From Climate Tipping Points to Tipping Cascades: Recalibrating Climate-Related Risks

Why are climate risks – and especially the approaching climate tipping points – still receiving too little attention across large parts of the financial industry?

Rapp: The significance of climate change is increasingly being underestimated, and many players seem overwhelmed by the topic. The enormous challenges looming just years away are no longer being recognized. Even more concerning is that the role of climate tipping points as massive risk amplifiers is not sufficiently understood. There is a clear deficit in risk perception.

How are climate tipping points currently perceived in the insurance industry?

Rapp: Insurers have a clear view of the issue – after all, they are directly confronted with the consequences of climate change across many areas. The problem of tipping points is increasingly being discussed, particularly among reinsurers. Individual players have been very active for years, contributing to a better understanding of tipping points and the development of corresponding risk models through systematic analysis of climate data.

What role do insurers play regarding tipping points – including in the context of the broader financial industry?

Rapp: Insurers represent the first line of defense against rapidly rising climate-related losses, as they currently still cover the majority of material costs. At the same time, insurers help rationally assess climate risks: by continuously assigning a market price to these risks, they ensure effective risk perception. However, as key climate tipping points draw closer, a fundamental reassessment is required – a genuine repricing of risk. Insurers are making essential contributions to this process. They also serve as an important gatekeeper within the financial system, sending clear risk signals to the market and fulfilling a critical early warning function. When leading insurers explicitly warn of climate risks, all red lights should be flashing. In our assessment, that point was reached in 2025.

Which tipping points pose the greatest economic dangers?

Rapp: This question is very difficult to answer. Many tipping dynamics are interconnected and mutually reinforcing. Currently, damage to buildings and infrastructure caused by extreme weather events still dominates. Going forward, the flooding of coastal regions and critical disruptions to global food supply chains are likely to move to the forefront. Ultimately, all climate tipping points carry such enormous force that they will fundamentally alter every ecosystem and habitat. These damages translate into rapidly rising costs, along with a wide range of threatening consequences on many other levels.

What does the term "tipping cascades" mean in this context?

Rapp: Tipping cascades are the ultimate amplifiers of climate change. They result from the interaction of tipping dynamics that overlap and reinforce one another. One example: the rapid melting of polar ice masses – a key tipping element – not only causes sea levels to rise, but simultaneously weakens other tipping elements such as the Atlantic Meridional Overturning Circulation, the current system that drives the Gulf Stream. Modern climate science assumes that the triggering of such tipping cascades will multiply the effects of climate change through complex feedback loops and a range of often still underestimated interdependencies.

How is climate change already affecting the insurance industry? Are there concrete figures to measure the economic impact?

Rapp: The costs of climate change to date speak for themselves. Cumulative losses since 1980 amount to $6.9 trillion, of which approximately $4.5 trillion has occurred since 1995, with a clearly rising trajectory. A large portion has so far been covered by insurers. However, these figures only account for material damages – such as damage to buildings and other assets. Going forward, the degradation of key ecosystems and permanent damage to agricultural land will also need to be factored in. Additional costs that could rise sharply include climate-related production losses, growing burdens on healthcare systems, and climate-driven migration. A recently updated study by the Potsdam-Institute for Climate Impact Research (PIK) estimates that global economic output could be reduced by around 17% by 2050 due to climate change. Such losses can hardly be covered by insurance. Other sources of liability will therefore be needed – yet many government coffers are already empty. How this problem will be solved remains unclear.

Which specific insurance products – for example in agriculture, real estate, or infrastructure – are particularly exposed to climate risks?

Rapp: Today, the primary focus is on natural hazard damage to buildings caused by extreme weather events. This market has already changed, not least following the flood disaster in the Ahr Valley. In regions such as Florida and the greater Los Angeles area, homeowners are already unable to find affordable insurance. Once this problem spills over into the credit and banking sector, systemic risk can quickly emerge. Business interruption policies are also gaining in relevance. When disruptions occur regularly – for instance because low river levels limit cooling water availability or shipping deliveries become unreliable – new risk calculations become unavoidable. A similar dynamic is playing out in agriculture, where persistently rising climate-related losses may soon become largely uninsurable. As a specialized topic, catastrophe bonds – or cat bonds – are coming into focus: securitized policies against natural disasters, where the coverage capital is raised by investors in the capital markets. Overall, accelerating climate change is opening up a broad spectrum of transformation.

What are the most significant misconceptions regarding CTPs – possibly within the insurance industry as well?

Rapp: First and foremost is an often insufficient understanding of the significance of climate tipping points. Those who do not know or understand the core problem cannot respond to it rationally. Second is an alarming pattern that has emerged from numerous climate studies in recent years: in almost every case, the dynamics of climate change – both in terms of speed and intensity – have been significantly underestimated. The massive influence of tipping dynamics has apparently not always been adequately taken into account. Feedback loops and other self-reinforcing mechanisms, which play a decisive role at tipping points, are operating far more powerfully than many climate models have assumed. Even more significant is the influence of cumulative effects resulting from the interaction and mutual reinforcement of tipping dynamics. One example is the disproportionate warming of the Arctic, which not only leads to the melting of polar ice and rising sea levels, but also directly accelerates the greenhouse effect. As ice cover retreats, the Earth reflects less sunlight, leading to increased heat absorption by land and water, which in turn drives further warming. Permafrost soils in the Arctic are also thawing, and large quantities of greenhouse gases previously locked in the ground will be released. All of these phenomena generate strongly pro-cyclical effects whose impact on the pace of global warming has surprised even leading climate scientists.

What conclusions does your research draw – particularly regarding the interdependence, nonlinearity, and irreversibility of CTP impacts – for the long-term business planning and risk management of insurers?

Rapp: Not only insurers, but all capital market participants face a fundamental challenge: approaches to capturing and assessing climate-related risks urgently need to be revised or completely rebuilt. Many risk models are not capable of meaningfully reflecting the complex effects of nonlinear tipping dynamics. This core problem must be addressed quickly. Calculations for certain policies – such as property insurance in climatically exposed regions – are not sustainable in the medium term and must be recalibrated. Due to the nonlinear nature of climate change, both the probability of risk events and the magnitude of losses are rising – likely faster and more severely than even negative scenarios currently assume. And most importantly: once a climate tipping point is triggered, its destructive dynamic runs relentlessly forward – there is no return to the previous state of normalcy.

Are there already new concepts for better risk capture and risk modeling with regard to CTPs?

Rapp: Work on new approaches is already underway in some areas, but the process is still in its early stages. The topic is extremely complex – even highly advanced models cannot capture or quantify all relevant variables of climate change. However, a team of climate experts at the University of Exeter is currently developing specialized concepts together with representatives of the insurance industry, known under the term "Planetary Solvency." The goal is to translate the latest knowledge on climate tipping points into actuarial risk modeling. This initiative makes sense and should serve as a model for others. It also raises awareness of the increasing likelihood of extreme climate change consequences.

What can the insurance industry do concretely right now to better address CTPs?

Rapp: First and foremost, the phenomenon of climate tipping points must be clearly recognized and understood. Climate change alone brings enormous challenges, but tipping points are genuine game changers. As global temperatures rise, key tipping points are drawing closer – or have already been triggered, as with the collapse of coral reefs. The core problem: once tipping points are activated, they amplify and accelerate climate change in ways that may be difficult for many financial market participants to even imagine. For this reason, insurers should do everything possible to help slow this threatening dynamic wherever they can.

Interview with Dr. Heinz-Werner Rapp in Zeitschrift für Versicherungswesen (print edition, March 1, 2026). The accompanying study "Climate Tipping Points" is available for download in the downloads section.