Our practicum aims to explore the mechanism in which extreme climate events shock the financial system. We focus on a specific chain: how the recent LA wildfires impacted the insurance market, then ultimately affected the value of the S&P 500 index portfolio. By mapping this specific risk transmission mechanism, we hope to uncover economic incentives to promote effective climate action.
Project motivation
I came into this project with two goals. One was to study the link between climate finance and market behavior more closely, specifically how physical risks like wildfires are absorbed by insurance and reinsurance companies and ultimately how they impact investor portfolios. The other was to sharpen my ability to work with data and financial modeling, building models that could capture these dynamics and present them in a way that is accessible to both specialists and general audiences.
Research framework and planning
We divided the project into three phases. First, we need to quantify the wildfire events themselves. Next, we analyze the direct impact of the disaster on insurance companies, tracking their reaction to the wildfire. Finally, we will construct a method framework to measure the effects on the broader S&P 500 portfolio.
Prior to the interim report, our work focused primarily on the first two steps: understanding the fires and the insurance industry’s reactions. Simultaneously, we began developing a method framework, using a range of indices to track and the statistical methods that would best capture the market’s reactions, and how the reactions impact the portfolios. After the interim report, our focus will shift to in-depth quantitative modeling to assess the impact on valuation multiples and precisely measure how insurance losses impact the overall portfolio value.
Preliminary findings
Our preliminary research shows that the 2025 Los Angeles wildfires (including the Palisades and Eaton fires) were among the most destructive wildfire disasters in U.S. history. Their impact went far beyond the destruction of properties and resulted in significant economic disruption. From other cases, we also clearly see the insurance industry playing a key role in this process, acting as a transmission mechanism, channeling the physical impact of the wildfires to the financial system. Surging claims pressure and tight capital are forcing insurers to reduce business in high-risk areas like LA and increase premiums, further widening the protection gap. A key finding is that the impacts on portfolios value is not solely based on expected increased insurance cost but is profoundly influenced by insurance availability, i.e. balance between market supply and demand. This complex relationship will be a key focus of our next phase of analysis.
Teamwork
The team’s collaborative spirit was undoubtedly one of the most valuable I gained from this project. Each member contributed unique perspectives, fostering an atmosphere of mutual respect and open communication. Even when disagreements arose, discussions remained constructive. This solid foundation of collaboration enabled us to efficiently divide work and provide strong support to each other when research challenges arose.
Client feedback
Client feedback was invaluable, particularly in helping us accurately define the scope of our research. When the team's pursuit of comprehensiveness threatened to lead us astray, clients brought us back on track and reminded us to focus on deliverables that were achievable within the timeline. This guidance helped us maintain clear and practical direction.
Core takeaways
The most important lesson I learned from this trip was the value of setting realistic goals. When it comes to analytical work, people are easily drawn to grand goals. However, I have learned that truly effective research often stems from posing a clearly defined question and developing an actionable plan for the answer. This is far more meaningful than trying to be all-encompassing but lose depth.