Measuring the Climate Risk Exposure of Insurers - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

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 November 2024

JEL classification: G1, G2, G3

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

We construct a novel physical risk factor by forming a portfolio of REITs, long on those with properties more exposed to climate risk and short on those less exposed. Combined with a transition risk factor, we assess the climate risk exposure of P&C and life insurance companies in the U.S. Insurers can be exposed to climate-related physical risk through their operations and transition risk through their $12 trillion of financial asset holdings. We estimate insurers’ dynamic physical and transition climate beta, i.e. their stock return sensitivity to the physical and transition risk factors. Validating our approach, we find that insurers with larger exposures to risky states have a higher sensitivity to physical risk, while insurers holding more brown assets have a higher sensitivity to transition risk. Using the estimated betas, we calculate the expected capital shortfall of insurers under various climate stress scenarios.

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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