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

2.2.2 Asset liquidation channel
Asset liquidation refers to the sudden sale of 
assets on a large scale by one large insurer or a 
sufficient number of smaller insurers, which could 
trigger a decrease in asset prices and significantly 
disrupt trading or funding in key financial markets 
or cause significant losses or funding problems for 
other firms with similar holdings. Such behaviour 
may have a more significant impact on smaller, 
less liquid markets or in a stressed environment.

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Climate-related shocks have the potential to lead 
the insurance industry to large-scale shifts in its 
portfolios. Market movements from investors’ 
procyclical behaviour (including insurers and other 
financial institutions) may amplify changes in asset 
prices. As noted by the FSB (2020), this effect 
may be particularly widespread where there are 
substantial commonalities between investors’ 
portfolios or concentrations of exposures through 
certain financial products (such as derivatives). It 
could also be amplified by changes in collateral 
values. Liquidity mismatches can also be seen 
in securities lending activities when collateral 
is invested by the insurers in less liquid assets. 
Furthermore, policyholders in need of cash (eg 
following damages resulting from a weather-
related event) may be triggered to surrender their 
life savings in insurance. If such behaviour were 
to occur, insurers may be forced into procyclical 
behaviour to obtain the necessary liquidity to meet 
policyholders’ payouts.
A procyclical phenomenon,
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pushing the market 
to simultaneous and large-scale sales of assets, 
may trigger increased market volatility and raise 
the likelihood of further losses and failures of 
actors within the financial system. As a result, 
liquidity risks may emerge if insurers are not able 
to sell the stranded assets quickly enough to 
prevent or minimise losses.