The most direct link from physical risks to the financial system is through the insurance sector. Insurance companies cover losses when these physical risks materialise. For example, 2017 recorded the highest insured losses ever for natural disasters, at 138 billion USD13. This risk of distress in the insurance sector will be bigger if insurance companies are unable to appropriately price and manage climate-related risks.
This is complicated by the extent that models rely on historical data to assess the risk of 2/8  BIS central bankers' speeches  catastrophe. With climate change, the past is unlikely to be a good guide to the future. The dynamics of climate change also present a major challenge to modelling future impacts14.