Abstract :
- Climate risks linked to extreme events are often described as systemic risks but remain difficult to assess due to their low probability and high impact.
- The interconnection of economic sectors, with globalized value chains, makes the amplification associated with the occurrence of an event complex to measure using conventional approaches.
- The recent unprecedented forest fires in California, with losses estimated at between $8 billion and $20 billion, have raised the specter of a systemic crisis in the insurance sector.
- A comparison with the financial crisis models of H. Minsky and C. Kindelberger offers an interesting perspective for understanding the potential effects of a systemic climate crisis. A « Minsky-style » adverse scenario can be considered a short-term view of a climate crisis, in contrast to the longer and cumulative timeframe of the IPCC’s adverse scenarios.
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Every year, Southern California is ravaged by increasingly frequent and destructive fires, fueled by climate change, growing urbanization, and extreme weather conditions. However, the northern region, including the city of Los Angeles, had never experienced such events before January 2025. Beyond the human, material, and environmental losses, these disasters jeopardize an essential link in the economy: the insurance sector.
Faced with an exponential increase in claims, some companies are reducing their coverage or withdrawing from the market, leaving homeowners and businesses without coverage for these risks. This dynamic raises a crucial question: could the wildfires in California trigger a systemic crisis affecting the entire financial sector?
This article explores the growing risks to insurance and the potential consequences for the global economy, using the recent fires in northern California as a case study. Drawing on economist H. Minsky’s model, it draws a parallel between a climate scenario under adverse assumptions and recent historical crises.
1) Understanding the phenomena in question between the concept of systemic risk and the mechanism of a crisis
1.1 Why can forest fires pose a systemic risk?
Systemic risk is defined as a threat that, through contagion, can cause the collapse of an entire sector or the entire economic and financial system. Climate risk is often perceived as systemic because of its simultaneous impact on several interconnected sectors. Natural disasters such as forest fires, hurricanes, and floods cause massive destruction of infrastructure, considerable economic losses, and increased costs for the insurance sector, which finds itself under pressure.
An increase in claims may prompt some insurance companies to reduce their coverage or withdraw from the market, leaving many economic actors unprotected and threatening the stability of the financial sector.
Furthermore, the energy transition needed to combat climate change calls into question the viability of many industries dependent on fossil fuels, leading to risks of asset devaluation and financial market instability. These dynamics can cause chain reactions, affecting banks, investors, and the global economy as a whole. Climate change is therefore not just an environmental risk, but a major systemic threat that could undermine global economic and financial stability.
1.2 Risk pricing by insurers and reinsurers
Recent events in California have caused an estimated financial loss of between $28 billion and $35 billion (VRSK, 2025). To put this figure into perspective, it is interesting to compare it with the profits of the largest US insurance company, State Farm, which recorded a net loss of $6.7 billion in 2022, largely due to an increase in claims related to natural disasters. This illustrates the scale of the damage caused by these extreme events and the growing challenges facing the insurance industry.
The insurance models used to estimate premiums and costs for extreme events are « fat-tail » models, where the probability of such events occurring is low, but their impact when they do occur is high. These models take into account the possibility of extreme losses that far exceed conventional forecasts, making risk management particularly complex. However, with the worsening of climate change, these events are becoming more frequent, calling into question the viability of these models and forcing insurers to review their pricing and coverage strategies.
In the case of the recent fires, as insurance premiums are based on a history of less devastating events, it is possible that premiums were too low to cover the risk, jeopardizing the sector’s profits for the year.
2) The price of risk and its propagation mechanism
2.1 California’s place in globalized production chains
California is an economic pillar of the United States (accounting for nearly 14% of the country’s GDP) thanks to the diversity of its production. The country’s leading agricultural state[1], California is above all a global center of technological innovation, with Silicon Valley home to giants such as Apple, Google, and Tesla. The aerospace sector, with companies such as SpaceX, plays a key role in space exploration. California is also at the forefront of renewable energy, being the country’s leading producer of solar energy( EIA, 2025). This economic diversity makes the state a key player in American, and therefore global, industry.
The location of the fires in this region could therefore cause delays in food production and slow down renewable energy production. However, the risk of a global crisis emerging from an extreme event in the region depends on regional adaptation policies and risk insurance coverage.
2.2 Risk pricing by insurers and reinsurers
The models used to measure potential losses from so-called extreme events tend to smooth out losses, which can underestimate the real impacts of rare but large-scale catastrophic events. For California, where the frequency and intensity of wildfires are increasing with climate change, this problem is particularly acute. Insurers must incorporate increasingly volatile scenarios into their calculations, where damage is no longer marginal but systemic.
Risk pricing is therefore subject to a double constraint: ensuring the solvency of insurance companies while maintaining the affordability of premiums for economic actors. In California, the continuous increase in wildfire-related claims has already led some insurers to withdraw from the market or reduce the coverage they offer, transferring the burden of protection to public mechanisms or international reinsurers. The latter play a crucial role in pooling risks on a global scale, but they too are facing increased costs due to the proliferation of climate disasters.
The question then becomes one of economic and social sustainability: to what extent can insurance markets absorb risks that are no longer exceptional but recurring? This development calls into question both the resilience of globalized production chains and the ability of governments to intervene to regulate, supplement, or replace insurance markets that are under pressure from climate change.
