Gimar special topic edition the impact of climate change on the financial stability of the insurance sector

Loans/
mortgages
Depends on the location. For example, 
lien assets located in areas more prone to 
flood risk or other weather-related events.
Loans to debtors may be impaired if the 
debtors fail to address climate change issues.
Real estate
Depends on the location. For example, 
buildings located in areas more prone to 
flood risks may experience suspension of 
business activities and increased credit 
losses, eg of corresponding mortgages 
and lower market values.
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Buildings with low energy efficiency may be 
prone to transition risks, for instance if new 
regulation forced all properties to meet certain 
higher sustainability standards, leading either 
to stranded assets or significant investments 
to meet the higher standard.
Table 1:
Climate-related risks and insurance investment portfolio

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unanticipated changes in public policy, technology 
developments or the preferences of investors or 
consumers. This may affect the balance sheet 
or generate a decline in financial earnings – with 
potential implications for the solvency position – of 
companies whose business models are not based 
on low carbon emissions or in favour of climate 
adaptation or mitigation. In this case, a direct 
consequence may be the write-down of assets 
held by insurers investing in such companies, 
potentially leading to large-scale sales of assets.
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Under these circumstances, the financial system 
as a whole (including insurers, banks, investment 
funds and hedge funds) may demonstrate 
procyclical behaviour. This would enhance market 
imperfections and could have a destabilising effect 
on the financial system. 
Climate-related risks may have an impact on 
insurers’ investments portfolio via three main 
identified transmission channels: exposure 
channel, asset liquidation channel and legal 
liability risk channel. The analysis focuses on the 
first two. It thereby explains the channels through 
which climate-related risks might impact the 
financial system, without including any conclusive 
statements on the likelihood that these risks
will materialise.