When natural disasters like hurricanes or wildfires hit, the damage is often obvious—damaged roofs or burned homes tell the story. But extreme heat waves cause damage that’s less visible and more spread out. Crops can fail, outdoor workers might have to stop, and data centers can overheat, cutting off online services. This kind of harm is harder to measure but growing more important as heat waves become longer and more frequent.
Insurance companies have long used climate risk models to predict the chances of fires or floods hitting specific places, sometimes right down to an individual address. These models help estimate how much damage those events could cause. However, heat waves haven’t been modeled in as much detail, partly because heat tends to threaten health, energy systems, and food supplies more than buildings themselves.
That’s beginning to change. A company called Cotality, which used to be CoreLogic, now includes heat risk in its modeling platform. Meanwhile, Mercer, part of Marsh & McLennan, recently launched a tool that estimates how extreme heat might raise a company’s health insurance costs. This works by looking at past health data and medical claims linked to heat and climate-related illnesses. Tracy Watts from Mercer points out that heat affects more than just health insurance—it can drive up workers’ compensation claims, cause disability issues, increase life insurance costs, and lead to more people missing work.
New financial products designed to handle weather risks are also evolving. Things like weather derivatives and parametric insurance help companies and utilities prepare. For example, a utility might lock in an electricity price for the summer with a forward contract. If it ends up hotter than expected, they benefit; if not, they take a small loss. Parametric insurance pays out if specific temperature conditions are met, like several days over 95°F.
Experts warn that the risk from heat is often underestimated in insurance. Garrett Bradford of Milliman says major heat events could have serious financial consequences if not properly taken into account. Last year was the hottest on record in the US, and deadly heat waves such as the 2021 Pacific Northwest heat dome have already caused hundreds of deaths.
Some regions are starting to measure the economic toll of heat. California found that seven extreme heat events between 2013 and 2022 caused around $7.7 billion in harm. One heat wave alone in the Central Valley reduced milk production by $44 million because cows produce less milk in very hot weather.
Modeling heat damage is tricky. Anand Srinivasan from Cotality explains that many factors matter: how long the heat wave lasts, whether it’s dry or humid heat, nighttime temperatures, and the type of industry affected. Outdoor workers face more risks than those in air-conditioned offices. Cotality has begun to offer tools that give detailed heat risk data down to individual addresses, though they don’t yet estimate dollar losses for heat events.
Some companies are already creating specialized insurance products. Skyline Partners developed a parametric policy for dairy cows affected by heat stress, a niche but important field. Unlike hurricane or wildfire models, which are more standardized, heat risk needs tailored approaches because it varies by industry and location.
In the past, insurance companies have sometimes been caught off guard by climate disasters, such as Hurricane Andrew in 1992 or California’s Camp Fire in 2018, which led to big losses and then improvements in modeling. The technology to fully analyze heat risks is available, says Cole Mayer of Aon, but many clients are still hesitant to buy more insurance for this threat. He believes that industries heavily reliant on data centers—like AI or cryptocurrency—might drive demand, as these centers are vulnerable to heat.
Dave Bigelow, a climate risk advisor at Aon, thinks the insurance industry’s understanding of heat risk will grow naturally over time, pointing out that unlike floods and hurricanes, we’re only beginning to get good data on heat-related dangers.
With extreme heat becoming a more frequent and costly threat, tools and insurance products that help manage this risk are starting to take shape. While early days, the push to measure and protect against heat’s hidden costs is gaining momentum.