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For a long time, insurance has been one of the least visible and most stable parts of the economy. It wasn't exciting. It didn't grow fast, and that was the point. Insurance worked because risks were local, infrequent, and mostly independent. Storms happened, but not everywhere at once. Wars were regional. Supply chains failed occasionally, not constantly. In that world, risk was predictable enough to price, and insurers could spread losses across millions of people in many years. But over the past few years, the conditions that made that system work have begun to break down. In 2023 alone, the US was hit with 28 weather and climate disasters, causing over $1 billion in damage. For most of the past four
decades, the average was fewer than nine per year. Climate risk, geopolitical conflict, financial volatility, and demographic pressure are stacking on top of each other, making risk harder to predict and price. As a result, insurers are losing confidence in the numbers and starting to pull back on coverage. You can see it in disasterprone areas where homeowners are being dropped or priced out entirely even though their home is often the most valuable asset they own. In the US alone, around 6 million homeowners are now uninsured, representing roughly $1.6 trillion in unprotected property value. That may seem reckless at first, but in reality, it reflects how expensive coverage has become. Home insurance costs have jumped
by around 10 to 12% in a single year. In Canada, rebuilding costs surged more than 50% after the pandemic, while reinsurance, the insurance insurers rely on, has become dramatically more expensive after years of heavy losses. And that pressure doesn't stay inside the insurance industry. Because as costs rise and insurance becomes unobtainable, you feel it fast. Loans dry up, everyday costs rise, and risks that used to be shared across society fall back on you instead. And that's only part of the story, because insurance isn't just about paying claims. It also determines what can be built, financed, shipped, or grown at scale. If something can't be insured, banks won't lend against it.
Investors won't fund it, and regulators often won't allow it to operate. In that sense, insurance isn't just protection, it's economic permission. So, as always, we've got some important questions to answer. What does insurance actually do for the economy? Why is it breaking down now? And what does the economy look like in a world where insurance no longer works? Have you ever been in the process of getting insured and been asked for your credit score? What's happening here is that insurance companies are adjusting your rates based on your credit score. In some cases, people with lower credit
scores end up paying nearly twice as much. That's where our sponsor, Kickoff, can help. Kickoff is a simple, beginner-friendly app designed to help people build credit easily and safely. And it works, too. Kickoff users who made on-time payments saw an average increase of 25 points in their first month and 86 points after their first year. It's actually the number one credit building app in the app store. Plans start as low as $5 a month, which surprised me because tools this helpful usually cost way more. Whether you're trying to rent a new apartment, finance a car, or just set your future self up better, credit matters, and Kickoff
makes it easier to get started. Kickoff is giving my audience 80% off your first month. That's as low as $1 to try it out. Click the link in my description or go to getkickoff.com/economics to get the offer. At its core, insurance runs on the same mathematics as a casino. When someone walks into a casino, the casino doesn't care whether that person wins or loses. What matters is that the rules of the games are set so that on average, players lose a little bit each time they play. Run that process often enough with enough players, and those small losses add up. Over time, the casino doesn't need to predict outcomes. Volume and time do all the work. In the same way, an insurer
doesn't need to know whether a particular house will burn down or a specific shipment will sink. Some will, most won't. As long as losses across millions of policies arrive slowly and predictably enough, the premiums collected from everyone can cover the claims paid out to the unlucky few. In many lines of insurance, claims and premiums roughly balance out over time. And that isn't a failure of the business model. It actually is the business model. Premiums are collected upfront long before most claims are paid out. That creates enormous pools of capital sitting on insurers balance sheets for months or years at a time. From there, the business starts to look less like insurance and more like asset
management. Instead of just stagnating in a bank account, that money gets invested in assets that are deliberately unglamorous. Government bonds, high-grade debt, short-term instruments. The returns are modest, but when you're holding tens or hundreds of billions of dollars, even a few percentage points matter. In the US alone, property casualty insurers have more than $1.4 trillion sitting in the economy. That money is financing government projects, new housing, infrastructure, and corporate debt, things most people never connect to insurance. Which means insurance isn't just about paying claims. It's actually underwriting a huge share of everyday economic
activity. That changes what's at stake. On top of that, if something can't be insured, it typically can't be built, planted, shipped, or financed at commercial scale. And that also quietly affects the economy by shaping which economic activities are viable. For example, mortgage lending depends on insurance because banks are not allowed to lend against uninsured collateral. If insurers pull back, lenders pull back with them. And once credit tightens, demand weakens. Over time, property values decline, even for homes that never burn down or flood. The same mechanism shows up in food production as well. Crop insurance allows farmers to borrow, plant, and take seasonal risks at commercial scale. Remove it and
farming becomes more conservative or simply unviable for smaller producers. Insurance even shapes global trade. Ships reroute because insurers decide a stretch of ocean can no longer be priced cheaply enough. In the Red Sea, war risk premiums surged after attacks on cargo vessels. In some cases, from around 0.3% of a ship's value to as high as 1% per voyage, adding hundreds of thousands of dollars to a single transit. For many rats, coverage became prohibitively expensive or unavailable altogether. So, ships diverted thousands of miles around Africa, slowing trade and raising costs across global supply chains. Economists have a name for this. They call insurance a complimentary good, which
means its value doesn't sit on its own. It's tied to the things it enables. If you want the simplest way to think about it, imagine this. If petrol suddenly cost $100 a liter, cars would lose much of their value altogether. The vehicles would still exist, but the system that makes them useful would break down. Insurance works the same way. Remove it and houses, farms, factories, and ships don't disappear overnight, but their economic usefulness slowly erodess. You can already see it happening. Look at California and Florida. Both became economic powerhouses by doing something that sounds a bit insane. Building in places they probably shouldn't have.
