Climate-driven physical risks threaten insulation for infrastructure investments

A survey by the MSCI Institute has put fresh focus on how climate-driven physical hazards are reshaping the risk landscape for infrastructure investors, warning that some assets may soon fall outside the scope of conventional insurance cover.

According to the MSCI Institute report, nearly all insurers questioned expressed anxiety that infrastructure in regions exposed to worsening climate impacts will become harder to insure. The survey, of more than 50 property and casualty insurers worldwide, found “96% of insurers globally (100% in North America and APAC) expressed concern that physical climate risks will undermine the long-term insurability of infrastructure in vulnerable regions”, Rumi Mahmood, MSCI Institute research director, said. He added that “If infrastructure assets in certain geographies are becoming difficult to insure, this could affect their attractiveness as investments, particularly for long-duration assets like infrastructure bonds or real estate in climate-vulnerable regions”, and warned that “Insurers sitting on both sides of this dynamic (as underwriters withdrawing capacity and as investors holding these assets) may face increasing pressure to align their investment strategies with their underwriting risk assessments.”

The potential for underwriting capacity to shrink matters for investors because insurance underpins the bankability and credit profiles of long-term projects. Industry figures underline the scale: according to the International Association of Insurance Supervisors, insurers managed about US$42 trillion of assets at the end of 2024, with roughly half allocated to fixed income and growing allocations to alternatives such as private credit and infrastructure. That mix means any contraction in insurance availability could feed back into investment mandates, pricing and portfolio selection.

MSCI’s broader research and tools point to how firms are trying to respond. According to MSCI analysis, insurers are increasingly folding physical-risk assessments into underwriting and enterprise risk frameworks, yet maturity varies by region and by function. The Institute’s findings also highlight a governance gap: although many boards discuss climate risk, 46% report regular board engagement, just 31% of firms globally have incorporated climate factors into executive performance metrics, falling to 15% in North America. Mahmood said this disconnect suggests board-level concern has not yet become systematically binding in areas such as asset management oversight or manager selection.

Other industry reporting and research echo the warning signs. According to CNBC, senior figures at major insurers have cautioned that rising temperatures and escalating losses could render some locations effectively uninsurable if adaptation becomes economically unviable. MSCI’s underwriting-focused analysis also points to concrete market responses: increased wildfire exposure and cost inflation have prompted insurers such as State Farm and Allstate to curtail or pause new homeowner business in high-risk US states, illustrating how underwriting retrenchment can alter market supply.

The MSCI Institute survey further found broad unease about systemic implications: almost all respondents flagged climate-driven physical risk as a potential source of financial-system distress, with European insurers showing particularly acute concern. According to MSCI’s charting of market views, a large share of financial-sector professionals regard escalating physical hazards as a credible threat to banking, insurance and capital-market stability.

For investors and asset owners, the implications are twofold. First, assets located in high-hazard zones may face rising insurance premiums, tighter terms or outright withdrawal of cover, undermining yield assumptions and debt serviceability. Second, the misalignment between underwriting risk assessments and investment mandates risks creating stranded exposures within insurance balance sheets that are simultaneously investors and underwriters.

Responding to these dynamics, MSCI offers analytical solutions designed to quantify location-specific physical risks across real estate and infrastructure portfolios, enabling exposure mapping, hazard identification and loss-impact estimation. According to MSCI, such tools aim to support due diligence, reporting and adaptation planning so that asset managers and lenders can better price and mitigate climate exposures.

Policymakers and regulators are also elevating the issue. MSCI’s research notes that physical risk has climbed the supervisory agenda, influencing capital requirements and disclosure expectations in some jurisdictions. That regulatory pressure, coupled with hardening market conditions, is likely to accelerate the need for clearer governance, binding investment criteria and closer alignment between underwriting and investment decision-making.

If insurers continue to withdraw capacity from the riskiest regions, the consequences could extend well beyond the insurance market. Project finance, municipal bond markets and real-estate valuations may all adjust to a new baseline in which climate vulnerability is a direct determinant of investability. According to the MSCI Institute report, the industry now faces the task of turning board-level concern into measurable accountability and embedding robust physical-risk assessment into both underwriting and investment processes to preserve market functioning and protect long-duration capital.