Does Climate Change Risk Impact Insurance Credit Risk? Cross Country Evidence

Abstract

While climate change poses a significant financial risk to the insurance industry, research has not yet examined the impact on the insurer's credit risk. This study investigates the impact of climate change risks on credit risk for insurance firms. We develop a novel climate risk measure by contrasting four key components: hydrological risks, temperature extremes, extreme weather events, and water related risks. Utilizing this comprehensive measure, we analyse a global sample of 150 insurance firms across 31 countries from 2001 to 2022. Our findings reveal a significant negative relationship between climate change risks and credit risk, measured by Z-score, F-score, and Altman's Z-score. This suggests that climate risks increase the likelihood of insurance firm defaults. These findings highlight the urgency for proactive climate risk management in the financial sector, including enhanced risk assessment methodologies and adaptation strategies. This research offers valuable insights for various stakeholders in the financial sector including policy makers, credit rating agencies and investors to better understand and manage climate risk exposure in the insurance industry.