3) Comparing a climate crisis to past systemic crises
3.1 Euphoria, bubble, crash, and crisis?
The models developed by Minsky and Kindleberger are a reference point for analyzing the dynamics of major historical crises (Minsky, 1992), (Kindleberger, 1978). According to them, crises generally follow an identifiable sequence: a phase of innovation or trigger attracts capital, followed by a phase of euphoria where growth and optimism mask underlying weaknesses. Next comes the bubble, when speculation and debt reach levels that are disconnected from real fundamentals. The inevitable crash occurs when confidence collapses, causing a domino effect throughout the entire system. Finally, the crisis sets in, requiring massive intervention by governments, central banks, or international institutions to prevent total collapse.
Applying this framework to climate risk highlights a similar dynamic, albeit more diffuse and of a different nature:
- Innovation here corresponds to the rise of fossil capitalism and productivist globalization, which have enabled rapid growth but at the cost of accumulating environmental vulnerabilities.
- Euphoria has translated into a belief in infinite growth, supported by globalized markets and the unlimited exploitation of natural resources.
- Thebubble is that of an economic and financial system blind to the real costs of climate change, continuing to value « carbon » assets whose future profitability is compromised. There is even talk of a carbon bubble or stranded assets to describe those assets that are rapidly losing their value during the energy transition.
- The climate crash could manifest itself in a proliferation of extreme events (fires, droughts, floods) simultaneously destabilizing supply chains, financial systems, and social balances. Unlike a one-off stock market crash, this is a slow but cumulative shock that gradually undermines global stability.
Finally, a systemic crisis occurs when all resilience mechanisms (insurers, governments, financial markets) are no longer able to contain losses, leading to sudden capital reallocations, mass migration, and global political instability.
3.2 Triggers of the crisis or Minsky moment
The Minsky moment occurs when the accumulation of risky debt leads to a widespread loss of confidence and a collapse, highlighting the endogenous nature of the crisis. Kindleberger, for his part, emphasizes the role of public authorities (central banks, governments, or international organizations) as lenders of last resort, capable of containing panic and preventing it from escalating into a systemic crisis. The two models therefore describe the same crisis dynamic, but each emphasizes different amplification mechanisms: one internal to the financial system, the other linked to contagion and the role of regulators.
Thus, while past financial crises have often been resolved through monetary and fiscal policy measures, a climate crisis defies this logic: no central bank can « reprint » natural resources or stabilize the climate. This would make it a systemic crisis of an unprecedented kind, with a longer timeframe but potentially more profound and irreversible consequences. While past financial crises have been sudden but reversible, the climate crisis is distinguished by its gradual, global, and irreversible nature. It is not just a speculative bubble that bursts, but a profound challenge to the material foundations of the global economy.
The question then is to assess the potential for a series of extreme events of significant magnitude to occur in regions with strong economic connectivity. Although possible, the probability of significant events occurring precisely in areas of intensive production remains low.
A climate Minsky moment could occur when an extreme global event, such as a severe drought simultaneously affecting California and other major agricultural basins, leads to a sudden collapse in food production, a surge in global prices, and a cascade of bankruptcies in agribusiness and insurance. Faced with the scale of the losses, investors would suddenly reevaluate the value of assets linked to vulnerable sectors (agriculture, fossil fuels, coastal real estate), triggering a financial panic comparable to that of the subprime crisis. The realization that the « ecological debt » accumulated over decades can no longer be deferred would then cause a systemic shock: massive capital withdrawal, the collapse of certain markets, and the inability of insurance mechanisms and governments to absorb the spiral of losses, marking the shift to an irreversible global crisis.
Conclusion
Ultimately, a climate crisis only becomes truly systemic when it affects strategic and interdependent links in the global economy that are capable of spreading the shock far beyond the affected territory. The review thus highlights that vulnerability lies not only in the intensity of climate hazards, but also in the growing integration of globalized value chains.
Faced with this reality, the implementation of coordinated policies, combining local adaptation and international regulation, appears to be an essential condition for limiting contagion effects and strengthening the resilience of economic and social systems.
Bibliography
EIA. (2025). California Profile.
Kindleberger, C. P. (1978). Manias, Panics, and Crashes: A History of Financial Crises. New York: Basic Books.
Minsky, H. P. (1992). The Financial Instability Hypothesis. The Jerome Levy Economics Institute of Bard College, Working Paper No. 74.
VRSK, N. (2025). Verisk Estimates Industry Insured Losses for the Palisades and Eaton Fires Will Fall Between USD 28 Billion and USD 35 Billion.
[1] It supplies a large portion of the fruits and vegetables consumed in the United States, including almonds, avocados, and wine from Napa Valley. In addition, California accounts for nearly 12.5% of total U.S. agricultural exports, according to a report by the California Department of Food and Agriculture.
[2] Renewable resources, including hydroelectricity and small-scale solar photovoltaic (PV) systems installed at customer sites (with a capacity of less than 1 megawatt), provided 57% of California’s total electricity production in 2024.
[3] For more information on this topic, read this opinion piece by BSI Economics economist C. Gardes in the Magazine des Professions Financières.
