Arctica Risk on Reframing Climate Finance Through Prevention Value and Long‑Term Risk‑Transfer Architecture

Climate risk is often discussed through the lens of disaster response. Yet Arctica Risk, an independent research platform analyzing climate risk and financial systems, argues that the conversation may also benefit from greater attention to the financial value created when losses never occur.

“Since most markets don’t really treat avoided losses as something you can invest in, climate‑related risks are likely to move through private insurers first and often later end up on public balance sheets,” says Sienna Shankel, founder and Principle Analyst at Arctica Risk. “It’s a good reminder that we may need a financial system built for long‑term, outcome‑focused collaboration.”

This perspective begins with the company’s observation about how today’s risk‑transfer system was designed. Insurance seems to continue to perform its intended function by pricing and distributing uncertainty across increasingly specialized layers of capital. However, “As wildfires, floods, and agricultural disruptions start happening together more often, the risks naturally get more tangled across the entire insurance chain,” Shankel states.

That progression appears to extend beyond primary insurers. According to Shankel, risk traditionally moves from policyholders to insurers, then through reinsurers and retrocessionaires before additional capacity is sourced from capital markets through instruments such as insurance‑linked securities. Each participant may contribute to distributing financial exposure. Shankel explains, “Every financial loss ultimately reaches a balance sheet. The more meaningful question concerns how financial structures influence where that destination eventually lies.”

As capacity becomes more selective in certain markets, the broader financial implications grow more significant. According to a 2025 climate and catastrophe insight report, natural disasters generated $368 billion in economic losses during 2024, while around 60% of those losses remained uninsured. The report also notes that insured losses reached $145 billion, illustrating both the substantial role insurance continues to play and the sizeable proportion of costs absorbed elsewhere. “Understanding where uninsured liabilities emerge becomes a more valuable exercise for policymakers, investors, and financial institutions,” Shankel emphasizes.

This broader perspective highlights the role of public finances. When private insurance capacity becomes more limited, additional support often emerges through disaster‑relief initiatives, public‑insurance frameworks, and other fiscal measures designed to aid recovery. According to Arctica Risk, this shift does not indicate a shortcoming within insurance itself. Rather, it reflects the wider structure of risk transfer, where financial responsibility moves through successive layers until it reaches institutions capable of absorbing the remaining exposure. Over time, taxpayers could take on a growing share of liabilities that previously rested elsewhere within the financial system.

Shankel believes this development points to a wider structural question. “Climate risk is often transferred effectively, but the financial value created through prevention remains difficult to recognize. When avoided loss appears as the absence of an event, conventional accounting frameworks have very little opportunity to record the economic benefit that was generated,” she states.

This observation informs Arctica Risk’s view that prevention may require a different financial structure altogether. Existing asset classes frequently support adaptation, recovery, or risk transfer, yet avoiding loss presents a distinct challenge because the value created is distributed across multiple beneficiaries. Governing bodies may spend less on emergency relief, insurers may experience lower claims, utilities may reduce infrastructure damage or legal exposure, and communities can retain economic activity that would otherwise have been disrupted. Bringing those benefits together within a single investment framework remains an area that Arctica Risk believes deserves greater exploration.

For that reason, the platform outlines three characteristics that could support prevention finance over the long term. The first involves multi‑party contracting, enabling organizations that benefit from avoided losses to participate in the same financial arrangement. The second centers on outcome‑based modeling, where data scientists compare projected scenarios with observed outcomes to estimate the economic value associated with successful preventive measures. The third recognizes that prevention often unfolds across decades, suggesting investment horizons that more closely resemble long‑term financial instruments than annual budgeting cycles.

These principles become easier to appreciate through practical examples. Forest management provides one illustration. Investment in vegetation management may help reduce wildfire severity, creating potential financial value across several stakeholders simultaneously. Utilities could experience fewer infrastructure disruptions and legal claims, insurers may encounter lower claim volumes, and governments may allocate fewer resources toward emergency response and rebuilding. “Prevention can create value across multiple balance sheets at the same time,” Shankel says. “Capturing that shared value depends upon financial structures that recognize each participant’s contribution and benefit.”

The same thinking extends into urban environments. During prolonged periods of extreme heat, electricity demand often increases substantially as cooling systems operate simultaneously across cities. Arctica Risk suggests that expanding urban tree canopies may help moderate local temperatures, potentially easing pressure on electricity networks while supporting broader resilience objectives. Although each individual benefit may appear modest when viewed separately, combining outcomes across utilities, insurers, and public institutions could reveal a broader economic picture that existing financial models seldom capture.

Overall, Arctica Risk believes discussions around climate finance may increasingly explore prevention alongside recovery and risk transfer. If financial markets develop reliable methods for recognizing the value of avoided losses through long‑term, outcome‑based collaboration, prevention finance could emerge as a recognized investment category. From this perspective, strengthening the links between governments, insurers, utilities, and capital providers may offer an opportunity to support public finances while encouraging greater private participation in resilience‑focused initiatives before future liabilities accumulate across public balance sheets.