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

Market risk:
Under a disorderly transition 
scenario, financial assets concentrated in certain 
sectors of the real economy and/or certain 
regions could be subject to a change in investors’ 
perception of profitability, leading to a propensity 
for reducing the value of these assets. As outlined 
by the FSB (2020), such changes need not, 
in themselves, pose risks to financial stability. 
However, such movements may be amplified by 
an unanticipated and sudden disorderly transition, 
which could have a destabilising effect on the 
financial system through a sharp fall in asset 
prices (eg stranded assets, significant decrease 
in the value of real estate, carbon intensive and/
or GHG intensive sectors). Following a regulatory 
shock aimed at sectors whose technology relies 
on carbon emissions, large-scale sales may 
ensue through several channels of transmission. 
First, investors may have trouble gauging the 
fundamental value of such assets, which itself 
depends on future regulatory actions that are 
not yet known. In a world of increasing physical 
risk events and lagging technology within those 
sectors, many investors may deem such assets 
as undesirable to hold. Further, coupled with more 

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stringent disclosure standards with respect to a 
portfolio’s carbon footprint, investors may fear a 
reputational cost associated with holding such 
instruments. These are two examples of how 
market risk can intensify and lead to a significant 
drop in the value of climate-relevant assets 
beyond what has already been priced in.
Liquidity risk: 
A lack of reliable and comparable 
information on climate-sensitive exposures could 
create uncertainty and cause procyclical market 
dynamics, including large-scale sales of carbon-
intensive assets, and hence reduce liquidity in 
these markets. As such, assets could become 
less liquid due to, for instance, climate-related 
increased credit or market risk, thereby triggering 
potential procyclical investment behaviour by 
insurers and negatively affecting insurers’ ability to 
liquidate the assets when needed.