A third of insurance assets 'exposed to climate change risk'

Climate change poses material risk to the insurance sector, according to a new report.

The research, from the International Association of Insurance Supervisors (IAIS), is the first global quantitative study of how insurance sector investments are exposed to climate change, with data covering 75 per cent of the global insurance sector.

The study found that more than 35 per cent of insurers’ invested assets are exposed to risks from climate change and concluded that there will be significant benefits of an orderly transition towards internationally agreed climate targets from both a financial stability and solvency perspective.

“Climate-relevant” assets within equities, corporate bonds, loans and mortgages, sovereign bonds and real estate represent more than 35 per cent of insurers’ total assets. Within equities, corporate bonds and loans and mortgages, most climate-relevant assets relate to the housing and energy-intensive sectors, the IAIS said.

Scenario analysis assessing the forward-looking impact of climate change shows that the magnitude of the impact is highly dependent on the type of climate transition considered.

Compared to an orderly transition towards internationally agreed climate targets, a disorderly transition, or a scenario whereby climate targets are not met, would have a two to six times greater adverse effect on sector-wide solvency.

For example, under a “disorderly transition” scenario, results show an absolute drop in insurers’ solvency ratio of more than 14 per cent increasing to almost 50 per cent under a “too little, too late” scenario.

Nevertheless, considering the solid overall solvency position of the global insurance sector, the sector as a whole appears to be able to absorb investment losses from all scenarios tested.

Jonathan Dixon, IAIS secretary general said: “This report underscores the importance for supervisors of assessing how climate change may affect the insurance sector and individual insurers and of developing an appropriate supervisory response.”

“The IAIS is committed to deepening the breadth and scope of our contributions to helping insurance supervisors mitigate the effects of climate change.”

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