Physical Climate Risk Factors and an Application to Measuring Insurers’ Climate Risk Exposure

89 Pages Posted: 14 Jul 2023 Last revised: 21 Dec 2024

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, Stern School of Business

Xuran Zeng

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

Date Written: July 01, 2023

Abstract

We construct a novel physical risk factor using a portfolio of REITs, long on those with properties highly exposed to climate risk and short on those with less exposure. Combined with a transition risk factor, we assess U.S. insurers’ climate risk through operations and $13 trillion in asset holdings. Estimating dynamic climate betas, we find higher stock return sensitivity to the physical risk among insurers operating in riskier regions and to transition risk among those holding more brown assets. Using these betas, we calculate capital shortfalls under climate stress scenarios, offering insights into insurers’ resilience to climate risks.

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, Physical Climate Risk Factors and an Application to Measuring Insurers’ Climate Risk Exposure (July 01, 2023). FRB of New York Staff Report No. 1066, Rev. December 2024. Previous title: “Measuring the Climate Risk Exposure of Insurers”, 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, Stern School of Business ( email )

44 W 4th St
Suite 9-160
New York, NY 10012
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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