Climate tipping points as progressive risk drivers

 The latest UN climate summit, COP30, held in Belém, Brazil, paints an alarming picture: according to the summit, global warming will “definitely” exceed 1.5 degrees Celsius, with the global average temperature threatening to rise by 2.8 degrees by the end of the century. Despite considerable efforts, humanity continues to move along a very dangerous path. Exceeding the Paris climate targets – “maximum 1.5 to 2 degrees of warming” – seems only a matter of a few years.

According to climate experts, this course of events would have extremely serious consequences for the Earth's climate and would cause massive damage to the global economy and financial system. However, the complexity of the underlying risks and risk drivers is often not yet fully understood. Not only the scale and scope of impending climate risks, but also their nonlinear dynamics and temporal proximity are regularly underestimated. This is a “blind spot” that is also becoming increasingly dangerous for the financial system. This becomes particularly clear when the role of critical tipping points in the Earth's climate system is adequately taken into account – also with the help of innovative risk models.¹

Climate Tipping Points: When Climate Systems Tip Over

Tipping elements are essential subsystems of the Earth's climate that, when critical temperature thresholds—known as climate tipping points—are exceeded, abruptly and usually irreversibly transition into a new state. The most important tipping elements include the ice sheets in Greenland and Antarctica, the Atlantic Meridional Overturning Circulation (AMOC), and the Amazon rainforest. However, the northern permafrost soils are also relevant, as their thawing releases large amounts of harmful greenhouse gases, further fueling the process of global warming. In each of these cases, positive feedback and other self-reinforcing mechanisms play a central role. Once the respective tipping point is exceeded, a highly dynamic, nonlinear, and self-accelerating process begins—a vicious circle.

In some critical areas, there are already clear signs of an incipient tipping dynamic: These include the ice sheets in Greenland and Antarctica, but also the AMOC, whose weakening would interrupt the Gulf Stream and expose large parts of Europe to massive cooling. The rapid progression of global warming not only drives this development forward, but also causes feedback loops and other nonlinear effects that further exacerbate many processes.³

These complex dynamics have far-reaching consequences, as there is an increasing likelihood that serious changes to the Earth's climate will occur within just a few years. This threatens to lead to more frequent droughts, flooding of coastal areas and major cities, and a significant increase in damage caused by extreme weather events. The foreseeable consequences endanger key ecosystems that are the basis for the well-being of billions of people.⁴

In addition, many climate tipping elements are interconnected in complex ways. For example, polar ice melt not only leads to sea level rise, but also directly intensifies global warming and simultaneously weakens the Atlantic circulation. This creates domino effects that in turn influence other tipping elements and can significantly alter and accelerate their dynamics, even leading to the emergence of veritable “tipping cascades”.⁵

This is precisely where a central problem lies, because the overall impact of such domino effects and tipping cascades creates far greater climate risks than many forecasts and risk models have assumed to date.⁶

Dangerous blind spots and escalating risk probabilities

The existence of planetary climate tipping points and their significance as triggers for massive and mostly irreversible changes in the Earth's climate is relatively unknown in many areas of the financial system. The same applies to the risk of planetary tipping cascades. This lack of knowledge (or ignorance) creates a classic “blind spot” that severely limits collective risk perception.

This is another core problem, because as soon as the dynamic amplification effects of planetary tipping points and tipping cascades are adequately taken into account in a risk assessment, a very clear consequence emerges: Fundamental climate changes that were previously interpreted as “high impact but low probability” are rapidly developing into “high impact and high probability” cascades of events as a result of ever-approaching climate tipping points and possible tipping cascades. ).⁷

Put simply, given the intensity and severity of future climate damage, there will be a rapid escalation in the likelihood of existing risks. In more technical terms, in typical risk models (including those used by insurance companies), extreme events – known as “tail risks” – are increasingly becoming part of the “normal” range of risk distribution.⁸

The enormous relevance of climate risks is already becoming apparent in the annual “Risk Reports” published by the World Economic Forum (WEF): Four planetary risk scenarios – all clearly related to climate change – currently top the list of the ten “Top Risks” for the coming years.⁹

Unlike many other financial market participants, who often ignore climate risks, insurance companies have long been aware of this issue. Global reinsurers, in particular, have been pointing out the problem of rapidly increasing climate damage for years. Financial experts warn of the danger of a systemic crisis as soon as climate damage exceeds the capacity of private or

public coverage funds. The CEO of a large insurance company recently pointed out (in a widely noted commentary) the massively increasing risks of climate change – in particular for the stability of existing insurance capacities and the integrity of the entire banking and credit system.¹⁰ 

Climate risks also threaten financial systems

At this point, at the latest, the question arises as to the economic costs of climate change. Damage since 1980 already totals US$6.9 trillion (around US$4.5 trillion since 1995). The focus here is on storm and flood disasters. These not only cause considerable damage to important infrastructure, but also destroy agricultural land and important food sources – often permanently.¹¹

Against the backdrop of ongoing global warming, these costs will continue to rise progressively in the future – probably even exponentially. The clear increase in climate-related major damage is the beginning of a trend that will lead to massive destruction of buildings, habitats, and important infrastructure in the coming years. In particularly exposed regions, residential buildings, factory buildings, and port facilities will suddenly be considered “no longer insurable.” ¹²

This quickly leads to the problem of insufficient coverage of basic risks (the “protection gap”), which then spreads to other parts of the financial system. If mortgage loans are involved, the problem also affects the credit markets (spillover). If this happens frequently and in a concentrated manner, as is inevitably the case with abrupt climate change, the respective financial and banking system faces a serious problem. However, this worrying aspect has not yet been sufficiently recognized, particularly on the capital markets. This makes it all the more important to take a rational and risk-based view in light of rapidly increasing climate risks.¹³

New risk models as an early warning system

Insurance companies play an important role within the financial system as vigilant gatekeepers and effective early warning systems. They identify various risks and assign them specific probabilities of occurrence based on statistical distribution assumptions. If the assumed risk distribution changes, the economic assessment of the risks also changes. If both the probability of occurrence and the expected amount of damage increase for a risk, the risk premium must also increase. This logic also applies in principle to climate risks.

