Authors: Hyeyoon Jung, Robert Engle, Shan Ge, and Xuran Zeng
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Staff Reports
Measuring the Climate Risk Exposure of Insurers
Number 1066
July 2023
July 2023
JEL classification: G1, G2, G3
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.
AUTHOR DISCLOSURE STATEMENT(S)
Robert Engle
Robert Engle declares that he has no relevant or material financial interests that relate to the research described in this paper.
Shan Ge
Shan Ge declares that she has no relevant or material financial interests that relate to the research described in this paper.
Hyeyoon Jung
Hyeyoon Jung declares that she has no relevant or material financial interests that relate to the research described in this paper.
Xuran Zeng
Xuran Zeng declares that she has no relevant or material financial interests that relate to the research described in this paper.
Robert Engle declares that he has no relevant or material financial interests that relate to the research described in this paper.
Shan Ge
Shan Ge declares that she has no relevant or material financial interests that relate to the research described in this paper.
Hyeyoon Jung
Hyeyoon Jung declares that she has no relevant or material financial interests that relate to the research described in this paper.
Xuran Zeng
Xuran Zeng declares that she has no relevant or material financial interests that relate to the research described in this paper.
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