Climate change refers to persistent alterations to global Earth's climate, such as a rise in global temperatures, which have reached unprecedented peaks in recent years. At the same time, global mean ocean-and-sea levels are on an upward trajectory. These climatic shifts significantly influence the frequency, intensity, and duration of extreme weather events, such as heatwaves, heavy precipitations, droughts, floods, and tropical cyclones, which represent substantial risks and challenges for the insurance industry. This paper delves into the profound impact of climate change on the insurance sector, with a particular focus on the agriculture, property, health, and life insurance industries. Our scientific approach consists in measuring climate change through an index composed of a basket of climate and weather-related extremes, such as the Actuarial Climate Index™ (ACI) defined in and for North America, and its European counterparts, the Iberian ACI (IACI) and French ACI (FACI) climate indices. We discuss how these indices help quantify the impact of climate change on the balance sheets of insurance companies and, therefore, its impact on the sustainability of the insurance business. The paper underscores the pressing need for the insurance industry to adapt and strategically plan for the increasing risks associated with climate change.
Policy Implications
- Insurance companies: Regulators require insurers to report a climate change materiality assessment using climate change scenarios (e.g., in Solvency II, for their own risk solvency assessment—ORSA), and a new requirement will be imposed in 2025 for environmental, social, and governance (ESG) risk. Companies should measure climate change risk by an ACI, to provide a homogeneous assessment across lines of business, as is done for inflation with the consumer price index.
- Governments: Through their national insurance control agencies, need to promote the adoption of these indices to measure the impact of climate change on insurance sustainability in a consistent and homogeneous way.
- Insurance companies: Need to study the degree of association between the ACI and insurance liability drivers such as claim severities and frequencies. The impact of climate change needs to be an integral part of the setting of insurance premiums and solvency capitals, through physical risk measures such as an ACI.
- Governments: Need to raise awareness of the effect of climate change on subsidized insurance markets, such as crop insurance. The sustainability and future of current insurance subsidy programs depend on an adequate evaluation of their vulnerability to climate change.
- Insurance companies: Need to identify the lines of business and markets that will be hit harder by climate change to guarantee their sustainability, using advanced analytics based on a metric such as ACI.