However, this methodology is becoming particularly relevant in view of the phenomenon of climate tipping points: The distinctly nonlinear dynamics of planetary tipping points and their potential to escalate into “catastrophic” climate tipping cascades require a completely new approach to risk modeling. A simple extrapolation of the climate damage that has occurred in recent years would be completely misguided; instead, progressive (“nonlinear”) adjustments to future risk probabilities (and damage levels) are necessary. This is because threatening climate impacts that were previously considered “unlikely” are very quickly becoming risks with a rapidly increasing probability of occurrence due to the dynamics of climate tipping points. This means that existing risk models must be completely recalibrated in many areas of the financial system and supplemented with progressively (or even exponentially) increasing tipping point risks.¹⁴

 Such considerations lead directly to the novel concept of planetary solvency, which aims to realistically capture climate-related extreme events and integrate them into typical risk models used by banks and insurance companies. However, such approaches are still in their infancy. Above all, precise climate data and adequate models for “converting” progressive climate effects into potential financial risks are required. This applies in particular to nonlinear climate processes and rapidly escalating risk cascades.¹⁵

Market participants must anticipate climate risks more effectively

At this point, at the latest, it becomes clear that impending climate risks are setting highly dynamic processes in motion in many areas. A planetary solvency risk logic on the capital markets would lead to a structural reassessment of climate-related risks, with considerable upheaval in exposed sectors. Real estate markets would be particularly affected, but so would parts of the credit and banking system. In the real economy, there would be an increase in stranded assets, i.e., business models that can no longer be continued. The decisive factor here is changed risk expectations. Even before impending climate damage actually occurs, its “pricing in” ensures that future risks are reflected in the financial system in a timely manner: anticipation beats realization!

Particularly alarming is the fact that previous climate models have also significantly underestimated the actual extent and pace of climate change. But climate tipping points allow for neither ignorance nor complacency. They are a planetary game changer and must be taken into account with great urgency, including in the decision-making logic of institutional asset owners. This also means serious challenges for insurance companies in the future. After all, the blind spot on the issue of climate change will not last forever.

The author has written a comprehensive study on this topic, which was published by the FERI Cognitive Finance Institute on October 22, 2025; a short version of the analysis, entitled “Climate Tipping Points – The collapse of essential climate systems as a global risk,” is available for download at: https://www.feri-institut.de/content-center/  

References:

¹ Rapp, H.W. (2025), Climate Tipping Points – Das Umkippen essentieller Klimasysteme als globales Risiko; https://www.feri-institut.de/media/wjhhhxyw/202510_climate-tipping-points_studie_kurz.pdf

² Global Tipping Points Report (2025); https://global-tipping-points.org/download/1418/

³ Potsdam-Institut für Klimafolgenforschung (2025), Kippelemente – Großrisiken im Erdsystem. Aktueller Forschungsstand: Kippelemente; https://www.pik-potsdam.de/de/produkte/infothek/kippelemente/kippelemente

⁴ IPCC (2023), AR6 Synthesis Report – Climate Change 2023, Sixth Assessment Report of the Intergovernmental Panel on Climate Change; https://www.ipcc.ch/report/ar6/syr/

⁵ Wunderling, N. et al. (2024), Climate Tipping Point Interactions and Cascades: a Review; https://esd.copernicus.org/articles/15/41/2024/

⁶ Wunderling, N. et al. (20221), Interacting Tipping Elements Increase Risk of Climate Domino Effects under Global Warming; https://esd.copernicus.org/articles/12/601/2021/esd-12-601-2021.pdf

⁷ Global Tipping Points Report (2023), insbes. S. 20; https://report-2023.global-tipping-points.org/download/4607/

⁸ Institute and Faculty of Actuaries (2024), Climate Scorpion – the Sting is in the Tail; https://actuaries.org.uk/media/g1qevrfa/climate-scorpion.pdf

⁹ World Economic Forum (2025), The Global Risks Report 2025; https://reports.weforum.org/docs/WEF_Global_Risks_Report_2025.pdf

¹⁰ Thallinger, G. (2025), Climate, Risk, Insurance: The Future of Capitalism; https://www.linkedin.com/pulse/climate-risk-insurance-future-capitalism-g%C3%BCnther-thallinger-smw5f

¹¹ World Economic Forum (2024), The Cost of Inaction: A CEO Guide to Navigating Climate Risk; https://reports.weforum.org/docs/WEF_The_Cost_of_Inaction_2024.pdf 

¹² Howden (2025), The Insurability Imperative Using Insurance to Navigate the Climate Transition; https://huk.howdenprod.com/sites/huk.howdenprod.com/files/2025-06/12440%20CRR%20Insurability%20whitepaper%20-%20Final%20Digital.pdf

¹³ Lenton, T. et al. (2023), Narrative Summary, in: Global Tipping Points Report (2023), S. 10; https://report-2023.global-tipping-points.org/download/4607/

¹⁴ Institute and Faculty of Actuaries (IFoA) (2024), Climate Scorpion – the Sting is in the Tail; https://actuaries.org.uk/media/g1qevrfa/climate-scorpion.pdf 15 Institute and Faculty of Actuaries (IFoA) (2025), Planetary Solvency – Finding our Balance with Nature; https://actuaries.org.uk/media/wqeftma1/planetary-solvency-finding-our-balance-with-nature.pdf