California sprawled into fireprone hills and earthquake zones while Florida put entire cities on hurricane exposed coastlines. None of it should have worked, but insurance made it possible. It turned risks that felt unmanageable into something you could actually price and plan around. So developers started building. Banks back then with loans and families bought homes trusting that a wildfire or hurricane wouldn't ruin them financially. For decades, that system held together and fueled enormous economic growth. But now, as insurers pull back, the engine starts running in reverse. Credit dries up first as banks won't lend against uninsured property.
Then building slows down and home values drop, even in places that haven't burned or flooded yet. Which makes the next question unavoidable. If insurance is so fundamental, why is it suddenly becoming more expensive and harder to get in so many parts of the economy? To answer that, we need to understand how insurance assesses and prices risk in the first place. Insurance is built on history. Insurers look at flood maps, fire cycles, mortality tables, and then assign a price to the risk. Their underlying assumption is simple. The future will look enough like the past that those prices will still make sense. For most of the 20th century, that assumption largely held, but it no longer describes the world insurers are
dealing with today. Over the past few decades, climate related disasters have more than doubled. At the same time, so-called man-made natural disasters, events like floods and droughts intensified by human activity have nearly tripled. Losses aren't just rising, they're also arriving more often in new places and with less warning. In parts of Northern California, the wildfire season now starts more than 10 weeks earlier than it did in the 1990s, breaking the seasonal patterns insurers used to rely on. Similarly, the total area burned by bushfires across Australia, has risen significantly over the past three decades. And in Europe, repeated storms turned 2024 into one of the wetest years since records began in
the 1950s, pushing rivers across large parts of the continent beyond levels seen in decades. That alone would be enough to strain the system. But climate isn't the only shock hitting insurers. multiple challenges are landing at once. The second pressure point is reinsurance. Insurance companies don't carry all their risk themselves. They offload the biggest rarest losses to global reinsurance firms. Companies like Munich Re, Swiss Re, and Hanover Re, which essentially act as insurance for insurers. But over the past decade, those firms have been absorbing hit after hit. Between 2017 and 2024, global insured losses from natural catastrophes regularly exceeded $100 billion in all but one year, with several years coming
in far higher. After years of payouts, reinsurers responded the only way they could by sharply raising prices, tightening terms, and pulling back from the riskiest regions altogether. For primary insurers, that creates an ugly choice. Either premiums rise quickly, coverage shrinks, or entire markets get abandoned. That's exactly what we're now seeing in housing markets from California to Florida, where major insurers have either exited or frozen new business altogether. But the pressure doesn't stop here. For years, insurers were able to survive thin underwriting margins because financial markets were unusually calm. Low interest rates, low volatility, and steadily rising asset prices made investment income reliable. But now that
cushion has weakened, higher interest rates have lifted yields, but they've also increased market volatility and exposed losses on existing bond portfolios. At the same time, inflation has driven up rebuilding costs dramatically. In the US, construction and materials costs are now more than 40% higher than they were before the pandemic, meaning every insured loss is more expensive to pay out, even if the number of claims stays the same. Taken together, insurers are now being squeezed from every direction at once. And most importantly, they're facing risks that stack, overlap, and reinforce each other. A severe heat wave can drive wildfires that disrupt housing markets and strain insurance coverage. As
coverage thins, lending tightens and stress spreads into credit markets. Inflation then pushes up claim costs across every line of business at the same time. Together, this turns what used to be manageable risks into systemwide stress that insurance was never designed to absorb all at once. Now, what's happening to property insurance is happening to health insurance, too. In the US, healthcare spending now exceeds $5 trillion per year, or roughly 18% of GDP, with per capita costs more than double the average of other advanced economies. For insurers, this creates a growing mismatch between what policies collect and what care actually costs. Drugs like Ompic, WGOV, and Mangaro have transformed treatment for diabetes and obesity, but they come with recurring
costs that can run into the tens of thousands of dollars per patient. Even more extreme are new gene therapies and cancer treatments, some carrying onetime price tags above $2 million. In 2024 alone, Sunlife Financial had to cover 47 individual claims exceeding $3 million each. At the same time, populations are aging, pushing claims higher across entire insurance pools. All of that feeds directly into what insurers have to charge. Between 2000 and 2023, average family health insurance premiums in the US more than quadrupled, even though overall inflation rose by roughly 80% over the same period. And yet, even those increases haven't fully offset rising claims. As premiums climb, the
