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

2.2.3 Legal liability risk channel
In addition to a reputational risk (through financial 
support for carbon-intensive sectors), insurers 
may also be exposed to counterparty risk from 
their business relations with companies subject to 
climate-related legal liabilities. This might also have 
implications for the financial system.
This risk is not further developed as it is less 
relevant to the analysis in this report.
2.3 FINAL CONSIDERATIONS
Insurers are dually exposed to the consequences of 
climate change, as they underwrite risks and invest 
in assets that could be affected by climate change. 
While climate risk analysis related to insurers’ 
investments often focuses on transition risks only, 
potential physical risks should not be neglected. 
The manifestation of physical risks – particularly 
prompted by a self-reinforcing acceleration in 
climate change and its economic effects – could 
also lead to a sharp fall in asset prices and increase 
in uncertainty (see FSB (2020)). 
A variety of mechanisms within the financial 
system could amplify the effects of credit, liquidity 
and counterparty risks arising from climate-related 
shocks. Interactions within the financial system 
and with the real economy may also increase risks 
to financial stability.
As noted by the FSB (2020), a widespread 
reappraisal of the creditworthiness of large portions 
of the real economy might reduce the willingness 
of firms to provide financial services, reducing 
access to (or raising the cost of) bank lending, 
corporate finance and insurance. By depressing 
macroeconomic prospects, this could result in 
further losses for the financial system, which in turn 
could lead to another reduction in finance.
Ultimately, as the financial sector provides financial 
support to the real economy and taking into 
account the strong interconnectedness of the 
financial system, physical and transition risks may 
generate ‘feedback effects’ within the financial 
system and between the financial system and 
the real economy
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. In particular, and directly in 
connection with insurers’ activities, these effects 
may be expected at a macroeconomic level and at 
the level of individual businesses and households 
(ie loan mortgages and homeowner’s insurance).

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