This article first appeared in Forum, The Edge Malaysia Weekly on June 22, 2026 - June 28, 2026

El Niño, Spanish for “the boy”, is stirring again. Its last appearance in 2023 and 2024 caused at least US$3 trillion in economic losses and tens of thousands of deaths worldwide. It is a natural climate cycle and, contrary to popular belief, global warming does not cause it.

But a hotter planet sharpens its impact, with consequences that vary by region. A dry spell can strain water supply, agriculture and electricity demand. Elsewhere, severe floods take hold.

Climate risk is now the backdrop for citizens and the economy, with drought, intense rain, coastal erosion and supply disruptions all routine. Every shock that farms and firms now absorb is protection that insurance and takaful could be providing. That makes climate adaptation a promising frontier, and many countries already treat climate stress as a new market.

Insurance is becoming more than a way to pay claims after damage. It is a system for anticipating physical risk, rewarding prevention, financing resilience and helping communities recover faster.

Put simply, insurance is now climate infrastructure, and that demands a different way of thinking. We usually picture retention ponds, early warning systems and coastal barriers. These are necessary, but not enough. A country can build flood walls, yet still leave people, small businesses and local authorities exposed when disaster strikes.

Closing that gap is where insurance is being reinvented, in four ways. The first innovation is parametric and index-based insurance, which pays faster. Instead of waiting for loss assessments, payouts trigger when a measurable threshold is crossed, such as rainfall deficit, river level or crop-stress indicators. In Africa, the African Risk Capacity uses parametric insurance to help governments prepare for drought and cyclones, releasing payouts without on-ground assessment. It shows how climate risk can be pooled at the sovereign level.

Pula, a micro-insurance firm serving 20 million farmers globally, applies the same logic closer to the farm. It combines ground and satellite data with artificial intelligence to insure smallholders and give lenders confidence to extend credit, reaching farmers whose recovery is often slowed by replanting costs and lost income.

The second innovation is resilience finance, which pays for prevention. If a flood mitigation project reduces expected losses, those avoided losses have financial value. The RE:Bound resilience bond model links insurance premiums to resilience projects and monetises that value through rebates, so part of what mitigation saves can fund the mitigation itself. The instrument is not yet in wide use, but the idea matters.

A third innovation is insurance that rewards prevention. In California, the wildfire framework pushes insurers to credit risk-reduction measures by property owners. To stay viable in a changing climate, insurance has to put a price on prevention as well as on loss.

A fourth innovation is insurance that recognises nature as protective infrastructure. In Mexico, the Quintana Roo reef model uses parametric cover to fund reef restoration after hurricane damage. When Hurricane Delta triggered the cover in 2020, US$850,000 was paid out to restore the coral reef, which protects beaches and local tourism from storms and erosion.

Together, these developments move insurance into the heart of the climate economy. It is no longer a back-office function. It now works as a pricing system, a warning system and, potentially, a financing system.

Malaysia is not starting from zero, although many still place insurance at the end of the disaster chain. In motor insurance, only 4% buy flood cover, sold as an optional extension. We insure the car but not the climate risk around it, remembering insurance only after something has gone wrong.

Yet the ecosystem is already moving ahead of that habit. Consider a paddy estate in Segamat, Johor, which has been written a parametric policy keyed to excess rainfall. When the rain crosses the trigger, the payout is disbursed automatically, with no loss adjuster sent and no claim to argue. The operator can clear the submerged fields and replant in time for the season, instead of waiting months for a cheque. Offered by a takaful operator, the same idea now covers solar farms against too little sunshine, using satellite data to track irradiation. These schemes are no perfect substitute for conventional insurance, but they pay out faster.

Bank Negara Malaysia pushes the insurance market towards climate risk management, scenario analysis and mandatory climate-related disclosures. Some insurers go beyond treating climate as a corporate social responsibility issue. They make no-new-coal commitments, review environmental, social and governance risks in their portfolios, engage energy companies on transition, and geotag flood-prone locations.

These are important signals that the industry is beginning to treat climate as underwriting, investment and balance-sheet risk. Yet the full potential remains untapped.

Floods remain Malaysia’s most obvious entry point, accounting for the majority of natural disasters. During the 2021 floods, roughly RM4 billion in losses was uninsured. We need new ideas to keep physical risk from becoming systemic financial risk, and to keep infrastructure in vulnerable locations insurable.

Taman Sri Muda in Shah Alam, Selangor, which floods repeatedly, shows the cost. The neighbourhood has turned into a stranded property market. As underwriting appetite falls, insurance becomes expensive or unavailable. Banks reassess collateral value, buyers price in the risk, rental yields weaken and long-time residents leave. What began as a drainage failure becomes an insurability problem, then a bankability problem and, finally, an investability problem.

It is tempting to conclude that Malaysians simply need to buy more coverage. The bigger opportunity is to redesign protection and do more with what we have.

Bank Negara’s Perlindungan Tenang can become a stronger platform for climate microinsurance and microtakaful, especially for B40 households. Parametric flood takaful fits high-risk districts, with payouts linked to rainfall or river levels. Premium rebates reward homes and shops that install flood barriers or use water-resistant materials. Industrial parks combine flood-risk mapping, business interruption cover and resilience upgrades.

Nature should also enter the insurance imagination. Mangroves, wetlands, forests and healthy rivers are not mere scenery; they reduce floods, erosion, heat and damage. If we insure buildings, machinery and vehicles, why do the natural systems that protect them remain financially invisible? Nature-linked insurance, backed by public-private partnerships, protects coastal settlements, river basins and tourism assets.

This redesign requires an active compact between insurers, regulators and other stakeholders. Better data must not simply mean higher premiums for those already exposed, pricing risk accurately while leaving people behind. Malaysia needs to balance actuarial discipline with solidarity, and takaful, with its language of mutual protection, offers a useful foundation.

El Niño will come and go, but the larger climate signal is here to stay. Malaysia can keep reaching for insurance after the loss, or build it into how the country prepares for the next one. The choice is still open.

Dr Hezri Adnan is a sustainability practitioner and fellow of the Academy of Sciences Malaysia whose work bridges public policy, markets and industry

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