system starts to thin. Healthier customers are more likely to drop coverage in individual markets, leaving insurers with a smaller, sicker pool and even higher average claims. Across housing, health, agriculture, and trade, the pattern keeps repeating. Which brings us to the most uncomfortable question of all. If insurance stops absorbing risk the way it used to, who ends up carrying the consequences instead? When insurance starts to fail, the risk simply gets pushed down the chain. As coverage becomes more expensive, large companies can still absorb the cost or negotiate better coverage. But smaller firms often can't. And that matters because employer sponsored plans are still the primary source of health insurance for most
Americans. So when smaller companies are priced out, employees are pushed into individual markets with thinner, more expensive plans, or they leave for employers that can still afford to insure them. In housing, rising insurance costs shift risk away from insurers and onto homeowners. In more than 150 zip codes across the US, at least one in 10 homeowners lost insurance coverage in 2022 simply because they stopped paying their premiums even though their homes were still standing. Cancellations clustered along the Carolina coastline, including places like Hilton Head, Charleston, and Myrtle Beach, where hurricane risk has intensified. They were also high in parts of California, Arizona, and West Virginia. Regions increasingly exposed
to wildfires, floods, and extreme heat. And even for people willing to pay, coverage is increasingly unavailable. State Farm, the largest home insurer in California, paused issuing new home insurance policies in 2023, citing wildfire risk. Farmers Insurance exited the Florida market entirely, saying the risk had become too difficult to manage. And in March 2024, State Farm announced it would not renew 72,000 home insurance policies in California, representing just over 2% of its policies in the state, pointing to inflation, catastrophe exposure, and rising reinsurance costs. When private insurers pull back like this, governments are often forced to fill the gap. And not just in housing. In the US, employer
sponsored health insurance, which covers roughly 165 million people, relies heavily on tax subsidies. In 2024 alone, the federal government spent around $384 billion supporting employer health plans through tax exemptions, far more than it spent on Obamacare subsidies. In some other places, governments are going further, acting as insurers of last resort or forcing markets to keep operating. In Italy, a new law that came into force in January 2025 now requires all businesses to purchase insurance against natural hazards like floods and landslides while simultaneously obliging insurers to offer those policies. It's the first law of its kind in Europe, introduced after climate related losses
in the country rose by about 2.9% per year between 2009 and 2023. But the law doesn't just mandate coverage. Italy paired it with a statebacked reinsurance layer, allowing insurers to offer policies without carrying the full weight of catastrophic losses on their own. In practice, that means part of the risk is transferred from insurers to the public sector, which keeps coverage available, but also weakens the price signal that normally discourages risky behavior. Over time, that can encourage more building in flood planes and landslide prone areas on the assumption that losses will be covered one way or another. The result is a cycle where risk rises, costs follow, and public
back stops are asked to absorb ever larger shocks, which exposes the deeper problem. As risks rise and insurance becomes harder to sustain, the traditional model starts to bend. Paying ever higher premiums isn't viable forever. Expecting governments to absorb unlimited losses isn't either. That's why insurers and policy makers are beginning to explore alternatives. One option is parametric insurance. Policies that pay out automatically when a predefined trigger is met, such as rainfall levels, wind speed, or temperature thresholds. Instead of waiting for damage assessments, payouts are based on independently verified data. It's faster, more predictable, and easier to price, but it requires far more sophisticated models and still isn't widely used. Another approach
focuses on risk reduction, not just risk transfer. Insurers can offer lower premiums to households and businesses that invest in flood barriers, fireresistant materials, or climate proof infrastructure, but only if pricing models can accurately reflect how much those measures actually reduce risk. Now, none of us can predict exactly how this will end, least of all economists. But if disasters keep getting more frequent and risks keep overlapping, insurance will thin, retreat, and repric. And when it can no longer absorb risk and governments can't carry it all either. The risk will concentrate and fall on those least able to absorb it. That is the real risk of an uninsurable world. An uninsurable world isn't just more dangerous. It's
more unequal, more brittle, and less willing to take the risks that growth depends on. If you want to zoom out and see how disasters ripple through economies both locally and globally, we made an entire video exploring the economics of disasters. From pandemics and earthquakes to floods, fires, and political shocks. You should be able to click to that on your screen now. Thanks for watching, mate. Bye.
