Heat waves are causing mounting economic disruptions across the United States, prompting a growing push to measure their costs more precisely. While events like hurricanes and wildfires produce visible destruction, heat-related damage often plays out more subtly through impacts on health, infrastructure, agriculture, and productivity.
Until recently, most climate risk models have focused on acute events such as floods and fires. Extreme heat, categorized as a chronic peril, has been harder to quantify. Its consequences are typically dispersed, and its effects are highly industry-specific. However, new modeling tools and financial instruments are beginning to address these gaps.
Cotality, previously known as CoreLogic, has added heat-hazard modeling to its risk-analysis platform, offering data down to the address level. The tool evaluates chronic risks like extreme heat, drought, cold waves, and heavy precipitation. Though it doesn’t yet assign financial values to potential heat impacts, it provides companies with data to inform operational decisions.
Mercer, a unit of Marsh & McLennan Cos Inc., launched a climate health cost forecaster in May. The tool assesses how extreme heat could affect corporate health insurance costs, drawing on historical incident data, medical claims linked to climate events, and academic research. Tracy Watts, Mercer’s U.S. leader for healthcare policy, notes that heat can influence not just health claims, but also workers’ compensation, disability, life insurance, and absenteeism.
In the financial sector, weather derivatives, forward contracts, and parametric insurance are among the instruments gaining traction. A forward contract might allow a utility to lock in energy prices for summer; if heat drives up demand, the arrangement offers a financial cushion. Parametric insurance pays out when specific conditions—such as five consecutive days over 95 degrees Fahrenheit—are met.
Garrett Bradford of Milliman Inc. suggests that heat-related risks are often underestimated in existing insurance models, potentially exposing businesses to substantial unaccounted-for losses.
California provides one of the few quantifiable examples of heat’s economic toll. A state study published in 2024 found that seven extreme heat events between 2013 and 2022 caused $7.7 billion in damage. This included $44 million in lost milk production from a single 2017 heat wave in the Central Valley, where high temperatures significantly reduced output from dairy cows.
Laurent Sabatié, co-founder of data firm Skyline Partners, said developing a custom parametric insurance policy for dairy operations required extensive analysis. Unlike hurricanes and wildfires, which have largely standardized models, extreme heat risk remains “bespoke,” shaped by both geography and industry.
The technology to conduct full-scale hazard analysis already exists, according to Cole Mayer of Aon Plc. However, interest in new coverage options may depend on evolving perceptions of risk. Dave Bigelow, also of Aon, points out that while there are centuries of data for hurricanes and floods, comprehensive heat records are only now being compiled.
Demand from sectors dependent on heat-sensitive data centers—such as artificial intelligence and cryptocurrency—could accelerate the development of heat-focused insurance markets. These emerging industries, with significant exposure to temperature fluctuations, may drive investment in new risk assessment tools.
As heat waves increase in frequency and duration, efforts continue to build more accurate models and financial protections against their wide-ranging impacts.
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