The figure that dominates coverage of physical climate risk - Moody's own estimate of US$41.4 trillion in global economic losses by 2050, equal to a 14.5% reduction in global GDP - is not useful for most financial and institutional decision-makers. That is Moody's argument in a new special report titled Understanding Physical Risk: A Framework for Financial and Institutional Decision-Making, and it is worth taking seriously because it comes from the organisation that produced the figure.
Moody's published the US$41.4 trillion projection in detail in late 2025. The report published this week starts from that number and argues explicitly that multi-decade totals measured in trillions are too distant and too aggregated to drive the decisions that actually matter: next year's budget, near-term credit exposures, and operational resilience over the next one to five years. A specific, quantified exposure over the next 24 months is actionable. A distant global total is not.
Munich Re estimated total global natural catastrophe economic losses at around US$320 billion in 2024, of which only about US$140 billion was insured. That protection gap - roughly 56% of economic losses uninsured - exists now, at a level already consequential for governments, businesses and their lenders, without any reference to 2050 projections. It is the kind of near-term, specific figure that actually drives underwriting decisions, reinsurance treaty structures, and credit assessments.
Moody's argument is that the same discipline - specific geography, specific peril, specific near-term time horizon - needs to be applied across financial and institutional decision-making more broadly. Banks setting credit limits, asset managers pricing real asset portfolios, corporates modelling business interruption exposure, and public sector bodies planning capital programmes all need the same thing: a quantified physical risk exposure that can be compared to a financial capacity to absorb it, over a timeframe that matches their planning cycle.
The insurance and reinsurance market has been doing this work, imperfectly but progressively, for the past decade. The piece of the framework that is still missing in most sectors is the translation of climate science into credit and financing terms at the asset and counterparty level.
Moody's has examined this unevenness across its recent work on sovereign and corporate credit. Two countries facing identical physical hazard can face very different credit outcomes depending on fiscal buffers, institutional strength, insurance penetration, and adaptation effectiveness. Repeated catastrophic events do more than cause one-off losses: they raise baseline government spending, weaken revenue, and push up sovereign risk premiums and borrowing costs in more exposed countries.
Flooding across South and Southeast Asia has exposed those markets' particular vulnerability - limited natural catastrophe insurance coverage means a larger share of losses falls directly on governments and households rather than insurers, with knock-on effects on sovereign fiscal positions.
In Europe, the differences are sharper than a continent-wide aggregate would suggest. Germany carries a protection gap of around 40% for inland flood risk despite rising demand for cover following repeated flood events. France spreads flood risk differently through its state-backed CCR structure, but as this summer's wildfire season has demonstrated, wildfire sits entirely outside that framework. Spain's 2025 wildfires caused close to €5 billion in damage, of which well under €1 billion was insured.
The ECB and EIOPA have found that only around a quarter of losses from climate-related catastrophes between 1980 and 2024 across Europe were insured - a protection gap that predates any future projection by decades and is already affecting the credit and financing conditions of exposed assets.
Moody's framework has direct implications for how brokers and underwriters approach the clients and risks most exposed to physical climate hazard. The actionable shift is from qualitative climate commentary to near-term specific exposure quantification.
For a broker advising a commercial client with property or operations in flood-prone, wildfire-exposed or coastal locations, the relevant question is not "what does climate change mean by 2050" but "what is the modelled loss probability for this specific asset over the next five years, and does the client's insurance programme, business continuity plan, and balance sheet have the capacity to absorb it?" That question is answerable with existing catastrophe modelling tools. What Moody's is arguing is that it needs to become a standard part of how credit, financing, and insurance decisions are made - not an optional add-on when a client asks.
For underwriters, the Moody's framework reinforces the same direction the market has already been moving: away from broad geographic portfolio management toward asset-level hazard quantification, with pricing that reflects specific exposure rather than postcode-level averages. The protection gap data from the ECB and EIOPA suggests that even in developed European markets, that shift is far from complete.
