Measuring the Climate Risk Exposure of Insurers

54 Pages Posted: 14 Jul 2023

See all articles by Hyeyoon Jung

Hyeyoon Jung

Federal Reserve Bank of New York

Robert F. Engle

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); New York University (NYU) - Volatility and Risk Institute

Shan Ge

New York University (NYU) - Department of Finance

Xuran Zeng

New York University (NYU) - Leonard N. Stern School of Business

Date Written: July 2023

Abstract

Insurance companies can be exposed to climate-related physical risk through their operations and to transition risk through their $12 trillion of financial asset holdings. We assess the climate risk exposure of property and casualty (P&C) and life insurance companies in the U.S. We construct a novel physical risk factor by forming a portfolio of P&C insurers’ stocks, with each insurer’s weight reflecting their operational exposure to states associated with high physical climate risk. We then estimate the dynamic physical climate beta, representing the stock return sensitivity of each insurer to the physical risk factor. In addition, using the climate beta estimates introduced by Jung et al. (2021), we calculate the expected capital shortfall of insurers under various climate stress scenarios. We validate our approach by utilizing granular data on insurers’ asset holdings and state-level operational exposure. Our findings indicate a positive association between larger exposures to risky states and higher holdings of brown assets with higher sensitivity to physical and transition risk, respectively.

Keywords: insurance, climate change, physical risk, transition risk

JEL Classification: G1, G2, G3

Suggested Citation

Jung, Hyeyoon and Engle, Robert F. and Ge, Shan and Zeng, Xuran, Measuring the Climate Risk Exposure of Insurers (July 2023). FRB of New York Staff Report No. 1066, Available at SSRN: https://ssrn.com/abstract=4510592 or http://dx.doi.org/10.2139/ssrn.4510592

Hyeyoon Jung (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Robert F. Engle

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Volatility and Risk Institute ( email )

44 West 4th Street
New York, NY 10012
United States

Shan Ge

New York University (NYU) - Department of Finance ( email )

New York, NY
United States

Xuran Zeng

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

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