven placed limits on new customers and six announced that parts of existing policies would be discontinued even before January’s wildfires. The companies cited their growing exposure to catastrophic weather events, an above-inflation rise in construction costs and a challenging regulatory environment.

This reduction in coverage can lead to a host of secondary effects, from potentially scuttling mortgage access, boosting climate migration, and undermining wider economic growth.

But is climate change wholly to blame for this developing situation? During the Annual Meeting, experts suggested that the situation was a little more complex.

Veronica Scotti, Chairperson, Public Sector Solutions at Swiss Re Management Ltd, said issues like urbanization were also at play. In particular, this has resulted in high-risk assets being located in high-risk, vulnerable areas. This is best encapsulated in the US in the trend for the wild/urban interface, which sees expensive homes built in vulnerable areas of nature.

Scotti said the “valued risks have increased because we’ve become wealthier, so have more to insure”. She added that loss drivers like urbanization have been more important than climate, but suggested that climate is a longer-term trend, which is now starting to emerge as a greater risk.

Through a changing lens, new forms of insurance are starting to emerge, among which is parametric insurance. This event-based product provides a payout when pre-defined conditions are met. By linking the insurance to the event rather than the losses sustained from the event, it can both increase the scope of coverage and protect against losses that traditional insurance either cannot or refuses to underwrite.

In a bid to improve forecasting and mitigation, the industry is also looking to new technologies, such as AI and geospatial data to manage the risk of extreme weather events. Alongside this, nature-based solutions are being employed to help reduce ambient temperatures. These are being increasingly coupled with early warning systems, which are regarded as a means to not only reduce the numbers killed in events, but better manage the effects of extreme weather.

Perhaps unsurprisingly given her profession, Scotti held that it is a question of using risk knowledge employed in underwriting to create scenarios and modelling, which can then inform strategy and planning.

Adaptation strategies will be essential, and the industry is looking to have regulations, such as building codes and their enforcement, boosted to support this. Here, collaboration will be essential and Brennan and Hines both called for public-private partnerships as a better means to manage risk.

By bringing together a range of skills and resources, and standards that make sense, new, better-developed mechanisms can be created. For Scotti, this is vital. She said the insurance market is becoming very receptive to just such mechanisms, and underscored a need to move from “implicit expectations to explicit agreements where all parties have defined roles”.

Speaking in his capacity as Climate Envoy for the Netherlands, H.R.H. Prince Jaime de Bourbon de Parme, made the much larger point that we need to pursue wide-ranging mitigation strategies, arguing that this is what will ultimately reduce the risk. He called for adaptation now to better avoid future risks and costs, as well as mitigation plans to help reduce emissions.

Most bill payers view insurance as a boring financial cost, but by pooling risk, individuals secure confidence and protection against the potential of devastating – and far more costly – loss. In the coming years, the risks – particularly from climate change – will continue to rise, and with it the financial burden. But with greater collaboration, a stronger sense of social responsibility, innovations in insurance, and improved data and modelling, the uncomfortable prospect of insurance deserts can be avoided.