When hurricanes or wildfires hit, the economic toll is immediately apparent — torn-off roofs and scorched homes starkly mark the devastation.
Heat waves also inflict economic damage, but in less visible ways: crops may wither in the fields, construction grinds to a halt, and data centers struggle to stay online, disrupting services for customers.
Climate risk models — widely used across the insurance industry — can estimate the likelihood of wildfires or floods striking a specific location in the U.S., even down to an individual address, and project the resulting damage. But so far, these models rarely offer detailed forecasts for extreme heat. One reason is that heat poses less of a direct threat to buildings than it does to human health, energy systems, and food production.
Yet cities, businesses and insurers increasingly need clearer assessments of heat-related financial risks — and some experts believe a new market for heat insurance is emerging, fueled by AI and the growing demand to protect data centers from rising temperatures.
Hedging against heat
Cotality — formerly known as CoreLogic — has recently added heat hazard modeling to its widely used risk analysis platform. Meanwhile, in May, Mercer (a subsidiary of Marsh & McLennan Companies) launched a climate health cost forecasting tool that assesses how extreme heat and other climate-related risks could affect employers’ health insurance expenses. The tool leverages historical incidence data, medical claims linked to climate events, and peer-reviewed research.
“The health cost is but one of many,” said Tracy Watts, Mercer’s US leader for healthcare policy. “You’ve got increased workers’ compensation cost, disability issues, life insurance, absentee issues.”
These new tools build on the rise of financial instruments such as weather derivatives, forward contracts, and parametric insurance. For instance, a utility might use a forward contract to lock in the price of additional electricity for the summer. If temperatures remain mild, the utility may overpay — but if they spike, the deal pays off. Parametric insurance, by contrast, issues payouts only when specific physical thresholds are met — such as temperatures exceeding 95°F for five consecutive days.
“I think when we look more closely at extreme heat,” said Garrett Bradford, a principal at Milliman Inc., an actuarial and management consulting firm, “we will find the risk often isn’t taken sufficiently into account” in insurance, “and the downside of a major heat event is potentially significant.”
Last year marked the hottest on record, and the U.S. has faced increasingly deadly heat waves in recent years — including the 2021 heat dome in the Pacific Northwest, which claimed hundreds of lives. According to the U.S. Environmental Protection Agency, heat waves are becoming more frequent in American cities, and the heat season is growing longer.
While public health officials and physicians confront the rising medical risks of extreme heat, researchers are beginning to measure its financial toll. In California, a state study published last year estimated that seven major heat events between 2013 and 2022 inflicted $7.7 billion in economic damage — including $44 million in lost milk production from a single 2017 heat wave in the Central Valley, where high temperatures suppressed dairy yields.
‘Bespoke’ predictions
Predicting the impacts of a heat wave is particularly challenging, explains Anand Srinivasan, a Cotality executive specializing in climate-related products, because heat damage is complex to model. Numerous factors influence its effects: How long does the heat wave persist? Is it characterized by dry or humid heat? Does nighttime bring any relief? Moreover, the risks vary widely by industry—a business with outdoor workers faces far greater challenges than one where employees work in air-conditioned environments.
As of last year, Cotality expanded its modeling capabilities beyond acute hazards like wildfires and floods to include chronic threats such as extreme heat, drought, cold waves, and heavy precipitation. The initial version of its chronic peril model provides heat risk indices down to the address level, though it does not yet quantify the financial impact of heat events.
“What we can do is provide the analytics and data for people,” says Srinivasan. “That way, a typical [company] risk manager would say, ‘Okay, do I keep my office open during this heat wave? What kind of extra support do I need to provide to my personnel?'”
Srinivasan anticipates that detailed modeling of the financial impacts of heat waves—tailored to individual industries—will emerge in due course.
Skyline Partners, a data firm with offices in Colorado and the UK, has developed metrics for a tailored parametric insurance policy designed to protect dairy cows from heat stress. Laurent Sabatié, Skyline’s co-founder and executive director, notes that creating the model demanded a "substantial amount of analysis."
He explained that while wildfire and hurricane models have become somewhat commoditized, heat forecasting remains largely bespoke, as it depends as much on the specific industry as on geographic location.
Historically, insurance companies have sometimes been slow to recognize shifts in climate risk, resulting in significant losses following major disasters. Notable examples include Hurricane Andrew in Florida in 1992 and Northern California’s Camp Fire in 2018. In both instances, insurers faced losses far exceeding their expectations, prompting investments in more precise modeling of hurricanes and wildfires, which subsequently led to higher premiums for policyholders.
The technology to conduct comprehensive heat hazard analyses for any industry or city is available, says Cole Mayer, who leads parametric products at risk management firm Aon Plc. However, client demand for expanded heat insurance coverage remains modest. “There’s a risk perception evolution that needs to happen,” says Mayer.
The heat-sensitive nature of data centers supporting AI and cryptocurrency could drive significant growth in the market, he adds: “These are exposures that didn’t exist to the same extent 10 years ago.”
Dave Bigelow, a climate risk advisor at Aon, believes that the passage of time will naturally bring about this change. “We’ve got hundreds of years of records of floods and hurricanes and acute perils,” he notes. “But for heat, we’re just starting to see it” in the data.
