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

1.1 CLIMATE CHANGE AS A FINANCIAL RISK
Climate change is an overarching global threat. It 
affects human, societal, environmental and economic 
systems through rising temperatures, rising sea 
levels, and an increasing frequency and severity of 
natural catastrophes and extreme weather-related 
events. Climate change, as well as the global 
response to the threats posed by climate change (eg 
the reduction of greenhouse gas (GHG) emissions 
and adaptation programmes), may have wide-ranging 
impacts on the structure and functioning of the global 
economy and financial system. 
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As such, climate change is a source of financial 
risk.
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It may have an impact on the resilience of 
individual financial institutions, including insurers, 
as well as on financial stability through physical 
risks and transition risks.
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Physical risk refers 
to increased damage and losses from physical 
phenomena associated with climate-related 
trends (eg changing weather patterns or rising sea 
levels) and events (eg natural disasters or extreme 
weather). Transition risk refers to disruptions and 
shifts associated with the transition to a low-
carbon economy, which may affect the value of 
assets or the costs of doing business. 
Important interdependencies may exist between 
physical and transition risks. For instance, if the 
transition is slow at first, this may increase the 
probability that physical risks will materialise. In 
turn, sharp increases in economic losses from 
weather-related events may trigger more abrupt 
policy responses, leading to higher transition 
risks. In the least favourable scenario, extreme 
climate-induced damage as a result of long 
delays in the transition will eventually force a 
sudden and radical change in the economy.