Who bears the risk? Stress-testing insurance system stability under evolving risks

Extreme weather events such as hurricanes exert increasing pressure on communities in hazard-prone areas and on the systems designed to protect them. Insurance serves as a primary risk-transfer mechanism, providing financial security for homeowners and supporting community resilience. Yet, behind this first layer of protection lies a complex web of reinsurers, capital markets, and public institutions that collectively absorb and redistribute disaster risk. Intensifying climate hazards, continued coastal development, and evolving market dynamics threaten the stability of this network.

In this study, we develop a risk-propagation model to assess whether single or sequential hurricanes striking Florida could generate systemic financial stress across the property insurance system. The model links physics-based, probabilistic simulations of hurricane wind and flood losses with detailed data on the Florida residential insurance market, its backstop mechanisms, and regulatory frameworks. We examine how losses cascade through interconnected entities under the present-day status quo, under future climate conditions, and when accounting for evolving market dynamics and adaptation measures, revealing who ultimately bears the bulk of catastrophe risk.