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

2.2.1 Exposure channel
The exposure channel is related to direct and 
indirect interlinkages between insurers and
other parts of the financial system, and the
real economy.
Investment exposure
As the value of insurers’ assets (cf table 1) runs 
the risk of a sharp downward shock, expected 
returns on investments become hazardous for 
investors (including insurers) who may face 
potential financial (market) losses. As noted by 
the FSB (2020), the breadth of climate-related 
risks might reduce the degree to which market 
participants are able to properly price and 
manage their investments, which is likely to lead 
to increases in risk premia across a wide range of 
assets. An unanticipated shift in asset prices may 
challenge market participants’ ability to diversify 
their exposure to climate-related risks.
Counterparty exposure
This phenomenon may be enhanced by the 
interconnectedness of lending activities between 
insurers and other financial institutions. Insurers 
are exposed to the banking and investment 
funds sectors through several exposed classes 
(mainly investments in bonds and equity). When 
financial institutions are hit by a shock, they can 
easily transmit it to the insurance sector through a 
sharp decline in the institutions’ creditworthiness. 
A reduction in (re)financing within the financial 
system could in time amplify climate-related 
shocks to the real economy.
Various insurers are also part of financial 
conglomerates (including credit institutions, 
investments funds, hedge funds and payment 
institutions), where a decline in the financial 
soundness and solvency position of one institution 
may affect the whole conglomerate. Further, the 
failure of a systemic financial group or the failure 
of several non-systemic financial institutions may 
lead to contagion in the broader financial system 
through interlinkages. As seen in previous financial 
crises, such as in 2008, such disruption of the 
whole financial market can trigger a market crash 
and a domino effect that impacts the global 
real economy.
Market and credit risks can also be concentrated 
in certain geographies and sectors of the real 
economy. Among insurers’ investments portfolios, 
mortgage loans and real estate portfolios are, 
in some geographies, particularly exposed to 
climate-related risks, increasing their default risk. 
Credit insurers will also need to monitor increasing 
risk of default on trade-credit insurance portfolios, 
in light of climate-related risks. Transition risk 
emerging from a large systemic default of 
corporates
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may mean trade-credit insurers are 
unable to honour their insurance liabilities (increase 
in market risks and credit risks).