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

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

Previous title: “Measuring the Climate Risk Exposure of Insurers”

Number 1066
July 2023 Revised December 2024

JEL classification: G1, G2, G3

Authors: Hyeyoon Jung, Robert Engle, Shan Ge, and Xuran Zeng

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.

Full Article

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.

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