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Assessing U.S. insurance firms' climate change impact and response

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Abstract

Climate change poses a serious risk for insurance firms, threatening their sustainability from numerous channels of impact. Assessing this impact, however, is not straightforward. We assess and distinguish between insurance firms by impact and response to climate change and relate the firms’ financial characteristics to climate risk exposure. A text mining approach using climate change sub-dictionaries on risk exposure, impact, and response, and a nested feature extraction method is developed to define and classify insurance firms’ adaptation levels to climate change. These features reveal that casualty insurance firms are most susceptible to acute climate risk, while life insurance firms are more prone to chronic climate risk. Insurance firms with the highest exposure to climate change present a high level of adaptation to pecuniary impact of the risk. Nevertheless, many firms with exposure remain inadequately prepared for climate change and firms with high exposure show relatively higher financial weakness.

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Notes

  1. As of 2021, the initiative had support from more than 2600 organisations, covering 89 countries and 1,069 financial institutions. https://www.fsb.org/2021/10/2021-status-report-task-force-on-climate-related-financial-disclosures/.

  2. https://www.congress.gov/bill/117th-congress/house-bill/2570.

  3. Briefing is published by Institutional Investors Group on Climate Change (IIGCC), the United Nations Environment Programme Finance Initiative (UNEP FI), the Cambridge Institute for Sustainability Leadership (CISL), and the Cambridge Judge Business School (CJBS)

  4. http://www.compustat.com.

  5. Carbon 4 is a consulting firm that specialises in climate issues. The CRIS method provides a physical risk rating for asset managers and investors to assess the level of risk in their portfolio and manage it. See: http://crisforfinance.com/wp-content/uploads/2017/11/CRIS-Guidebook_Publicversion_Nov2017.pdf.

  6. https://www.georgetownclimate.org/adaptation/plans.html.

  7. Greg Lowe, Global Head of Resilience and Sustainability at Aon plc. refers to chronic risk as ‘death by one thousand cuts’. https://www.aon.com/unitedkingdom/insights/weather-volatility-and-chronic-climate-risk.jsp.

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Acknowledgements

Jue Wang acknowledges support for this paper from a Global Association of Risk Professionals (GARP) Research Fellowship.

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Authors and Affiliations

  1. Rensselaer Polytechnic Institute, Troy , NY, USA

    Aparna Gupta

  2. Montclair State University, Montclair, NJ, USA

    Abena Owusu

  3. University of Massachusetts, Amherst, MA, USA

    Jue Wang

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  1. Aparna Gupta
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Correspondence to Aparna Gupta.

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Appendices

Appendix A: Source of climate change dictionary

An exclusive and scientific climate change dictionary is constructed by collecting 33 climate change white papers and climate reports from sources including the Intergovernmental Panel on Climate Change (IPCC), U.S. Environmental Protection Agency (EPA), International Monetary Fund (IMF), U.S. Global Change Research Program, Task force on Climate-Related Financial Disclosures (TCFD), United Nations Environmental Programme (UNEP), and Network for Green the Financial System (NGFS). Table 8 lists the title, institution, and year of publication of the 33 climate change white papers and reports.

Additionally, 59 climate glossaries such as from the EPA, WHO, and IPCC described in Engle et al. (2020) are added to the repository to enlarge our climate change dictionary. The following 24 climate change glossaries out of the 59 provide a source of words and phrases that make up the climate change dictionary: U.S. Environmental Protection Agency (EPA), BBC, United Nations(UN), Centre for Climate and Energy Solutions Glossary of Key Terms, Intergovernmental Panel on Climate Change (IPCC), World Health Organisation (WHO), European Climate Adaptation Platform, Wikipedia, Guardian, New York Times, Natural Climate Change, UN Climate Change Conference, UK Climate Impacts Programme (UKCIP), Climate Policy Information Hub, Explaining Climate Change, Four Degrees Preparation, The European Initiative for Upscaling Energy Efficiency in the Music Event Industry (EE MUSIC), Regional Education and Information Centre (REIC), Ecology, Climate Reality Project, National Geographic, Agricultural Marketing Resource Centre (AgMRC), Global Greenhouse Warming, and Conservation in a Changing Climate.

Table 8 List of climate change white papers and reports
Full size table

Appendix B: Variable definitions

See Table 9.

Table 9 Definition of variables
Full size table

Appendix C: State climate change adaptation

Data on the U.S. state and local adaptation plans are found on the Georgetown Climate Centre: https://www.georgetownclimate.org/adaptation/plans.html. Data cover state, local, and regional climate change plans and provide the dates and the number of plans that were finalised. Table 10 indicates whether a state has adopted a state-led climate change plan and, in brackets, the earliest year a plan was finalised. Data are as of June 2020.

Table 10 Climate change adaptation plans by state
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Gupta, A., Owusu, A. & Wang, J. Assessing U.S. insurance firms' climate change impact and response. Geneva Pap Risk Insur Issues Pract (2023). https://doi.org/10.1057/s41288-023-00297-7

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